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) 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.

x x x           x x x          x x x

(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.

x x x           x x x          x x x

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:

x x x           x x x          x x x

(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 Exempt

from a withholding tax at
source as prescribed in
Sec. 2.57.5 of these
 regulations.

With a selling price of 1.5%

five hundred thousand
pesos (₱500,000.00) or
less.

With a selling price of 3.0%

more than five hundred
thousand pesos
(₱500,000.00) but not
more than two million
pesos (₱2,000,000.00).

With selling price of 5.0%

more than two million
pesos (₱2,000,000.00)

x x x           x x x          x x x

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:

x x x           x x x          x x x

(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 Exempt

from [CWT] 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 1.5%
Thousand Pesos (₱500,000.00) or less.
With a selling price of more than Five 3.0%
Hundred Thousand Pesos
(₱500,000.00) but not more than Two
Million Pesos (₱2,000,000.00).
With a selling price of more than two 5.0%
Million Pesos (₱2,000,000.00).

x x x           x x x          x x x

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.

x x x           x x x          x x x

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;

x x x           x x x          x x x

(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.

x x x           x x x          x x x

c. In the case of domestic corporations. –

x x x           x x x          x x x

(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.

x x x           x x x          x x x

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 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 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.

x x x           x x x          x x x

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 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. –

x x x           x x x          x x x
(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;

x x x           x x x          x x x

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;

x x x           x x x          x x x

(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.

x x x           x x x          x x x
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 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 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 income a) Taxes withheld on

tax withheld by the
withholding agent is
constituted as a full and
final payment of the income
tax due from the payee on
the said income.
certain income payments
are intended to equal or at
least approximate the tax
due of the payee on said
income.

b)The liability for payment b) Payee of income is

of the tax rests primarily on required to report the
the payor as a withholding income and/or pay the
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 is

required to file an income
tax return for the particular
income.73
still required to file an
income tax return, as
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

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.89 As 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.
G.R. No. 183137               April 10, 2013

PELIZLOY REALTY CORPORATION, represented herein by its President, GREGORY K.

LOY, Petitioner,
vs.
THE PROVINCE OF BENGUET, Respondent.

DECISION

LEONEN, J.:

The principal issue in this case is the scope of authority of a province to impose an amusement tax.

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that the
December 10, 2007 decision of the Regional Trial Court,- Branch 62, La Trinidad, Benguet in Civil
Case No. 06-CV-2232 be reversed and set aside and a new one issued in which: ( 1) respondent
Province of Benguet is declared as having no authority to levy amusement taxes on admission fees
for resorts, swimming pools, bath houses, hot springs, tourist spots, and other places for recreation;
(2) Section 59, Article X of the Benguet Provincial Revenue Code of 2005 is declared null and void;
and (3) the respondent Province of Benguet is permanently enjoined from enforcing Section 59,
Article X of the Benguet Provincial Revenue Code of 2005.

Petitioner Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort, which is designed for
recreation and which has facilities like swimming pools, a spa and function halls. It is located at Asin,
Angalisan, Municipality of Tuba, Province of Benguet.

On December 8, 2005, the Provincial Board of the Province of Benguet approved Provincial Tax
Ordinance No. 05-107, otherwise known as the Benguet Revenue Code of 2005 ("Tax Ordinance").
Section 59, Article X of the Tax Ordinance levied a ten percent (10%) amusement tax on gross
receipts from admissions to "resorts, swimming pools, bath houses, hot springs and tourist spots."
Specifically, it provides the following:

Article Ten: Amusement Tax on Admission

Section 59. Imposition of Tax. There is hereby levied a tax to be collected from the proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing
schools, night or day clubs, and other places of amusement at the rate of thirty percent (30%) of the
gross receipts from admission fees; and

A tax of ten percent (10%) of gross receipts from admission fees for boxing, resorts, swimming
pools, bath houses, hot springs, and tourist spots is likewise levied. [Emphasis and underscoring
supplied]

Section 162 of the Tax Ordinance provided that the Tax Ordinance shall take effect on January 1,
2006.

It was Pelizloy's position that the Tax Ordinance's imposition of a 10% amusement tax on gross
receipts from admission fees for resorts, swimming pools, bath houses, hot springs, and tourist spots
is an ultra vires act on the part of the Province of Benguet. Thus, it filed an appeal/petition before the
Secretary of Justice on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the effectivity of a tax ordinance
allowed by Section 187 of Republic Act No. 7160, otherwise known as the Local Government Code
(LGC).1 The appeal/petition was docketed as MSO-OSJ Case No. 03-2006.

Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days from receipt of the
appeal to render a decision. After the lapse of which, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction.

Treating the Secretary of Justice's failure to decide on its appeal/petition within the sixty (60) days
provided by Section 187 of the LGC as an implied denial of such appeal/petition, Pelizloy filed a
Petition for Declaratory Relief and Injunction before the Regional Trial Court, Branch 62, La Trinidad,
Benguet. The petition was docketed as Civil Case No. 06-CV-2232.

Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a percentage tax in violation
of the limitation on the taxing powers of local government units (LGUs) under Section 133 (i) of the
LGC. Thus, it was null and void ab initio. Section 133 (i) of the LGC provides:

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:

xxx

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein

The Province of Benguet assailed the Petition for Declaratory Relief and Injunction as an improper
remedy. It alleged that once a tax liability has attached, the only remedy of a taxpayer is to pay the
tax and to sue for recovery after exhausting administrative remedies.2

On substantive grounds, the Province of Benguet argued that the phrase ‘other places of
amusement’ in Section 140 (a) of the LGC3 encompasses resorts, swimming pools, bath houses, hot
springs, and tourist spots since "Article 220 (b) (sic)" of the LGC defines "amusement" as
"pleasurable diversion and entertainment x x x synonymous to relaxation, avocation, pastime, or
fun."4 However, the Province of Benguet erroneously cited Section 220 (b) of the LGC. Section 220
of the LGC refers to valuation of real property for real estate tax purposes. Section 131 (b) of the
LGC, the provision which actually defines "amusement", states:

Section 131. Definition of Terms. - When used in this Title, the term:

xxx

(b) "Amusement" is a pleasurable diversion and entertainment. It is synonymous to relaxation,

avocation, pastime, or fun On December 10, 2007, the RTC rendered the assailed Decision
dismissing the Petition for Declaratory Relief and Injunction for lack of merit.

Procedurally, the RTC ruled that Declaratory Relief was a proper remedy. On the validity of Section
59, Article X of the Tax Ordinance, the RTC noted that, while Section 59, Article X imposes a
percentage tax, Section 133 (i) of the LGC itself allowed for exceptions. It noted that what the LGC
prohibits is not the imposition by LGUs of percentage taxes in general but the "imposition and levy of
percentage tax on sales, barters, etc., on goods and services only."5 It further gave credence to the
Province of Benguet's assertion that resorts, swimming pools, bath houses, hot springs, and tourist
spots are encompassed by the phrase ‘other places of amusement’ in Section 140 of the LGC.

On May 21, 2008, the RTC denied Pelizloy’s Motion for Reconsideration.

Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure questions of law. It assailed
the legality of Section 59, Article X of the Tax Ordinance as being a (supposedly) prohibited
percentage tax per Section 133 (i) of the LGC.

In its Comment, the Province of Benguet, erroneously citing Section 40 of the LGC, argued that
Section 59, Article X of the Tax Ordinance does not levy a percentage tax "because the imposition is
not based on the total gross receipts of services of the petitioner but solely and actually limited on
the gross receipts of the admission fees collected."6 In addition, it argued that provinces can validly
impose amusement taxes on resorts, swimming pools, bath houses, hot springs, and tourist spots,
these being ‘amusement places’.

For resolution in this petition are the following issues:

1. Whether or not Section 59, Article X of Provincial Tax Ordinance No. 05-107, otherwise
known as the Benguet Revenue Code of 2005, levies a percentage tax.

2. Whether or not provinces are authorized to impose amusement taxes on admission fees
to resorts, swimming pools, bath houses, hot springs, and tourist spots for being
"amusement places" under the Local Government Code.

The power to tax "is an attribute of sovereignty,"7 and as such, inheres in the State. Such, however,
is not true for provinces, cities, municipalities and barangays as they are not the sovereign;8 rather,
they are mere "territorial and political subdivisions of the Republic of the Philippines".9

The rule governing the taxing power of provinces, cities, muncipalities and barangays is summarized
in Icard v. City Council of Baguio:10

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 arising out of the term used in granting 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.11 [Underscoring supplied]

Therefore, the power of a province to tax is limited to the extent that such power is delegated to it
either by the Constitution or by statute. Section 5, Article X of the 1987 Constitution is clear on this
point:

Section 5. Each local government unit shall have the power to create its own sources of revenues
and 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. [Underscoring supplied]

Per Section 5, Article X of the 1987 Constitution, "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
charges."12 Nevertheless, such authority is "subject to such guidelines and limitations as the
Congress may provide".13

In conformity with Section 3, Article X of the 1987 Constitution,14 Congress enacted Republic Act No.
7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs local
taxation and fiscal matters.

Relevant provisions of Book II of the LGC establish the parameters of the taxing powers of LGUS
found below.

First, Section 130 provides for the following fundamental principles governing the taxing powers of
LGUs:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based as far as practicable on the taxpayer's ability to pay;

b. be levied and collected only for public purposes;

c. not be unjust, excessive, oppressive, or confiscatory;

d. not be contrary to law, public policy, national economic policy, or in the restraint of
trade.

3. The collection of local taxes, fees, charges and other impositions shall in no case be let to
any private person.

4. The revenue collected pursuant to the provisions of the LGC shall inure solely to the
benefit of, and be subject to the disposition by, the LGU levying the tax, fee, charge or other
imposition unless otherwise specifically provided by the LGC.

5. Each LGU shall, as far as practicable, evolve a progressive system of taxation.

Second, Section 133 provides for the common limitations on the taxing powers of LGUs. Specifically,
Section 133 (i) prohibits the levy by LGUs of percentage or value-added tax (VAT) on sales, barters
or exchanges or similar transactions on goods or services except as otherwise provided by the LGC.

As it is Pelizloy’s contention that Section 59, Article X of the Tax Ordinance levies a prohibited
percentage tax, it is crucial to understand first the concept of a percentage tax.

In Commissioner of Internal Revenue v. Citytrust Investment Phils. Inc.,15 the Supreme Court defined
percentage tax as a "tax measured by a certain percentage of the gross selling price or gross value
in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any
person engaged in the sale of services." Also, Republic Act No. 8424, otherwise known as the
National Internal Revenue Code (NIRC), in Section 125, Title V,16 lists amusement taxes as among
the (other) percentage taxes which are levied regardless of whether or not a taxpayer is already
liable to pay value-added tax (VAT).
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain
specified establishments.

Thus, applying the definition in CIR v. Citytrust and drawing from the treatment of amusement taxes
by the NIRC, amusement taxes are percentage taxes as correctly argued by Pelizloy.

However, provinces are not barred from levying amusement taxes even if amusement taxes are a
form of percentage taxes. Section 133 (i) of the LGC prohibits the levy of percentage taxes "except
as otherwise provided" by the LGC.

Section 140 of the LGC provides:

SECTION 140. Amusement Tax - (a) The province may levy an amusement tax to be collected from
the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts
from admission fees.

(b) In the case of theaters of cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the provincial treasurer before the gross
receipts are divided between said proprietors, lessees, or operators and the distributors of
the cinematographic films.

(c) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower
shows, musical programs, literary and oratorical presentations, except pop, rock, or similar
concerts shall be exempt from the payment of the tax herein imposed.

(d) The Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions
for the payment of tax. In case of fraud or failure to pay the tax, the Sangguniang
Panlalawigan may impose such surcharges, interests and penalties.

(e) The proceeds from the amusement tax shall be shared equally by the province and the
municipality where such amusement places are located. [Underscoring supplied]

Evidently, Section 140 of the LGC carves a clear exception to the general rule in Section 133 (i).
Section 140 expressly allows for the imposition by provinces of amusement taxes on "the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and
other places of amusement."

However, resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those
places expressly mentioned by Section 140 of the LGC as being subject to amusement taxes. Thus,
the determination of whether amusement taxes may be levied on admissions to resorts, swimming
pools, bath houses, hot springs, and tourist spots hinges on whether the phrase ‘other places of
amusement’ encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots.

Under the principle of ejusdem generis, "where a general word or phrase follows an enumeration of
particular and specific words of the same class or where the latter follow the former, the general
word or phrase is to be construed to include, or to be restricted to persons, things or cases akin to,
resembling, or of the same kind or class as those specifically mentioned."17

The purpose and rationale of the principle was explained by the Court in National Power Corporation
v. Angas18 as follows:
The purpose of the rule on ejusdem generis is to give effect to both the particular and general words,
by treating the particular words as indicating the class and the general words as including all that is
embraced in said class, although not specifically named by the particular words. This is justified on
the ground that if the lawmaking body intended the general terms to be used in their unrestricted
sense, it would have not made an enumeration of particular subjects but would have used only
general terms. [2 Sutherland, Statutory Construction, 3rd ed., pp. 395-400].19

In Philippine Basketball Association v. Court of Appeals,20 the Supreme Court had an opportunity to

interpret a starkly similar provision or the counterpart provision of Section 140 of the LGC in the
Local Tax Code then in effect. Petitioner Philippine Basketball Association (PBA) contended that it
was subject to the imposition by LGUs of amusement taxes (as opposed to amusement taxes
imposed by the national government).  In support of its contentions, it cited Section 13 of
1âwphi1

Presidential Decree No. 231, otherwise known as the Local Tax Code of 1973, (which is analogous
to Section 140 of the LGC) providing the following:

Section 13. Amusement tax on admission. - The province shall impose a tax on admission to be
collected from the proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusement xxx.

Applying the principle of ejusdem generis, the Supreme Court rejected PBA's assertions and noted
that:

In determining the meaning of the phrase 'other places of amusement', one must refer to the prior
enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their
common characteristic. Professional basketball games do not fall under the same category as
theaters, cinematographs, concert halls and circuses as the latter basically belong to artistic forms of
entertainment while the former caters to sports and gaming.21 [Underscoring supplied]

However, even as the phrase ‘other places of amusement’ was already clarified in Philippine
Basketball Association, Section 140 of the LGC adds to the enumeration of 'places of amusement'
which may properly be subject to amusement tax. Section 140 specifically mentions 'boxing stadia'
in addition to "theaters, cinematographs, concert halls and circuses" which were already mentioned
in PD No. 231. Also, 'artistic expression' as a characteristic does not pertain to 'boxing stadia'.

In the present case, the Court need not embark on a laborious effort at statutory construction.
Section 131 (c) of the LGC already provides a clear definition of ‘amusement places’:

Section 131. Definition of Terms. - When used in this Title, the term:

xxx

(c) "Amusement Places" include theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances [Underscoring supplied]

Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound by a common
typifying characteristic in that they are all venues primarily for the staging of spectacles or the
holding of public shows, exhibitions, performances, and other events meant to be viewed by an
audience. Accordingly, ‘other places of amusement’ must be interpreted in light of the typifying
characteristic of being venues "where one seeks admission to entertain oneself by seeing or viewing
the show or performances" or being venues primarily used to stage spectacles or hold public shows,
exhibitions, performances, and other events meant to be viewed by an audience.

As defined in The New Oxford American Dictionary,22 ‘show’ means "a spectacle or display of
something, typically an impressive one";23 while ‘performance’ means "an act of staging or
presenting a play, a concert, or other form of entertainment."24 As such, the ordinary definitions of the
words ‘show’ and ‘performance’ denote not only visual engagement (i.e., the seeing or viewing of
things) but also active doing (e.g., displaying, staging or presenting) such that actions are
manifested to, and (correspondingly) perceived by an audience.

Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist
spots cannot be considered venues primarily "where one seeks admission to entertain oneself by
seeing or viewing the show or performances". While it is true that they may be venues where people
are visually engaged, they are not primarily venues for their proprietors or operators to actively
display, stage or present shows and/or performances.

Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the same
category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they
cannot be considered as among the ‘other places of amusement’ contemplated by Section 140 of
the LGC and which may properly be subject to amusement taxes.

At this juncture, it is helpful to recall this Court’s pronouncements in Icard:

The power to tax when granted to a province is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the province.
Inferences, implications, deductions – all these – have no place in the interpretation of the taxing
power of a province.25

In this case, the definition of' amusement places' in Section 131 (c) of the LGC is a clear basis for
determining what constitutes the 'other places of amusement' which may properly be subject to
amusement tax impositions by provinces. There is no reason for going beyond such basis. To do
otherwise would be to countenance an arbitrary interpretation/application of a tax law and to inflict an
injustice on unassuming taxpayers.

The previous pronouncements notwithstanding, it will be noted that it is only the second paragraph
of Section 59, Article X of the Tax Ordinance which imposes amusement taxes on "resorts,
swimming pools, bath houses, hot springs, and tourist spots". The first paragraph of Section 59,
Article X of the Tax Ordinance refers to "theaters, cinemas, concert halls, circuses, cockpits, dancing
halls, dancing schools, night or day clubs, and other places of amusement".  In any case, the issues
1âwphi1

raised by Pelizloy are pertinent only with respect to the second paragraph of Section 59, Article X of
the Tax Ordinance. Thus, there is no reason to invalidate the first paragraph of Section 59, Article X
of the Tax Ordinance. Any declaration as to the Province of Benguet's lack of authority to levy
amusement taxes must be limited to admission fees to resorts, swimming pools, bath houses, hot
springs and tourist spots.

Moreover, the second paragraph of Section 59, Article X of the Tax Ordinance is not limited to
resorts, swimming pools, bath houses, hot springs, and tourist spots but also covers admission fees
for boxing. As Section 140 of the LGC allows for the imposition of amusement taxes on gross
receipts from admission fees to boxing stadia, Section 59, Article X of the Tax Ordinance must be
sustained with respect to admission fees from boxing stadia.
WHEREFORE, the petition for review on certiorari is GRANTED. The second paragraph of Section
59, Article X of the Benguet Provincial Revenue Code of 2005, in so far as it imposes amusement
taxes on admission fees to resorts, swimming pools, bath houses, hot springs and tourist spots, is
declared null and void. Respondent Province of Benguet is permanently enjoined from enforcing the
second paragraph of Section 59, Article X of the Benguet Provincial Revenue Code of 2005 with
respect to resorts, swimming pools, bath houses, hot springs and tourist spots.

SO ORDERED.

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.
OSMEÑA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995  of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
1

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  denying the
2

motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue
of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:

a) encourage, promote and develop international and

domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and
 b) upgrade the services and facilities of the airports
and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from

realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:

Sec. 133. Common Limitations on the Taxing Powers of Local

Government Units. — Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:

a) . . .

x x x           x x x          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)

Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax exemption
privilege has been withdrawn by virtue of Sections 193 and 234 of the Local
Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

 Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

x x x           x x x          x x x

(c) . . .

Except as provided herein, any exemption from payment of real

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

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

Respondent City, however, asserted that MACIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995,  the trial court dismissed the petition in light of its findings,
4

to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).
 With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall provide
for a more responsive and accountable local government structure instituted through
a system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE

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

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER

IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF
CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people.  Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
6

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,"  and that it is an attached agency of the Department of
7

Transportation and Communication (DOTC),  the petitioner "may stand in [sic] the same
8

footing as an agency or instrumentality of the national government." Hence, its tax exemption
privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage
of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the taxing powers of local government units shall not extend to the
levy of taxes of fees or charges of any kind on the national government its agencies and
instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation; 9
 Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke
is governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (McCulloch v. Maryland,
4 Wheat 316, 4 L Ed. 579).

This doctrine emanates from the "supremacy" of the National Government over local
government.

Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to 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 power of the local
government units.

In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution  and enhanced further by the
10

LGC. While it may be true that under its Charter the petitioner was exempt from the payment
of realty taxes,  this exemption was withdrawn by Section 234 of the LGC. In response to the
11

petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that
the petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing governmental
and purely proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation,   and to reject the application of
12

Basco because it was "promulgated . . . before the enactment and the singing into law of
R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the
framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through
their Constitutions.  Our Constitution, for instance, provides that the rule of taxation shall be
13

uniform and equitable and Congress shall evolve a progressive system of taxation.  So 14

potent indeed is the power that it was once opined that "the power to tax involves the power
to destroy."  Verily, taxation is a destructive power which interferes with the personal and
15

property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer.  But since taxes are
16

what we pay for civilized society,  or are the lifeblood of the nation, the law frowns against
17

exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority.  A claim of exemption from tax payment must be clearly shown and based on
18

language in the law too plain to be mistaken.  Elsewise stated, taxation is the rule,
19

exemption therefrom is the exception.  However, if the grantee of the exemption is a political
20

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.  Under the latter, the exercise of the power may be subject to such guidelines
22

and limitations as the Congress may provide which, however, must be consistent with the
basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units. —
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

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

acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

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

(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when

sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of

Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal

Revenue Code, as amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and

person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in this
code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually

exported, except as otherwise provided herein;
 (n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprise and Cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and

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

NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity,  while "charges" are
24

pecuniary liabilities such as rents or fees against person or property.

25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:

Sec. 232. Power to Levy Real Property Tax. — A province or city or a municipality

within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

Sec. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

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

its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents

appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as

provided for under R.A. No. 6938; and;
 (e) Machinery and equipment used for pollution control and
environmental protection.

Except as provided herein, any exemptions from payment of real

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

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on

the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the

basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of
electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously

granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in

this code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned, or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units

may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by
the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of

Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and
other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees,
and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items (c)
and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then Section
232 must be deemed to qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section
232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph
of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical
persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption
is withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,

its agencies, or instrumentalities, and local government units.

I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the said
section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of

the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government."  These autonomous regions, provincial, city, municipal or barangay
27

subdivisions" are the political subdivision. 28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments."  The National
29

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;"  while an "instrumentality" refers
31

to "any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy; usually through a
charter. This term includes regulatory agencies, chartered institutions and government-
owned and controlled corporations". 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o),
then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress
did not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including government-
owned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax
Code, which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments  and the objective of the LGC that they enjoy genuine and
33

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.  The 34
power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government were that such privilege resulted in serious
tax base erosion and distortions in the tax treatment of similarly situated enterprises, and
there was a need for this entities to share in the requirements of the development, fiscal or
otherwise, by paying the taxes and other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu",  which belonged to the Republic of the Philippines, then
36

under the Air Transportation Office (ATO). 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports."  Hence, the petitioner is now the owner of the
38

land in question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege only
in respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
 view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco

vs. Philippine Amusement and Gaming Corporation  is unavailing since it was decided
39

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.

Luzon Drug Corporation  in our ruling in Carlos Superdrug Corporation,  this referred only to
50 51

preliminary matters. A fair reading of Carlos Superdrug Corporation  would show that we
52

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 Corporation  and we find no cogent reason to overturn, modify or
53

abandon it. We also note that petitioners’ arguments are a mere reiteration of those raised and
resolved in Carlos Superdrug Corporation.  Thus, we sustain Carlos Superdrug Corporation.
54 55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug
Corporation  as to why the 20% discount is a valid exercise of police power and why it may not,
56

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,  or the use of property is merely prohibited,
65

regulated or restricted  to promote public welfare. In such cases, there is no compensable taking,
66

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)  as well as zoning ordinances prohibiting the use of property for purposes injurious to
67

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 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 property  or the compelled interconnection of the telephone system between
71

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 conditions  as well as the evolving meaning and scope of public use  and just
73 74

compensation  in eminent domain evinces that these are not static concepts. Because of the
75

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,  however, describes the 20% discount as an exercise of the power of eminent domain
78

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.,  we recognized that— x x x a taking also could be found if
80

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,  petitioners, who were franchise holders of electric
83

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 Corporation  when we ruled that
85

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
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 Corporation  did. Petitioners went directly to this Court without first
86

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 Corporation  that the 20% senior citizen discount and tax deduction scheme are valid
88

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 Corporation  is not obiter dicta ; (2) allowable taking, in police
89

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 9  of the Constitution; and (4) the permanent reduction in a private establishment’s total
90

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 Corporation  is obiter
91

dicta. As previously discussed, in Central Luzon Drug Corporation,  the BIR, pursuant to Sections 2.i
92

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 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, 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 Corporation  by94
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 Corporation  would show that the Court
95

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.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled
the enactment of a particular statute or legal provision. However, statements made relative thereto
are not always necessary in resolving the actual controversies presented before it. This was the
case in Central Luzon Drug Corporation  resulting in that unfortunate statement that the tax credit
96

"can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by deductive
reasoning, that the 20% discount is an exercise of the power of eminent domain. The Dissent
essentially adopts this theory and reasoning which, as will be shown below, is contrary to settled
principles in police power and eminent domain analysis. II The Dissent discusses at length the
doctrine on "taking" in police power which occurs when private property is destroyed or placed
outside the commerce of man. Indeed, there is a whole class of police power measures which justify
the destruction of private property in order to preserve public health, morals, safety or welfare. As
earlier mentioned, these would include a building on the verge of collapse or confiscated obscene
materials as well as those mentioned by the Dissent with regard to property used in violating a
criminal statute or one which constitutes a nuisance. In such cases, no compensation is required.
However, it is equally true that there is another class of police power measures which do not involve
the destruction of private property but merely regulate its use. The minimum wage law, zoning
ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting the
working hours to eight, and the like would fall under this category. The examples cited by the
Dissent, likewise, fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the
Social Security Law, and Section 7 of the Pag-IBIG 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 not required because they fall within the sphere of permissible
police power measures. The senior citizen discount law falls under this latter category. III The
Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due
to the 20% discount, is a "taking" of private property for public purpose without payment of just
compensation. At the outset, it must be emphasized that petitioners never presented any evidence
to establish that they were forced to suffer enormous losses or operate at a loss due to the effects of
the assailed law. They came directly to this Court and provided a hypothetical 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 profit  is ₱5.00  or a profit margin  of 50%.
98 99 100 101

Under the assailed law, the aforesaid product would have to be sold at ₱8.00 to senior citizens yet
the business would still earn ₱3.00  or a 30%  profit margin. On the other hand, if the product costs
102 103

₱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

But note that since not all customers of a business establishment are senior citizens, the business
establishment may continue to earn ₱1.00 from non-senior citizens which, in turn, can offset any
loss arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the
business establishment from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or
income/gross sales which would otherwise arise from the giving of the 20% discount. To illustrate,
suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law, A
sells his products at ₱10.00 a piece to X and Y resulting in income/gross sales of ₱20.00 (₱10.00 +
₱10.00). With the passage of the law, A must now sell his product to X at ₱8.00 (i.e., ₱10.00 less
20%) so that his income/gross sales would be ₱18.00 (₱8.00 + ₱10.00) or lower by ₱2.00. To
prevent this from happening, A decides to increase the price of his products to ₱11.11 per piece.
Thus, he sells his product to X at ₱8.89 (i.e. , ₱11.11 less 20%) and to Y at ₱11.11. As a result, his
income/gross sales would still be ₱20.00  (₱8.89 + ₱11.11). The capacity, then, of business
105

establishments to revise their pricing strategy makes it possible for them not to suffer any reduction
in profits or income/gross sales, or, in the alternative, mitigate the reduction of their profits or
income/gross sales even after the passage of the law. In other words, business establishments have
the capacity to adjust their prices so that they may remain profitable even under the operation of the
assailed law.

The Dissent, however, states that – The explanation by the majority that private establishments can
always increase their prices to recover the mandatory discount will only encourage private
establishments to adjust their prices upwards to the prejudice of customers who do not enjoy the
20% discount. It was likewise suggested that if a company increases its prices, despite the
application of the 20% discount, the establishment becomes more profitable than it was before the
implementation of R.A. 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),  and not all private establishments make a 20% profit margin (which conversely implies that
108

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 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 loss  and that the 20% discount forces business establishments
111

to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,  which the Dissent essentially adopts and relies
113

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 sales  of the business
114

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 x
116

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 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,"  it is assuming what it ought to prove. First, there are laws
119

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.  This would, in turn, be integrated as part of the cost of its goods or services. Again, if
1âwphi1

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)  is an exercise of eminent domain
120

that requires the State to pay just compensation,"  then these statutory provisions would, likewise,
121

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 Corporation  and followed in Carlos Superdurg
126

Corporation  consistent with long standing principles in police power and eminent domain analysis.
127
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.

G.R. No. 204429               February 18, 2014

SMART COMMUNICATIONS, INC., Petitioner,

vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review  challenges the 26 June 2012 Decision  and 13 November 2012
1 2

Resolution  of the Court of Tax. Appeals (CTA) En Banc.

3

Th e CTA En Banc affirmed the 17 December 2010 Decision  and 7 April 2011 Resolution  of the
4 5

CTA First Division, which in turn affirmed the 2 December 2008 Decision  and 21 May 2009 Order  of
6 7

the Regional Trial Court of Tanauan City, Batangas, Branch 6. The trial court declared void the
assessment imposed by respondent Municipality of Malvar, Batangas against petitioner Smart
Communications, Inc. for its telecommunications tower for 2001 to July 2003 and directed
respondent to assess petitioner only for the period starting 1 October 2003.

The Facts

Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the business of
providing telecommunications services to the general public while respondent Municipality of Malvar,
Batangas (Municipality) is a local government unit created by law.

In the course of its business, Smart constructed a telecommunications tower within the territorial
jurisdiction of the Municipality. The construction of the tower was for the purpose of receiving and
transmitting cellular communications within the covered area.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An Ordinance
Regulating the Establishment of Special Projects."
On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the
Mayor of the Municipality an assessment letter with a schedule of payment for the total amount of
₱389,950.00 for Smart’s telecommunications tower. The letter reads as follows:

This is to formally submit to your good office your schedule of payments in the Municipal Treasury of
the Local Government Unit of Malvar, province of Batangas which corresponds to the tower of your
company built in the premises of the municipality, to wit:

TOTAL PROJECT COST: PHP 11,000,000.00

For the Year 2001-2003

50% of 1% of the total project cost Php55,000.00

Add: 45% surcharge 24,750.00

Php79,750.00
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00
For the year 2004
1% of the total project cost Php110,000.00
37% surcharge 40,700.00
==========
Php150,700.00
TOTAL Php389,950.00

Hoping that you will give this matter your preferential attention. 8

Due to the alleged arrears in the payment of the assessment, the Municipality also caused the
posting of a closure notice on the telecommunications tower.

On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of the
assessment and closure notice. In the same protest, Smart challenged the validity of Ordinance No.
18 on which the assessment was based.

In a letter dated 28 September 2004, the Municipality denied Smart’s protest.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas, Branch 6,
an "Appeal/Petition" assailing the validity of Ordinance No. 18. The case was docketed as SP Civil
Case No. 04-11-1920.

On 2 December 2008, the trial court rendered a Decision partly granting Smart’s Appeal/Petition.
The trial court confined its resolution of the case to the validity of the assessment, and did not rule
on the legality of Ordinance No. 18. The trial court held that the assessment covering the period from
2001 to July 2003 was void since Ordinance No. 18 was approved only on 30 July 2003. However,
the trial court declared valid the assessment starting 1 October 2003, citing Article 4 of the Civil
Code of the Philippines,  in relation to the provisions of Ordinance No. 18 and Section 166 of
9

Republic Act No. 7160 or the Local Government Code of 1991 (LGC).  The dispositive portion of the
10

trial court’s Decision reads:

WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment dated
August 24, 2004 against petitioner is hereby declared null and void insofar as the assessment made
from year 2001 to July 2003 and respondent is hereby prohibited from assessing and collecting,
from petitioner, fees during the said period and the Municipal Government of Malvar, Batangas is
directed to assess Smart Communications, Inc. only for the period starting October 1, 2003.

No costs.

SO ORDERED. 11

The trial court denied the motion for reconsideration in its Order of 21 May 2009.

On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA AC
No. 58.

On 17 December 2010, the CTA First Division denied the petition for review. The dispositive portion
of the decision reads:

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the assailed
Decision dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of the Regional
Trial Court of Tanauan City, Batangas in SP. Civil Case No. 04-11-1920 entitled "Smart
Communications, Inc. vs. Municipality of Malvar, Batangas" are AFFIRMED.

SO ORDERED. 12

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for reconsideration.

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Division’s
decision and resolution. The dispositive portion of the CTA En Banc’s 26 June 2012 decision reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED for lack
of merit.
1âwphi1

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7, 2011 are
hereby AFFIRMED.

SO ORDERED. 13

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Ruling of the CTA En Banc

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En Banc
declared that it is a court of special jurisdiction and as such, it can take cognizance only of such
matters as are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of Republic Act No.
9282, the CTA En Banc held that the CTA has exclusive appellate jurisdiction to review on appeal,
decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally resolved by
them in the exercise of their original or appellate jurisdiction. However, the same provision does not
confer on the CTA jurisdiction to resolve cases where the constitutionality of a law or rule is
challenged.

The Issues

The petition raises the following arguments:

1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the CTA En Banc should have exercised
its jurisdiction and declared the Ordinance as illegal.

2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the doctrine of exhaustion of
administrative remedies does not apply in [this case].

3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the respondent has no authority to impose
the so-called "fees" on the basis of the void ordinance. 14

The Ruling of the Court

The Court denies the petition.

On whether the CTA has jurisdiction over the present case

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart maintains
that the CTA has jurisdiction over the present case considering the "unique" factual circumstances
involved.

The CTA refuses to take cognizance of this case since it challenges the constitutionality of
Ordinance No. 18, which is outside the province of the CTA.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No. 9282,
created the Court of Tax Appeals. Section 7, paragraph (a), sub-paragraph (3)  of the law vests the
15

CTA with the exclusive appellate jurisdiction over "decisions, orders or resolutions of the Regional
Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original
or appellate jurisdiction."

The question now is whether the trial court resolved a local tax case in order to fall within the ambit
of the CTA’s appellate jurisdiction This question, in turn, depends ultimately on whether the fees
imposed under Ordinance No. 18 are in fact taxes.

Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not regulatory,
but revenue-raising. Citing Philippine Airlines, Inc. v. Edu,  Smart contends that the designation of
16

"fees" in Ordinance No. 18 is not controlling.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the
power to create its own sources of revenues and 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 government."

Consistent with this constitutional mandate, the LGC grants the taxing powers to each local
government unit. Specifically, Section 142 of the LGC grants municipalities the power to levy taxes,
fees, and charges not otherwise levied by provinces. Section 143 of the LGC provides for the scale
of taxes on business that may be imposed by municipalities  while Section 147  of the same law
17 18

provides for the fees and charges that may be imposed by municipalities on business and
occupation.

The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against
persons or property, while the term "fee" means "a charge fixed by law or ordinance for the
regulation or inspection of a business or activity."
19

In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance Regulating
the Establishment of Special Projects," to regulate the "placing, stringing, attaching, installing, repair
and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and
other apparatus, and provide for the correction, condemnation or removal of the same when found to
be dangerous, defective or otherwise hazardous to the welfare of the inhabitant[s]."  It was also
20

envisioned to address the foreseen "environmental depredation" to be brought about by these

"special projects" to the Municipality.  Pursuant to these objectives, the Municipality imposed fees on
21

various structures, which included telecommunications towers.

As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate the
"placing, stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph
and telephone wires, conduits, meters and other apparatus" listed therein, which included Smart’s
telecommunications tower. Clearly, the purpose of the assailed Ordinance is to regulate the
enumerated activities particularly related to the construction and maintenance of various structures.
The fees in Ordinance No. 18 are not impositions on the building or structure itself; rather, they are
impositions on the activity subject of government regulation, such as the installation and construction
of the structures.
22

Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the
identified special projects, which included "cell sites" or telecommunications towers, the fees
imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-raising.
While the fees may contribute to the revenues of the Municipality, this effect is merely incidental.
Thus, the fees imposed in Ordinance No. 18 are not taxes.

In Progressive Development Corporation v. Quezon City,  the Court declared that "if the generating
23

of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make
the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias,  the Court reiterated that the purpose and
24

effect of the imposition determine whether it is a tax or a fee, and that the lack of any standards for
such imposition gives the presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether
the imposition is properly a license tax or a license fee. The determining factors are the purpose and
effect of the imposition as may be apparent from the provisions of the ordinance. Thus, "[w]hen no
police inspection, supervision, or regulation is provided, nor any standard set for the applicant to
establish, or that he agrees to attain or maintain, but any and all persons engaged in the business
designated, without qualification or hindrance, may come, and a license on payment of the stipulated
sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye,
but according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is
strong that the power of taxation, and not the police power, is being exercised."

Contrary to Smart’s contention, Ordinance No. 18 expressly provides for the standards which Smart
must satisfy prior to the issuance of the specified permits, clearly indicating that the fees are
regulatory in nature.

These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.

The following documents shall be submitted to the SB Secretary in triplicate:

a) zoning clearance

b) Vicinity Map

c) Site Plan

d) Evidence of ownership

e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or

telegraph line, ERB in case of gasoline station, power plant, and other concerned national
agencies

f) Conversion order from DAR is located within agricultural zone.

g) Radiation Protection Evaluation.

h) Written consent from subdivision association or the residence of the area concerned if the
special projects is located within the residential zone.

i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit – Upon the expiration of 180 days and the
proponents of special projects shall apply for final [development permit] and they are require[d] to
submit the following:

a) evaluation from the committee where the Vice Mayor refers the special project

b) Certification that all local fees have been paid.

Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is
questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition for lack of
jurisdiction. Likewise, Section 187 of the LGC,  which outlines the procedure for questioning the
25

constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the resolution of the issue
on non-exhaustion of administrative remedies.
On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart argues that the
Municipality exceeded its power to impose taxes and fees as provided in Book II, Title One, Chapter
2, Article II of the LGC. Smart maintains that the mayor’s permit fees in Ordinance No. 18
(equivalent to 1% of the project cost) are not among those expressly enumerated in the LGC.

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not appear
in the enumeration of taxes under Section 143 of the LGC.

Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the
Municipality is empowered to impose taxes, fees and charges, not specifically enumerated in the
LGC or taxed under the Tax Code or other applicable law. Section 186 of the LGC, granting local
government units wide latitude in imposing fees, expressly provides:

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may exercise
the power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the National Internal Revenue Code, as
amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That
the ordinance levying such taxes, fees or charges shall not be enacted without any prior public
hearing conducted for the purpose.

Smart further argues that the Municipality is encroaching on the regulatory powers of the National
Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act No. 7925 which
provides that the National Telecommunications Commission (NTC), in the exercise of its regulatory
powers, shall impose such fees and charges as may be necessary to cover reasonable costs and
expenses for the regulation and supervision of the operations of telecommunications entities. Thus,
Smart alleges that the regulation of telecommunications entities and all aspects of its operations is
specifically lodged by law on the NTC.

To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other
apparatus" within the Municipality. The fees are not imposed to regulate the administrative,
technical, financial, or marketing operations of telecommunications entities, such as Smart’s; rather,
to regulate the installation and maintenance of physical structures – Smart’s cell sites or
telecommunications tower. The regulation of the installation and maintenance of such physical
structures is an exercise of the police power of the Municipality. Clearly, the Municipality does not
encroach on NTC’s regulatory powers.

The Court likewise rejects Smart’s contention that the power to fix the fees for the issuance of
development permits and locational clearances is exercised by the Housing and Land Use
Regulatory Board (HLURB). Suffice it to state that the HLURB itself recognizes the local government
units’ power to collect fees related to land use and development. Significantly, the HLURB issued
locational guidelines governing telecommunications infrastructure.  Guideline No. VI relates to the
1âwphi1

collection of locational clearance fees either by the HLURB or the concerned local government unit,
to wit:

VI. Fees

The Housing and Land Use Regulatory Board in the performance of its functions shall collect the
locational clearance fee based on the revised schedule of fees under the special use project as per
Resolution No. 622, series of 1998 or by the concerned LGUs subject to EO 72. 26
On whether Ordinance No. 18 is valid and constitutional

Smart contends that Ordinance No. 18 violates Sections 130(b)(3)  and 186 of the LGC since the
27

fees are unjust, excessive, oppressive and confiscatory. Aside from this bare allegation, Smart did
not present any evidence substantiating its claims. In Victorias Milling Co., Inc. v. Municipality of
Victorias,  the Court rejected the argument that the fees imposed by respondent therein are
28

excessive for lack of evidence supporting such claim, to wit:

An ordinance carries with it the presumption of validity. The question of reasonableness though is
open to judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will
go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained acceptance
is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of
the business made subject to imposition.

Plaintiff, has however not sufficiently proven that, taking these factors together, the license taxes are
unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to insisting that the
amounts levied exceed the cost of regulation and the municipality has adequate funds for the
alleged purposes as evidenced by the municipality’s cash surplus for the fiscal year ending 1956.

On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality of
Ordinance No. 18 in the Prayer of the Petition, without any argument or evidence to support its plea.
Nowhere in the body of the Petition was this issue specifically raised and discussed. Significantly,
Smart failed to cite any constitutional provision allegedly violated by respondent when it issued
Ordinance No. 18.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down a law
as unconstitutional, Smart has the burden to prove a clear and unequivocal breach of the
Constitution, which Smart miserably failed to do. In Lawyers Against Monopoly and Poverty (LAMP)
v. Secretary of Budget and Management,  the Court held, thus:
29

To justify the nullification of the law or its implementation, there must be a clear and unequivocal, not
a doubtful, breach of the Constitution. In case of doubt in the sufficiency of proof establishing
unconstitutionality, the Court must sustain legislation because "to invalidate [a law] based on xx x
baseless supposition is an affront to the wisdom not only of the legislature that passed it but also of
the executive which approved it." This presumption of constitutionality can be overcome only by the
clearest showing that there was indeed an infraction of the Constitution, and only when such a
conclusion is reached by the required majority may the Court pronounce, in the discharge of the duty
it cannot escape, that the challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:
G.R. Nos. 147036-37               April 10, 2012

Petitioner-Organizations, namely: PAMBANSANG KOALISYON NG MGA SAMAHANG

MAGSASAKA AT MANGGAGAWA SA NIYUGAN (PKSMMN), COCONUT INDUSTRY REFORM
MOVEMENT (COIR), BUKLOD NG MALAYANG MAGBUBUKID, PAMBANSANG KILUSAN NG
MGA SAMAHANG MAGSASAKA (PAKISAMA), CENTER FOR AGRARIAN REFORM,
EMPOWERMENT AND TRANSFORMATION (CARET), PAMBANSANG KATIPUNAN NG MGA
SAMAHAN SA KANAYUNAN (PKSK); Petitioner-Legislator: REPRESENTATIVE LORETA ANN
ROSALES; and Petitioner-Individuals, namely: VIRGILIO V. DAVID, JOSE MARIE FAUSTINO,
JOSE CONCEPCION, ROMEO ROYANDOYAN, JOSE V. ROMERO, JR., ATTY. CAMILO L.
SABIO, and ATTY. ANTONIO T. CARPIO, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), and
UNITED COCONUT PLANTERS BANK (UCPB), Respondents.

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

G.R. No. 147811

TEODORO J. AMOR, representing the Peasant Alliance of Samar and Leyte (PASALEY),
DOMINGO C. ENCALLADO, representing Aniban ng Magsasaka at Manggagawa sa Niyugan
(AMMANI), and VIDAL M. PILIIN, representing the Laguna Coalition, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT PRODUCERS FEDERATION, UNITED COCONUT
PLANTERS BANK, Respondents.

DECISION

ABAD, J.:

These are consolidated petitions to declare unconstitutional certain presidential decrees and
executive orders of the martial law era relating to the raising and use of coco-levy funds.

The Facts and the Case

On June 19, 1971 Congress enacted Republic Act (R.A.) 6260 that established a Coconut
1 

Investment Fund (CI Fund) for the development of the coconut industry through capital
financing. Coconut farmers were to capitalize and administer the Fund through the Coconut
2 

Investment Company (CIC) whose objective was, among others, to advance the coconut farmers’
3 

interests. For this purpose, the law imposed a levy of ₱0.55 on the coconut farmer’s first domestic
sale of every 100 kilograms of copra, or its equivalent, for which levy he was to get a receipt
convertible into CIC shares of stock. 4

About a year following his proclamation of martial law in the country or on August 20, 1973 President
Ferdinand E. Marcos issued Presidential Decree (P.D.) 276, which established a Coconut
5 

Consumers Stabilization Fund (CCS Fund), to address the crisis at that time in the domestic market
for coconut-based consumer goods. The CCS Fund was to be built up through the imposition of a
₱15.00-levy for every first sale of 100 kilograms of copra resecada. The levy was to cease after a
6 

year or earlier provided the crisis was over. Any remaining balance of the Fund was to revert to the
CI Fund established under R.A. 6260. 7

A year later or on November 14, 1974 President Marcos issued P.D. 582, creating a permanent fund
8 

called the Coconut Industry Development Fund (CID Fund) to channel for the ultimate direct benefit
of coconut farmers part of the levies that they were already paying. The Philippine Coconut Authority
(PCA) was to provide ₱100 million as initial capital of the CID Fund and, thereafter, give the Fund at
least ₱0.20 per kilogram of copra resecada out of the PCA’s collection of coconut consumers
stabilization levy. In case of the lifting of this levy, the PCA was then to impose a permanent levy of
₱0.20 on the first sale of every kilogram of copra to form part of the CID Fund. Also, under P.D. 582, 9 

the Philippine National Bank (PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund. P.D. 582 authorized the PNB to invest the unused portion of the
10 

CID Fund in easily convertible investments, the earnings of which were to form part of the Fund. 11

In 1975 President Marcos enacted P.D. 755 which approved the acquisition of a commercial bank
12 

for the benefit of the coconut farmers to enable such bank to promptly and efficiently realize the
industry’s credit policy. Thus, the PCA bought 72.2% of the shares of stock of First United Bank,
13 

headed by Pedro Cojuangco. Due to changes in its corporate identity and purpose, the bank’s
14 

articles of incorporation were amended in July 1975, resulting in a change in the bank’s name from
First United Bank to United Coconut Planters Bank (UCPB). 15

On July 14, 1976 President Marcos enacted P.D. 961, the Coconut Industry Code, which
16 

consolidated and codified existing laws relating to the coconut industry. The Code provided that
surpluses from the CCS Fund and the CID Fund collections, not used for replanting and other
authorized purposes, were to be invested by acquiring shares of stock of corporations, including the
San Miguel Corporation (SMC), engaged in undertakings related to the coconut and palm oil
industries. UCPB was to make such investments and equitably distribute these for free to coconut
17 

farmers. These investments constituted the Coconut Industry Investment Fund (CIIF). P.D. 961 also
18 

provided that the coconut levy funds (coco-levy funds) shall be owned by the coconut farmers in
their private capacities. This was reiterated in the PD 1468 amendment of June 11, 1978.
19  20 

In 1980, President Marcos issued P.D. 1699, suspending the collections of the CCS Fund and the
21 

CID Fund. But in 1981 he issued P.D. 1841 which revived the collection of coconut levies. P.D.
22 

1841 renamed the CCS Fund into the Coconut Industry Stabilization Fund (CIS Fund). This Fund 23 

was to be earmarked proportionately among several development programs, such as coconut hybrid
replanting program, insurance coverage for the coconut farmers, and scholarship program for their
children.
24

In November 2000 then President Joseph Estrada issued Executive Order (E.O.) 312, establishing 25 

a Sagip Niyugan Program which sought to provide immediate income supplement to coconut
farmers and encourage the creation of a sustainable local market demand for coconut oil and other
coconut products. The Executive Order sought to establish a ₱1-billion fund by disposing of assets
26 

acquired using coco-levy funds or assets of entities supported by those funds. A committee was 27 

created to manage the fund under this program. A majority vote of its members could engage the
28 

services of a reputable auditing firm to conduct periodic audits. 29

At about the same time, President Estrada issued E.O. 313, which created an irrevocable trust fund
30 

known as the Coconut Trust Fund (the Trust Fund). This aimed to provide financial assistance to
coconut farmers, to the coconut industry, and to other agri-related programs. The shares of stock of31 

SMC were to serve as the Trust Fund’s initial capital. These shares were acquired with CII Funds
32 

and constituted approximately 27% of the outstanding capital stock of SMC. E.O. 313 designated
UCPB, through its Trust Department, as the Trust Fund’s trustee bank. The Trust Fund Committee
would administer, manage, and supervise the operations of the Trust Fund. The Committee would
33 

designate an external auditor to do an annual audit or as often as needed but it may also request the
Commission on Audit (COA) to intervene. 34

To implement its mandate, E.O. 313 directed the Presidential Commission on Good Government,
the Office of the Solicitor General, and other government agencies to exclude the 27% CIIF SMC
shares from Civil Case 0033, entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al.,
which was then pending before the Sandiganbayan and to lift the sequestration over those shares. 35

On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered the suspension
of E.O.s 312 and 313. This notwithstanding, on March 1, 2001 petitioner organizations and
36 

individuals brought the present action in G.R. 147036-37 to declare E.O.s 312 and 313 as well as
Article III, Section 5 of P.D. 1468 unconstitutional. On April 24, 2001 the other sets of petitioner
organizations and individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 also for being unconstitutional.

The Issues Presented

The parties submit the following issues for adjudication:

Procedurally –

1. Whether or not petitioners’ special civil actions of certiorari under Rule 65 constituted the
proper remedy for their actions; and

2. Whether or not petitioners have legal standing to bring the same to court.

On the substance –

3. Whether or not the coco-levy funds are public funds; and

4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of P.D.s 961 and 1468,
(c) E.O. 312, and (d) E.O. 313 are unconstitutional.

The Rulings of the Court

First. UCPB questions the propriety of the present petitions for certiorari and mandamus under Rule
65 on the ground that there are no ongoing proceedings in any tribunal or board or before a
government official exercising judicial, quasi-judicial, or ministerial functions. UCPB insists that the
37 

Court exercises appellate jurisdiction with respect to issues of constitutionality or validity of laws and
presidential orders.38

But, as the Court previously held, where there are serious allegations that a law has infringed the
Constitution, it becomes not only the right but the duty of the Court to look into such allegations and,
when warranted, uphold the supremacy of the Constitution. Moreover, where the issues raised are
39 

of paramount importance to the public, as in this case, the Court has the discretion to brush aside
technicalities of procedure. 40
Second. The Court has to uphold petitioners’ right to institute these petitions. The petitioner
organizations in these cases represent coconut farmers on whom the burden of the coco-levies
attaches. It is also primarily for their benefit that the levies were imposed.

The individual petitioners, on the other hand, join the petitions as taxpayers. The Court recognizes
their right to restrain officials from wasting public funds through the enforcement of an
unconstitutional statute. This so-called taxpayer’s suit is based on the theory that expenditure of
41 

public funds for the purpose of executing an unconstitutional act is a misapplication of such funds. 42

Besides, the 1987 Constitution accords to the citizens a greater participation in the affairs of
government. Indeed, it provides for people's initiative, the right to information on matters of public
concern (including the right to know the state of health of their President), as well as the right to file
cases questioning the factual bases for the suspension of the privilege of writ of habeas corpus or
declaration of martial law. These provisions enlarge the people’s right in the political as well as the
judicial field. It grants them the right to interfere in the affairs of government and challenge any act
tending to prejudice their interest.

Third. For some time, different and conflicting notions had been formed as to the nature and
ownership of the coco-levy funds. The Court, however, finally put an end to the dispute when it
categorically ruled in Republic of the Philippines v. COCOFED that these funds are not only affected
43 

with public interest; they are, in fact, prima facie public funds. Prima facie means a fact presumed to
be true unless disproved by some evidence to the contrary. 44

The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper
governmental purpose. They were raised with the use of the police and taxing powers of the State
for the benefit of the coconut industry and its farmers in general. The COA reviewed the use of the
funds. The Bureau of Internal Revenue (BIR) treated them as public funds and the very laws
governing coconut levies recognize their public character. 45

The Court has also recently declared that the coco-levy funds are in the nature of taxes and can only
be used for public purpose. Taxes are enforced proportional contributions from persons and
46 

property, levied by the State by virtue of its sovereignty for the support of the government and for all
its public needs. Here, the coco-levy funds were imposed pursuant to law, namely, R.A. 6260 and
47 

P.D. 276. The funds were collected and managed by the PCA, an independent government
corporation directly under the President. And, as the respondent public officials pointed out, the
48 

pertinent laws used the term levy, which means to tax, in describing the exaction.
49  50 

Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the
government’s general funds but to provide means for the rehabilitation and stabilization of a
threatened industry, the coconut industry, which is so affected with public interest as to be within the
police power of the State. The funds sought to support the coconut industry, one of the main
51 

economic backbones of the country, and to secure economic benefits for the coconut farmers and
farm workers. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and 52 

the oil price stabilization funds under P.D. 1956, as amended by E.O. 137.
53  54

Respondent UCPB suggests that the coco-levy funds are closely similar to the Social Security
System (SSS) funds, which have been declared to be not public funds but properties of the SSS
members and held merely in trust by the government. But the SSS Law collects premium
55  56 

contributions. It does not collect taxes from members for a specific public purpose. They pay
contributions in exchange for insurance protection and benefits like loans, medical or health
services, and retirement packages. The benefits accrue to every SSS member, not to the public, in
general.57
Furthermore, SSS members do not lose ownership of their contributions. The government merely
holds these in trust, together with his employer’s contribution, to answer for his future benefits. The58 

coco-levy funds, on the other hand, belong to the government and are subject to its administration
and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as
all its assets, properties, and shares of stocks procured with such funds must be treated, used,
administered, and managed as public funds. 59

Lastly, the coco-levy funds are evidently special funds. In Gaston v. Republic Planters Bank, the60 

Court held that the State collected stabilization fees from sugar millers, planters, and producers for a
special purpose: to finance the growth and development of the sugar industry and all its
components. The fees were levied for a special purpose and, therefore, constituted special fund
when collected. Its character as such fund was made clear by the fact that they were deposited in
the PNB (then a wholly owned government bank) and not in the Philippine Treasury. In Osmeña v.
Orbos, the Court held that the oil price stabilization fund was a special fund mainly because this was
61 

segregated from the general fund and placed in what the law referred to as a trust account. Yet it
remained subject to COA scrutiny and review. The Court finds no substantial distinction between
these funds and the coco-levy funds, except as to the industry they each support.

Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above is void and
unconstitutional for disregarding the public character of coco-levy funds. The subject section
provides:

Section 2. Financial Assistance. x x x and since the operations, and activities of the Philippine
Coconut Authority are all in accord with the present social economic plans and programs of the
Government, all collections and levies which the Philippine Coconut Authority is authorized to levy
and collect such as but not limited to the Coconut Consumers’ Stabilization Levy, and the Coconut
Industry Development Fund as prescribed by Presidential Decree No. 582 shall not be considered or
construed, under any law or regulation, special and/or fiduciary funds and do not form part of the
general funds of the national government within the contemplation of Presidential Decree No. 711.
(Emphasis ours)

The Court has, however, already passed upon this question in Philippine Coconut Producers
Federation, Inc. (COCOFED) v. Republic of the Philippines. It held as unconstitutional Section 2 of
62 

P.D. 755 for "effectively authorizing the PCA to utilize portions of the CCS Fund to pay the financial
commitment of the farmers to acquire UCPB and to deposit portions of the CCS Fund levies with
UCPB interest free. And as there also provided, the CCS Fund, CID Fund and like levies that PCA is
authorized to collect shall be considered as non-special or fiduciary funds to be transferred to the
general fund of the Government, meaning they shall be deemed private funds."

Identical provisions of subsequent presidential decrees likewise declared coco-levy funds private
properties of coconut farmers. Article III, Section 5 of P.D. 961 reads:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund as well as all disbursements of said funds for the benefit of the coconut farmers
as herein authorized shall not be construed or interpreted, under any law or regulation, as special
and/or fiduciary funds, or as part of the general funds of the national government within the
contemplation of P.D. No. 711; nor as a subsidy, donation, levy, government funded investment, or
government share within the contemplation of P.D. 898, the intention being that said Fund and the
disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by
them in their own private capacities. (Emphasis ours)

Section 5 of P.D. 1468 basically reproduces the above provision, thus–

Section 5. Exemption. — The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund, as well as all disbursements as herein authorized, shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of the
general funds of the national government within the contemplation of P.D. 711; nor as subsidy,
donation, levy government funded investment, or government share within the contemplation
of P.D. 898, the intention being that said Fund and the disbursements thereof as herein
authorized for the benefit of the coconut farmers shall be owned by them in their private
capacities: Provided, however, That the President may at any time authorize the Commission on
Audit or any other officer of the government to audit the business affairs, administration, and
condition of persons and entities who receive subsidy for coconut-based consumer products x x x.
(Emphasis ours)

Notably, the raising of money by levy on coconut farm production, a form of taxation as already
stated, began in 1971 for the purpose of developing the coconut industry and promoting the interest
of coconut farmers. The use of the fund was expanded in 1973 to include the stabilization of the
domestic market for coconut-based consumer goods and in 1974 to divert part of the funds for
obtaining direct benefit to coconut farmers. After five years or in 1976, however, P.D. 961 declared
the coco-levy funds private property of the farmers. P.D. 1468 reiterated this declaration in 1978. But
neither presidential decree actually turned over possession or control of the funds to the farmers in
their private capacity. The government continued to wield undiminished authority over the
management and disposition of those funds.

In any event, such declaration is void. There is ownership when a thing pertaining to a person is
completely subjected to his will in everything that is not prohibited by law or the concurrence with the
rights of another. An owner is free to exercise all attributes of ownership: the right, among others, to
63 

possess, use and enjoy, abuse or consume, and dispose or alienate the thing owned. The owner is
64 

of course free to waive all or some of these rights in favor of others. But in the case of the coconut
farmers, they could not, individually or collectively, waive what have not been and could not be
legally imparted to them.

Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468
completely ignore the fact that coco-levy funds are public funds raised through taxation. And since
taxes could be exacted only for a public purpose, they cannot be declared private properties of
individuals although such individuals fall within a distinct group of persons. 65

The Court of course grants that there is no hard-and-fast rule for determining what constitutes public
purpose. It is an elastic concept that could be made to fit into modern standards. Public purpose, for
instance, is no longer restricted to traditional government functions like building roads and school
houses or safeguarding public health and safety. Public purpose has been construed as including
the promotion of social justice. Thus, public funds may be used for relocating illegal settlers, building
low-cost housing for them, and financing both urban and agrarian reforms that benefit certain poor
individuals. Still, these uses relieve volatile iniquities in society and, therefore, impact on public order
and welfare as a whole.

But the assailed provisions, which removed the coco-levy funds from the general funds of the
government and declared them private properties of coconut farmers, do not appear to have a color
of social justice for their purpose. The levy on copra that farmers produce appears, in the first place,
to be a business tax judging by its tax base. The concept of farmers-businessmen is incompatible
with the idea that coconut farmers are victims of social injustice and so should be beneficiaries of the
taxes raised from their earnings.
It would altogether be different of course if the laws mentioned set apart a portion of the coco-levy
fund for improving the lives of destitute coconut farm owners or workers for their social amelioration
to establish a proper government purpose. The support for the poor is generally recognized as a
public duty and has long been an accepted exercise of police power in the promotion of the common
good. But the declarations do not distinguish between wealthy coconut farmers and the
66 

impoverished ones. And even if they did, the Government cannot just embark on a philanthropic
orgy of inordinate dole-outs for motives political or otherwise. Consequently, such declarations are
67 

void since they appropriate public funds for private purpose and, therefore, violate the citizens’ right
to substantive due process. 68

On another point, in stating that the coco-levy fund "shall not be construed or interpreted, under any
law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national
government," P.D.s 961 and 1468 seek to remove such fund from COA scrutiny.

This is also the fault of President Estrada’s E.O. 312 which deals with ₱1 billion to be generated out
of the sale of coco-fund acquired assets. Thus–

Section 5. Audit of Fund and Submission of Report. – The Committee, by a majority vote, shall
engage the services of a reputable auditing firm to conduct periodic audits of the fund. It shall render
a quarterly report on all pertinent transactions and availments of the fund to the Office of the
President within the first three (3) working days of the succeeding quarter. (Emphasis ours)

E.O. 313 has a substantially identical provision governing the management and disposition of the
Coconut Trust Fund capitalized with the substantial SMC shares of stock that the coco-fund
acquired. Thus–

Section 13. Accounting. — x x x

The Fund shall be audited annually or as often as necessary by an external auditor

designated by the Committee. The Committee may also request the Commission on Audit to
conduct an audit of the Fund. (Emphasis ours)

But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and 1468 as well as those of
E.O.s 312 and 313 that remove such funds and the assets acquired through them from the
jurisdiction of the COA violate Article IX-D, Section 2(1) of the 1987 Constitution. Section 2(1) vests
69 

in the COA the power and authority to examine uses of government money and property. The cited
P.D.s and E.O.s also contravene Section 2 of P.D. 898 (Providing for the Restructuring of the
70 

Commission on Audit), which has the force of a statute.

And there is no legitimate reason why such funds should be shielded from COA review and audit.
The PCA, which implements the coco-levy laws and collects the coco-levy funds, is a government-
owned and controlled corporation subject to COA review and audit.

E.O. 313 suffers from an additional infirmity. Its title, "Rationalizing the Use of the Coconut Levy
Funds by Constituting a ‘Fund for Assistance to Coconut Farmers’ as an Irrevocable Trust Fund and
Creating a Coconut Trust Fund Committee for the Management thereof" tends to mislead.
Apparently, it intends to create a trust fund out of the coco-levy funds to provide economic
assistance to the coconut farmers and, ultimately, benefit the coconut industry. But on closer look,
71 

E.O. 313 strays from the special purpose for which the law raises coco-levy funds in that it permits
the use of coco-levy funds for improving productivity in other food areas. Thus:
Section 2. Purpose of the Fund. — The Fund shall be established for the purpose of financing
programs of assistance for the benefit of the coconut farmers, the coconut industry, and other agri-
related programs intended to maximize food productivity, develop business opportunities in
the countryside, provide livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)

xxxx

Section 9. Use and Disposition of the Trust Income. — The Coconut Trust Fund Committee, on an
annual basis, shall determine and establish the amount comprising the Trust Income. After such
determination, the Committee shall earmark, allocate and disburse the Trust Income for the following
purposes, namely:

xxxx

(d) Thirty percent (30%) of the Trust Income shall be used to assist and fund agriculturally-
related programs for the Government, as reasonably determined by the Trust Fund Committee,
implemented for the purpose of: (i) maximizing food productivity in the agriculture areas of the
country, (ii) enhancing the upliftment and well-being of the living conditions of farmers and
agricultural workers, (iii) developing viable industries and business opportunities in the countryside,
(iv) providing alternative means of livelihood to the direct dependents of agriculture businesses and
enterprises, and (v) providing financial assistance and support to coconut farmers in times of
economic hardship due to extremely low prices of copra and other coconut products, natural
calamities, world market dislocation and similar occurrences, including financial support to the
ERAP’s Sagip Niyugan Program established under Executive Order No. 312 dated November 3,
2000; x x x. (Emphasis ours)

Clearly, E.O. 313 above runs counter to the constitutional provision which directs that all money
collected on any tax levied for a special purpose shall be treated as a special fund and paid out for
such purpose only. Assisting other agriculturally-related programs is way off the coco-fund’s
72 

objective of promoting the general interests of the coconut industry and its farmers.

A final point, the E.O.s also transgress P.D. 1445, Section 84(2), the first part by the previously
73  74 

mentioned sections of E.O. 313 and the second part by Section 4 of E.O. 312 and Sections 6 and 7
of E.O. 313. E.O. 313 vests the power to administer, manage, and supervise the operations and
disbursements of the Trust Fund it established (capitalized with SMC shares bought out of coco-levy
funds) in a Coconut Trust Fund Committee. Thus–

Section 6. Creation of the Coconut Trust Fund Committee. — A Committee is hereby created to
administer, manage and supervise the operations of the Trust Fund, chaired by the President
with ten (10) members, as follows:

(a) four (4) representatives from the government sector, two of whom shall be the Secretary
of Agriculture and the Secretary of Agrarian Reform who shall act as Vice Chairmen;

(b) four (4) representatives from coconut farmers’ organizations, one of whom shall come
from a list of nominees from the Philippine Coconut Producers Federation Inc.
("COCOFED");

(c) a representative from the CIIF; and

 (d) a representative from a non-government organization (NGO) involved in agricultural and
rural development.

All decisions of the Coconut Trust Fund Committee shall be determined by a majority vote of all the
members.

The Coconut Trust Fund Committee shall perform the functions and duties set forth in Section 7
hereof, with the skill, care, prudence and diligence necessary under the circumstances then
prevailing that a prudent man acting in like capacity would exercise.

The members of the Coconut Trust Fund Committee shall be appointed by the President and shall
hold office at his pleasure.

The Coconut Trust Fund Committee is authorized to hire administrative, technical and/or support
staff as may be required to enable it to effectively perform its functions and responsibilities.
(Emphasis ours)

Section 7. Functions and Responsibilities of the Committee. — The Coconut Trust Fund Committee
shall have the following functions and responsibilities:

(a) set the investment policy of the Trust Fund;

(b) establish priorities for assistance giving preference to small coconut farmers and
farmworkers which shall be reviewed periodically and revised as necessary in accordance
with changing conditions;

(c) receive, process and approve project proposals for financing by the Trust Fund;

(d) decide on the use of the Trust Fund’s income or net earnings including final action
on applications for assistance, grants and/or loans;

(e) avail of professional counsel and services by retaining an investment and financial
manager, if desired;

(f) formulate the rules and regulations governing the allocation, utilization and
disbursement of the Fund; and

(g) perform such other acts and things as may be necessary proper or conducive to attain
the purposes of the Fund. (Emphasis ours)

Section 4 of E.O. 312 does essentially the same thing. It vests the management and disposition of
the assistance fund generated from the sale of coco-levy fund-acquired assets into a Committee of
five members. Thus, Section 4 of E.O. 312 provides –

Section 4. Funding. – Assets acquired through the coconut levy funds or by entities financed by the
coconut levy funds identified by the President for appropriate disposal or sale, shall be sold or
disposed to generate a maximum fund of ONE BILLION PESOS (₱1,000,000,000.00) which shall be
managed by a Committee composed of a Chairman and four (4) members to be appointed by the
President whose term shall be co-terminus with the Program. x x x (Emphasis ours)
In effect, the above transfers the power to allocate, use, and disburse coco-levy funds that P.D. 232
vested in the PCA and transferred the same, without legislative authorization and in violation of P.D.
232, to the Committees mentioned above. An executive order cannot repeal a presidential decree
which has the same standing as a statute enacted by Congress.

UCPB invokes the principle of separability to save the assailed laws from being struck down. The
general rule is that where part of a statute is void as repugnant to the Constitution, while another part
is valid, the valid portion, if susceptible to being separated from the invalid, may stand and be
enforced. When the parts of a statute, however, are so mutually dependent and connected, as
conditions, considerations, or compensations for each other, as to warrant a belief that the
legislature intended them as a whole, the nullity of one part will vitiate the rest. In which case, if
some parts are unconstitutional, all the other provisions which are thus dependent, conditional, or
connected must consequently fall with them. 75

But, given that the provisions of E.O.s 312 and 313, which as already stated invalidly transferred
powers over the funds to two committees that President Estrada created, the rest of their provisions
became non-operational. It is evident that President Estrada would not have created the new funding
programs if they were to be managed by some other entity. Indeed, he made himself Chairman of
the Coconut Trust Fund and left to his discretion the appointment of the members of the other
committee.

WHEREFORE, the Court GRANTS the petition in G.R. 147036-37, PARTLY GRANTS the petition in
G.R. 147811, and declares the following VOID:

a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445, and Article IX-D, Section 2(1)
of the Constitution; and

b) E.O. 313, for being in contravention of Section 84(2) of P.D. 1445, and Article IX-D,
Section 2(1) and Article VI, Section 29(3) of the Constitution.

The Court has previously declared Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and
1468 unconstitutional.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

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.
DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court   questioning the authority
1

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,   any decision, order or ruling of the Constitutional
2

Commissions   may be brought to this Court on certiorari by the aggrieved party within thirty (30)
3

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"   in declaring that petitioner cannot avail of the right to offset any amount that it may be
5

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.   The proposal reads: 10

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.   Decision No. 921 reads:
11

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 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.

x x x           x x x          x x x

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.   Decision No. 1171 reads
15

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 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

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF

FINANCING CHARGES FROM THE OPSF.

II
 RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's   CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
17

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.

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 respondents to comment on the petition
within ten (10) days from notice.  18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment.  19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice.  20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents.  21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery 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 "other factors" mentioned therein that may be determined by the Ministry (now Department) of
Finance may include financing charges for "in essence, financing charges constitute unrecovered
cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989
Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the
tax on interest income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the
basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated
with crude oil shipments, the following guidelines on the utilization of the Oil Price
Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk
premium and recovery of financing charges will be implemented:

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 percent
per month thereafter up to a maximum period of one year, to be
applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the
basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil

companies shall be allowed to recover financing charges directly from
the OPSF per barrel of crude oil based on the following schedule:

F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
 b
u
r
s
e
m
e
n
t

R
a
t
e

P
e
s
o
s

p
e
r

B
a
r
r
e
l

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days.  22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:
 This refers to the letters of the Oil Industry dated December 4, 1986 and February 5,
1987 and subsequent discussions held by the Price Review committee on February
6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price
Stabilization Fund (OPSF). Such a reduction would allow the industry to recover
partly associated financing charges on crude oil imports. Accordingly, 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 thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the
OPSF in accordance with the provisions of the attached Department of Finance
circular. 
23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges
from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges

directly from the OPSF for both crude and product shipments loaded
after January 1, 1987 based on the following rates:

F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
 e
n
t

R
a
t
e

(
P
B
b
l
.
)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days.  24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87
dated February 18, 1987 which allowed the recovery of financing charges directly
from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together
with the claim on peso cost differential for a particular shipment and
duly certified supporting documents provided for under Ministry of
Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement

certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the
OPSF. The oil companies may also redeem said certificates in cash if
not utilized, subject to availability of funds. 
25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration.   The function of the COA, particularly in the matter of allowing or disallowing certain
27
expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or
uses of government funds and properties.  28

(3) Denial of petitioner's claim for reimbursement would be 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,   are broader
30

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 thereof provided:

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   and Ramos vs. Aquino,   are no longer controlling as the two (2) were decided in the
32 33

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   and Administrative
34

Code of 1987.   Pursuant to its power to promulgate accounting and auditing rules and regulations
35

for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of

funds,   the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
36

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.   A reading of subparagraphs (i) and (ii) easily discloses that they
38

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 valorem taxes. 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 trace the laws providing for such exemption.   The last law cited is the Fiscal Incentives
40

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.   The pertinent part of Section 2, Republic Act No. 6952
41

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;"   in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
42

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."   It is further stated that: "Moreover, it is evident that OPSF was not created to aid
43

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   as required by Article 2 of the
45

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,   ruled:
47

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.   The burden of proof rests upon the party claiming exemption to prove that it
48

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.   Respondents,
49

on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it.   In fact, when OEA submitted the claims of petitioner for pre-audit, the
50

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.

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."   Petitioner also mentions
52

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,   contend that there can be
53

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."   The 54

reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc.,   is that money due
55

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 . . .,"   and that the OPSF contributions do not go to the general fund of
56

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:

x x x           x x x          x x x

(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.   There can be no
57

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.   Taxes cannot be the subject of compensation because the government and taxpayer
58
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.

G.R. No. 159796               July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS

NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL
POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY
ELECTRIC COMPANY INC. (PECO), Respondents.

DECISION

NACHURA, J.:

Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network,

Inc. (ECN) (petitioners), come before this Court in this original action praying that Section 34 of
Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001"
(EPIRA), imposing the Universal Charge,1 and Rule 18 of the Rules and Regulations (IRR)2 which
seeks to implement the said imposition, be declared unconstitutional. Petitioners also pray that the
Universal Charge imposed upon the consumers be refunded and that a preliminary injunction and/or
temporary restraining order (TRO) be issued directing the respondents to refrain from implementing,
charging, and collecting the said charge.3 The assailed provision of law reads:

SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal
charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-
users for the following purposes:

(a) Payment for the stranded debts4 in excess of the amount assumed by the National
Government and stranded contract costs of NPC5 and as well as qualified stranded contract
costs of distribution utilities resulting from the restructuring of the industry;

(b) Missionary electrification;6

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of
energy vis-à-vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour

(₱0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed by NPC under existing
arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3)
years.

The universal charge shall be a non-bypassable charge which shall be passed on and collected from
all end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities
and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the
fifteenth (15th) of the succeeding month, net of any amount due to the distribution utility. Any end-
user or self-generating entity not connected to a distribution utility shall remit its corresponding
universal charge directly to the TRANSCO. The PSALM Corp., as administrator of the fund, shall
create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an
open and transparent manner. All amount collected for the universal charge shall be distributed to
the respective beneficiaries within a reasonable period to be provided by the ERC.

The Facts

Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.7
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group8 (NPC-
SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for the availment from
the Universal Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-
165.9

On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194,
praying that the proposed share from the Universal Charge for the Environmental charge of ₱0.0025
per kilowatt-hour (/kWh), or a total of ₱119,488,847.59, be approved for withdrawal from the Special
Trust Fund (STF) managed by respondent Power Sector Assets and

Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed

areas.11

On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally
approving the computed amount of ₱0.0168/kWh as the share of the NPC-SPUG from the Universal
Charge for Missionary Electrification and authorizing the National Transmission Corporation
(TRANSCO) and Distribution Utilities to collect the same from its end-users on a monthly basis.

On June 26, 2003, the ERC rendered its Decision13 (for ERC Case No. 2002-165) modifying its
Order of December 20, 2002, thus:

WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner
National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated
December 20, 2002 is hereby modified to the effect that an additional amount of ₱0.0205 per
kilowatt-hour should be added to the ₱0.0168 per kilowatt-hour provisionally authorized by the
Commission in the said Order. Accordingly, a total amount of ₱0.0373 per kilowatt-hour is hereby
APPROVED for withdrawal from the Special Trust Fund managed by PSALM as its share from the
Universal Charge for Missionary Electrification (UC-ME) effective on the following billing cycles:

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and

(b) July 2003 for Distribution Utilities (Dus).

Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of ₱0.0373
per kilowatt-hour and remit the same to PSALM on or before the 15th day of the succeeding month.

In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to
include Audited Financial Statements and physical status (percentage of completion) of the projects
using the prescribed format. 1avvphi1

Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).

SO ORDERED.

On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among
others,14 to set aside the above-mentioned Decision, which the ERC granted in its Order dated
October 7, 2003, disposing:

WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by
petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby
GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:

1. Projects for CY 2002 undertaken;

2. Location

3. Actual amount utilized to complete the project;

4. Period of completion;

5. Start of Operation; and

6. Explanation of the reallocation of UC-ME funds, if any.

SO ORDERED.15

Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw
up to ₱70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the
availability of funds for the Environmental Fund component of the Universal Charge.16

On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged
petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their
respective electric bills starting from the month of July 2003.17

Hence, this original action.

Petitioners submit that the assailed provision of law and its IRR which sought to implement the same
are unconstitutional on the following grounds:

1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be
implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected
from all electric end-users and self-generating entities. The power to tax is strictly a
legislative function and as such, the delegation of said power to any executive or
administrative agency like the ERC is unconstitutional, giving the same unlimited authority.
The assailed provision clearly provides that the Universal Charge is to be determined, fixed
and approved by the ERC, hence leaving to the latter complete discretionary legislative
authority.

2) The ERC is also empowered to approve and determine where the funds collected should
be used.

3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory
and amounts to taxation without representation as the consumers were not given a chance
to be heard and represented.18

Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund
the operations of the NPC. They argue that the cases19 invoked by the respondents clearly show the
regulatory purpose of the charges imposed therein, which is not so in the case at bench. In said
cases, the respective funds20 were created in order to balance and stabilize the prices of oil and
sugar, and to act as buffer to counteract the changes and adjustments in prices, peso devaluation,
and other variables which cannot be adequately and timely monitored by the legislature. Thus, there
was a need to delegate powers to administrative bodies.21 Petitioners posit that the Universal Charge
is imposed not for a similar purpose.

On the other hand, respondent PSALM through the Office of the Government Corporate Counsel
(OGCC) contends that unlike a tax which is imposed to provide income for public purposes, such as
support of the government, administration of the law, or payment of public expenses, the assailed
Universal Charge is levied for a specific regulatory purpose, which is to ensure the viability of the
country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police
power. On this premise, PSALM submits that there is no undue delegation of legislative power to the
ERC since the latter merely exercises a limited authority or discretion as to the execution and
implementation of the provisions of the EPIRA.22

Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor
General (OSG), share the same view that the Universal Charge is not a tax because it is levied for a
specific regulatory purpose, which is to ensure the viability of the country's electric power industry,
and is, therefore, an exaction in the exercise of the State's police power. Respondents further
contend that said Universal Charge does not possess the essential characteristics of a tax, that its
imposition would redound to the benefit of the electric power industry and not to the public, and that
its rate is uniformly levied on electricity end-users, unlike a tax which is imposed based on the
individual taxpayer's ability to pay. Moreover, respondents deny that there is undue delegation of
legislative power to the ERC since the EPIRA sets forth sufficient determinable standards which
would guide the ERC in the exercise of the powers granted to it. Lastly, respondents argue that the
imposition of the Universal Charge is not oppressive and confiscatory since it is an exercise of the
police power of the State and it complies with the requirements of due process.23

On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining
to the Missionary Electrification and Environmental Fund components of the Universal Charge,
pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165.
Otherwise, PECO could be held liable under Sec. 4624 of the EPIRA, which imposes fines and
penalties for any violation of its provisions or its IRR.25

The Issues

The ultimate issues in the case at bar are:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the
ERC.26

Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.

Petitioners filed before us an original action particularly denominated as a Complaint assailing the
constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's
IRR. No doubt, petitioners have locus standi. They impugn the constitutionality of Sec. 34 of the
EPIRA because they sustained a direct injury as a result of the imposition of the Universal Charge
as reflected in their electric bills.

However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint"
directly with us. Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion
on the part of the ERC or any of the public respondents, in order for the Court to consider it as a
petition for certiorari or prohibition.

Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:

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

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and

consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas
corpus.

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.

But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto,

and habeas corpus, while concurrent with that of the regional trial courts and the Court of Appeals,
does not give litigants unrestrained freedom of choice of forum from which to seek such relief.28 It
has long been established that this Court will not entertain direct resort to it unless the redress
desired cannot be obtained in the appropriate courts, or where exceptional and compelling
circumstances justify availment of a remedy within and call for the exercise of our primary
jurisdiction.29 This circumstance alone warrants the outright dismissal of the present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We
are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will
certainly resurface in the near future, resulting in a repeat of this litigation, and probably involving the
same parties. In the public interest and to avoid unnecessary delay, this Court renders its ruling now.

The instant complaint is bereft of merit.

The First Issue

To resolve the first issue, it is necessary to distinguish the State’s power of taxation from the police
power.

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 that is to pay it.30 It is based on the principle
that taxes are the lifeblood of the government, and their prompt and certain availability is an
imperious need.31 Thus, the theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being
of the people.32

On the other hand, police power is the power of the state to promote public welfare by restraining
and regulating the use of liberty and property.33 It is the most pervasive, the least limitable, and the
most demanding of the three fundamental powers of the State. The justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere
tuo ut alienum non laedas (so use your property as not to injure the property of others). As an
inherent attribute of sovereignty which virtually extends to all public needs, police power grants a
wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its
regulatory powers.34 We have held that the power to "regulate" means the power to protect, foster,
promote, preserve, and control, with due regard for the interests, first and foremost, of the public,
then of the utility and of its patrons.35

The conservative and pivotal distinction between these two powers rests in the purpose for which
the charge is made. If generation of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax.36

In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which
enumerates the purposes for which the Universal Charge is imposed37 and which can be amply
discerned as regulatory in character. The EPIRA resonates such regulatory purposes, thus:

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State:

(a) To ensure and accelerate the total electrification of the country;

(b) To ensure the quality, reliability, security and affordability of the supply of electric power;

(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine products in the global market;

(d) To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;

(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;

(f) To protect the public interest as it is affected by the rates and services of electric utilities
and other providers of electric power;

(g) To assure socially and environmentally compatible energy sources and infrastructure;

(h) To promote the utilization of indigenous and new and renewable energy resources in
power generation in order to reduce dependence on imported energy;

(i) To provide for an orderly and transparent privatization of the assets and liabilities of the
National Power Corporation (NPC);

(j) To establish a strong and purely independent regulatory body and system to ensure
consumer protection and enhance the competitive operation of the electricity market; and

(k) To encourage the efficient use of energy and other modalities of demand side
management.

From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a
tax, but an exaction in the exercise of the State's police power. Public welfare is surely promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an implement of
police power.38 In Valmonte v. Energy Regulatory Board, et al.39 and in Gaston v. Republic Planters
Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund
(SSF) were exactions made in the exercise of the police power. The doctrine was reiterated
in Osmeña v. Orbos41 with respect to the OPSF. Thus, we disagree with petitioners that the instant
case is different from the aforementioned cases. With the Universal Charge, a Special Trust Fund
(STF) is also created under the administration of PSALM.42 The STF has some notable
characteristics similar to the OPSF and the SSF, viz.:

1) In the implementation of stranded cost recovery, the ERC shall conduct a review to
determine whether there is under-recovery or over recovery and adjust (true-up) the level of
the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that
any excess amount shall be remitted to the STF. A separate account shall be created for
these amounts which shall be held in trust for any future claims of distribution utilities for
stranded cost recovery. At the end of the stranded cost recovery period, any remaining
amount in this account shall be used to reduce the electricity rates to the end-users.43

2) With respect to the assailed Universal Charge, if the total amount collected for the same is
greater than the actual availments against it, the PSALM shall retain the balance within the
STF to pay for periods where a shortfall occurs.44

3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred
to the DOF or any of the DOF attached agencies as designated by the DOF Secretary.45

The OSG is in point when it asseverates:

Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of
Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of
the government to secure the physical and economic survival and well-being of the community, that
comprehensive sovereign authority we designate as the police power of the State.46

This feature of the Universal Charge further boosts the position that the same is an exaction
imposed primarily in pursuit of the State's police objectives. The STF reasonably serves and assures
the attainment and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to
ensure the viability of the country's electric power industry.

The Second Issue

The principle of separation of powers ordains that each of the three branches of government has
exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated
sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of
powers, as expressed in the Latin maxim potestas delegata non delegari potest (what has been
delegated cannot be delegated). This is based on the ethical principle that such delegated power
constitutes not only a right but a duty to be performed by the delegate through the instrumentality of
his own judgment and not through the intervening mind of another. 47

In the face of the increasing complexity of modern life, delegation of legislative power to various
specialized administrative agencies is allowed as an exception to this principle.48 Given the volume
and variety of interactions in today's society, it is doubtful if the legislature can promulgate laws that
will deal adequately with and respond promptly to the minutiae of everyday life. Hence, the need to
delegate to administrative bodies - the principal agencies tasked to execute laws in their specialized
fields - the authority to promulgate rules and regulations to implement a given statute and effectuate
its policies. All that is required for the valid exercise of this power of subordinate legislation is that the
regulation be germane to the objects and purposes of the law and that the regulation be not in
contradiction to, but in conformity with, the standards prescribed by the law. These requirements are
denominated as the completeness test and the sufficient standard test.

Under the first test, the law must be complete in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it.
The second test mandates adequate guidelines or limitations in the law to determine the boundaries
of the delegate's authority and prevent the delegation from running riot.49

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.

Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof,
a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users," and therefore, does not state the specific amount to be paid as Universal
Charge, the amount nevertheless is made certain by the legislative parameters provided in the law
itself. For one, Sec. 43(b)(ii) of the EPIRA provides:

SECTION 43. Functions of the ERC. — The ERC shall promote competition, encourage market
development, ensure customer choice and penalize abuse of market power in the restructured
electricity industry. In appropriate cases, the ERC is authorized to issue cease and desist order after
due notice and hearing. Towards this end, it shall be responsible for the following key functions in
the restructured industry:

xxxx

(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with
law, a National Grid Code and a Distribution Code which shall include, but not limited to the
following:

xxxx

(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities
and suppliers: Provided, That in the formulation of the financial capability standards, the nature and
function of the entity shall be considered: Provided, further, That such standards are set to ensure
that the electric power industry participants meet the minimum financial standards to protect the
public interest. Determine, fix, and approve, after due notice and public hearings the universal
charge, to be imposed on all electricity end-users pursuant to Section 34 hereof;

Moreover, contrary to the petitioners’ contention, the ERC does not enjoy a wide latitude of
discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA50 clearly
provides:

SECTION 51. Powers. — The PSALM Corp. shall, in the performance of its functions and for the
attainment of its objective, have the following powers:

xxxx

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC
which shall form the basis for ERC in the determination of the universal charge;
 (e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the universal charge.

Thus, the law is complete and passes the first test for valid delegation of legislative power.

As to the second test, this Court had, in the past, accepted as sufficient standards the following:
"interest of law and order;"51 "adequate and efficient instruction;"52 "public interest;"53 "justice and
equity;"54 "public convenience and welfare;"55 "simplicity, economy and efficiency;"56 "standardization
and regulation of medical education;"57 and "fair and equitable employment practices."58 Provisions of
the EPIRA such as, among others, "to ensure the total electrification of the country and the quality,
reliability, security and affordability of the supply of electric power"59 and "watershed rehabilitation
and management"60 meet the requirements for valid delegation, as they provide the limitations on the
ERC’s power to formulate the IRR. These are sufficient standards.

It may be noted that this is not the first time that the ERC's conferred powers were challenged.
In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion to say:

In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be
read in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a
whole, and is animated by one general purpose and intent. Its meaning cannot to be extracted from
any single part thereof but from a general consideration of the statute as a whole. Considering the
intent of Congress in enacting the EPIRA and reading the statute in its entirety, it is plain to see that
the law has expanded the jurisdiction of the regulatory body, the ERC in this case, to enable the
latter to implement the reforms sought to be accomplished by the EPIRA. When the legislators
decided to broaden the jurisdiction of the ERC, they did not intend to abolish or reduce the powers
already conferred upon ERC's predecessors. To sustain the view that the ERC possesses only the
powers and functions listed under Section 43 of the EPIRA is to frustrate the objectives of the law.

In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief
Justice, Reynato S. Puno described the immensity of police power in relation to the delegation of
powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit:

Over the years, however, the range of police power was no longer limited to the preservation of
public health, safety and morals, which used to be the primary social interests in earlier times. Police
power now requires the State to "assume an affirmative duty to eliminate the excesses and
injustices that are the concomitants of an unrestrained industrial economy." Police power is now
exerted "to further the public welfare — a concept as vast as the good of society itself." Hence,
"police power is but another name for the governmental authority to further the welfare of society
that is the basic end of all government." When police power is delegated to administrative bodies
with regulatory functions, its exercise should be given a wide latitude. Police power takes on an even
broader dimension in developing countries such as ours, where the State must take a more active
role in balancing the many conflicting interests in society. The Questioned Order was issued by the
ERC, acting as an agent of the State in the exercise of police power. We should have exceptionally
good grounds to curtail its exercise. This approach is more compelling in the field of rate-regulation
of electric power rates. Electric power generation and distribution is a traditional instrument of
economic growth that affects not only a few but the entire nation. It is an important factor in
encouraging investment and promoting business. The engines of progress may come to a
screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result
of power outages or unreliable electric power services. The State thru the ERC should be able to
exercise its police power with great flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v. Energy
Regulatory Commission63 where the Court held that the ERC, as regulator, should have sufficient
power to respond in real time to changes wrought by multifarious factors affecting public utilities.

From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative
power to the ERC.

Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition
of the Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation
without representation. Hence, such contention is deemed waived or abandoned per Resolution64 of
August 3, 2004.65 Moreover, the determination of whether or not a tax is excessive, oppressive or
confiscatory is an issue which essentially involves questions of fact, and thus, this Court is precluded
from reviewing the same.66

As a penultimate statement, it may be well to recall what this Court said of EPIRA:

One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and regulatory framework for the electric power industry.
The new thrust is to tap private capital for the expansion and improvement of the industry as the
large government debt and the highly capital-intensive character of the industry itself have long been
acknowledged as the critical constraints to the program. To attract private investment, largely
foreign, the jaded structure of the industry had to be addressed. While the generation and
transmission sectors were centralized and monopolistic, the distribution side was fragmented with
over 130 utilities, mostly small and uneconomic. The pervasive flaws have caused a low utilization of
existing generation capacity; extremely high and uncompetitive power rates; poor quality of service
to consumers; dismal to forgettable performance of the government power sector; high system
losses; and an inability to develop a clear strategy for overcoming these shortcomings.

Thus, the EPIRA provides a framework for the restructuring of the industry, including the
privatization of the assets of the National Power Corporation (NPC), the transition to a competitive
structure, and the delineation of the roles of various government agencies and the private entities.
The law ordains the division of the industry into four (4) distinct sectors, namely: generation,
transmission, distribution and supply.

Corollarily, the NPC generating plants have to privatized and its transmission business spun off and
privatized thereafter.67

Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification,
there must be a clear and unequivocal breach of the Constitution and not one that is doubtful,
speculative, or argumentative.68 Indubitably, petitioners failed to overcome this presumption in favor
of the EPIRA. We find no clear violation of the Constitution which would warrant a pronouncement
that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:
G.R. No. 159647 April 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,

vs.
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 under Rule 45 of the Rules of Court, seeking to set aside the
1 

August 29, 2002 Decision and the August 11, 2003 Resolution of the Court of Appeals (CA) in CA-
2  3 

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 petitioner’s 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 ₱904,769.00.

"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
₱904,769.00 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 dismissing respondent’s Petition for lack
5 

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.

‘x x x x x x x x x

‘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, granted 6 

respondent’s 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
CTA’s 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 ₱903,038.39. 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
 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 Court’s 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 grants to senior citizens the privilege of obtaining a 20 percent discount on
10 

their purchase of medicine from any private establishment in the country. The latter may then claim
11 

the cost of the discount as a tax credit. But can such credit be claimed, even though an
12 

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, tax credit generally refers to an
13 

amount that is "subtracted directly from one’s total tax liability." It is an "allowance against the tax
14 

itself" or "a deduction from what is owed" by a taxpayer to the government. Examples of tax
15  16 

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," or an amount that is "allowed by law to
18 

reduce income prior to [the] application of the tax rate to compute the amount of tax which is
due." An example of a tax deduction is any of the allowable deductions enumerated in Section
19 

34 of the Tax Code.

20 

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. A tax deduction, on the other, reduces the income that is subject to tax in
21  22 

order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely
23 

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 credit can be applied. For the
24 

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 credit may 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 donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s 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 person’s beginning inventory of goods,
materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on
the said items. Clearly from this provision, the tax credit refers to an input tax that is either due only
25 

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 credit certificate 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. Where a
26 

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. Although true, this provision actually refers to the tax credit as a condition only for the
27 

imposition of a lower tax rate, not as a deduction from 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 petitioner’s redetermination of it.

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. Apparently, payment is made
29 

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. In order to avail of such
30 

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. However, we do not agree with its
31 

finding that the carry-over of tax credits under the said special law to succeeding taxable periods,
32 
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. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
33 

procedures for its availment. To deny such credit, despite the plain mandate of the law and the
34 

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
35 

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
36 

amount of money;" or "a reduction from the full amount or value of something, especially a price." In
37  38 

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.
39 

Business Discounts

Deducted from  Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment. It is a "reduction in price offered to the purchaser if payment is made within a
40 

shorter period of time than the maximum time specified." Also referred to as a sales discount on the
41 

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." It is also called a volume or bulk
43 

discount.44

A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers" is known as a trade discount. No entry for it need be made in the manual or
45 

computerized books of accounts, since the purchase or sale is already valued at the net price
actually charged the buyer. The purpose for the discount is to encourage trading or increase sales,
46 
and the prices at which the purchased goods may be resold are also suggested. Even a chain
47 

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 supplier’s price discount given to a
purchaser based on the [latter’s] role in the [former’s] distribution system." This role usually involves
49 

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 as a line item deducted -- along with returns, allowances, rebates and other similar
50 

expenses -- from gross sales to arrive at net sales. This type of presentation is resorted to, because
51 

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. This manner of recording
52 

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 and reflected in the financial statements. A separate line item cannot be shown, because
54  55 

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 -- is deducted
56 

from gross sales to come up with the gross income, profit or margin derived from business. In

57  58 

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. While determinative only of the VAT, the
59 

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 establishment’s outright
deduction of the discount from the invoice price of the medicine sold to the senior citizen. It is, 60 

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. Although prompt payment is made for an arm’s-length transaction by
61 

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.

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"; it cannot prevail.
62 

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
63 

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
64 

competence to provide." The regulations these authorities issue are relied upon by taxpayers, who
65 

are certain that these will be followed by the courts. Courts, however, will not uphold these
66 

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. A "regulation adopted pursuant to law is law." Conversely,
68  69 

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 implies that the
71 

availability of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right
72 

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." For the tax
73 

authorities to compel respondent to deduct the 20 percent discount from either its gross income or
its gross sales is, therefore, not only to make an imposition without basis in law, but also to blatantly
74 

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 accordingly. If, however, the business continues to operate at a loss
75 

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. The78 

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. Tax measures are but "enforced contributions exacted on pain of penal
80 

sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed
81  82 

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." For this reason, a just
84 

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 --
85 

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.

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. These objectives are
86 

consonant with the constitutional policy of making "health x x x services available to all the people at
affordable cost" and of giving "priority for the needs of the x x x elderly." Sections 2.i and 4 of RR 2-
87  88 

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." In addition, "[w]here there are two statutes,
90 

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, one as a
91 

general law of the land, the other as the law of a particular case." "It is a canon of statutory
92 

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 credit may 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 be made to
94 

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.

G.R. No. 76778 June 6, 1990

FRANCISCO I. CHAVEZ, petitioner,
vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity
as Acting Municipal Treasurer of the Municipality of Las Piñas, respondents, REALTY
OWNERS ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.

Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression
(Bonifacio) for petitioner.

Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.

MEDIALDEA, J.:

The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which We quote in full, as follows (78 O.G.
5861):

EXECUTIVE ORDER No. 73

PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON

THE 1984 REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21
OF THE REAL PROPERTY TAX CODE, AS AMENDED

WHEREAS, the collection of real property taxes is still based on the 1978 revision of
property values;

WHEREAS, the latest general revision of real property assessments completed in

1984 has rendered the 1978 revised values obsolete;

WHEREAS, the collection of real property taxes based on the 1984 real property
values was deferred to take effect on January 1, 1988 instead of January 1, 1985,
thus depriving the local government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial
resources to meet the rising cost of rendering effective services to the people;

NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do

hereby order:

SECTION 1. Real property values as of December 31, 1984 as determined by the

local assessors during the latest general revision of assessments shall take effect
beginning January 1, 1987 for purposes of real property tax collection.

SEC. 2. The Minister of Finance shall promulgate the necessary rules and
regulations to implement this Executive Order.

SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.

SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified accordingly.

SEC. 5. This Executive Order shall take effect immediately.

On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of
Executive Order No. 73 until June 30, 1987.

The petitioner, Francisco I. Chavez,   is a taxpayer and an owner of three parcels of land. He alleges
1

the following: that Executive Order No. 73 accelerated the application of the general revision of
assessments to January 1, 1987 thereby mandating an excessive increase in real property taxes by
100% to 400% on improvements, and up to 100% on land; that any increase in the value of real
property brought about by the revision of real property values and assessments would necessarily
lead to a proportionate increase in real property taxes; that sheer oppression is the result of
increasing real property taxes at a period of time when harsh economic conditions prevail; and that
the increase in the market values of real property as reflected in the schedule of values was brought
about only by inflation and economic recession.

The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national
association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive
Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is
unconstitutional insofar as it imposes an additional one percent (1%) tax on all property owners to
raise funds for education, as real property tax is admittedly a local tax for local governments; that the
General Revision of Assessments does not meet the requirements of due process as regards
publication, notice of hearing, opportunity to be heard and insofar as it authorizes "replacement cost"
of buildings (improvements) which is not provided in Presidential Decree No. 464, but only in an
administrative regulation of the Department of Finance; and that the Joint Local
Assessment/Treasury Regulations No. 2-86   is even more oppressive and unconstitutional as it
2

imposes successive increase of 150% over the 1986 tax.

The Office of the Solicitor General argues against the petition.

The petition is not impressed with merit.

Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73
insofar as the revision of the assessments and the effectivity thereof are concerned. It should be
emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:

SECTION 1. Real property values as of December 31, 1984 as determined by the

local assessors during the latest general revision of assessments shall take effect
beginning January 1, 1987 for purposes of real property tax collection. (emphasis
supplied)

The general revision of assessments completed in 1984 is based on Section 21 of Presidential

Decree No. 464 which provides, as follows:

SEC. 21. General Revision of Assessments. — Beginning with the assessor shall

make a calendar year 1978, the provincial or city general revision of real property
assessments in the province or city to take effect January 1, 1979, and once every
five years thereafter: Provided; however, That if property values in a province or city,
or in any municipality, have greatly changed since the last general revision, the
provincial or city assesor may, with the approval of the Secretary of Finance or upon
bis direction, undertake a general revision of assessments in the province or city, or
in any municipality before the fifth year from the effectivity of the last general revision.

Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73
has no legal basis as the general revision of assessments is a continuing process mandated by
Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which should be
challenged as constitutionally infirm. However, Chavez failed to raise any objection against said
decree. It was ROAP which questioned the constitutionality thereof. Furthermore, Presidential
Decree No. 464 furnishes the procedure by which a tax assessment may be questioned:

SEC. 30. Local Board of Assessment Appeals. — Any owner who is not satisfied with
the action of the provincial or city assessor in the assessment of his property may,
within sixty days from the date of receipt by him of the written notice of assessment
as provided in this Code, appeal to the Board of Assessment Appeals of the province
or city, by filing with it a petition under oath using the form prescribed for the purpose,
together with copies of the tax declarations and such affidavit or documents
submitted in support of the appeal.

xxx xxx xxx

SEC. 34. Action by the Local Board of assessment Appeals. — The Local Board of
Assessment Appeals shall decide the appeal within one hundred and twenty days
from the date of receipt of such appeal. The decision rendered must be based on
substantial evidence presented at the hearing or at least contained in the record and
disclosed to the parties or such relevant evidence as a reasonable mind might accept
as adequate to support the conclusion.

In the exercise of its appellate jurisdiction, the Board shall have the power to
summon witnesses, administer oaths, conduct ocular inspection, take depositions,
and issue subpoena and subpoena duces tecum. The proceedings of the Board shall
be conducted solely for the purpose of ascertaining the truth without-necessarily
adhering to technical rules applicable in judicial proceedings.

The Secretary of the Board shall furnish the property owner and the Provincial or City
Assessor with a copy each of the decision of the Board. In case the provincial or city
assessor concurs in the revision or the assessment, it shall be his duty to notify the
property owner of such fact using the form prescribed for the purpose. The owner or
administrator of the property or the assessor who is not satisfied with the decision of
the Board of Assessment Appeals, may, within thirty days after receipt of the
decision of the local Board, appeal to the Central Board of Assessment Appeals by
filing his appeal under oath with the Secretary of the proper provincial or city Board of
Assessment Appeals using the prescribed form stating therein the grounds and the
reasons for the appeal, and attaching thereto any evidence pertinent to the case. A
copy of the appeal should be also furnished the Central Board of Assessment
Appeals, through its Chairman, by the appellant.

Within ten (10) days from receipt of the appeal, the Secretary of the Board of
Assessment Appeals concerned shall forward the same and all papers related
thereto, to the Central Board of Assessment Appeals through the Chairman thereof.

xxx xxx xxx

SEC. 36. Scope of Powers and Functions. — The Central Board of Assessment

Appeals shall have jurisdiction over appealed assessment cases decided by the
Local Board of Assessment Appeals. The said Board shall decide cases brought on
appeal within twelve (12) months from the date of receipt, which decision shall
 become final and executory after the lapse of fifteen (15) days from the date of
receipt of a copy of the decision by the appellant.

In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals,
or upon express authority, the Hearing Commissioner, shall have the power to
summon witnesses, administer oaths, take depositions, and
issue subpoenas and subpoenas duces tecum.

The Central Board of assessment Appeals shall adopt and promulgate rules of
procedure relative to the conduct of its business.

Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any
owner who doubts the assessment of his property, may appeal to the Local Board of Assessment
Appeals. In case the, owner or administrator of the property or the assessor is not satisfied with the
decision of the Local Board of Assessment Appeals, he may, within thirty days from the receipt of
the decision, appeal to the Central Board of Assessment Appeals. The decision of the Central Board
of Assessment Appeals shall become final and executory after the lapse of fifteen days from the
date of receipt of the decision.

Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R.
No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et al. (G.R. No. 59431, July 25,
1984, 130 SCRA 654).

The reliance on these two cases is certainly misplaced because the due process requirement called
for therein applies to the "power to tax." Executive Order No. 73 does not impose new taxes nor
increase taxes.

Indeed, the government recognized the financial burden to the taxpayers that will result from an
increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985,
deferring the implementation of the increase in real property taxes resulting from the revised real
property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof is quoted herein
as follows:

SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as
amended by Presidential Decree No. 1621, shall be collected beginning January 1,
1988 instead of January 1, 1985 in order to enable the Ministry of Finance and the
Ministry of Local Government to establish the new systems of tax collection and
assessment provided herein and in order to alleviate the condition of the people,
including real property owners, as a result of temporary economic
difficulties. (emphasis supplied)

The issuance of Executive Order No. 73 which changed the date of implementation of the increase
in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive
Order No. 1019, also finds ample justification in its "whereas' clauses, as follows:

WHEREAS, the collection of real property taxes based on the 1984 real property
values was deferred to take effect on January 1, 1988 instead of January 1,
1985, thus depriving the local government units of an additional source of revenue;
 WHEREAS, there is an urgent need for local governments to augment their financial
resources to meet the rising cost of rendering effective services to the
people; (emphasis supplied)

xxx xxx xxx

The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to
be resolved in the present petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but an
ancillary and supplemental one which, in the nature of things, unless otherwise provided for by
legislation (or Rules of Court), must be in subordination to the main proceeding, and it may be laid
down as a general rule that an intervention is limited to the field of litigation open to the original
parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).

We agree with the observation of the Office of the Solicitor General that without Executive Order No.
73, the basis for collection of real property taxes win still be the 1978 revision of property values.
Certainly, to continue collecting real property taxes based on valuations arrived at several years ago,
in disregard of the increases in the value of real properties that have occurred since then, is not in
consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a
sound tax system, requires that sources of revenues must be adequate to meet government
expenditures and their variations.

ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.

SO ORDERED.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and
COURT OF TAX APPEALS, respondents.

PUNO, J.:

For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or
tax credit for amounts representing pre-payment of income and common carrier's taxes under the
National Internal Revenue Code, section 24 (b) (2), as amended. 1

Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship

Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980,
NASUTRA  chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines.  On
2 3

December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency,  paid the
4

required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND
FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and
FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE
CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel.  Upon arriving,
5

however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981,
NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without
any cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was
realized from the charter agreement, private respondent instituted a claim for tax credit or refund of
the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and
SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of Internal Revenue on
March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private
respondent filed a petition for review  before public respondent Court of Tax Appeals.
6

Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that
taxes are presumed to have been collected in accordance with law; that in an action for refund, the
burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the
taxpayer's failure to sustain said burden is fatal to the action for refund; and that claims for refund
are construed strictly against tax claimants.7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned
statutory requirement by having filed a written claim for refund within the two-year
period from date of payment; 2) the respondent has not issued any deficiency
assessment nor disputed the correctness of the tax returns and the corresponding
amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed
out of the Philippine port with absolutely no cargo laden on board as cleared and
certified by the Customs authorities; nonetheless 4) respondent's apparent bit of
reluctance in validating the legal merit of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for refund which is the subject
matter of this case has not yet submitted his report. Whether or not respondent will
present his evidence will depend on the said report of the examiner." (Respondent's
Manifestation and Motion dated September 7, 1982). Be that as it may the case was
submitted for decision by respondent on the basis of the pleadings and records and
by petitioner on the evidence presented by counsel sans the respective
memorandum.

An examination of the records satisfies us that the case presents no dispute as to

relatively simple material facts. The circumstances obtaining amply justify petitioner's
righteous indignation to a more expeditious action. Respondent has offered no
reason nor made effort to submit any controverting documents to bash that patina of
legitimacy over the claim. But as might well be, towards the end of some two and a
half years of seeming impotent anguish over the pendency, the respondent
Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution
by manifesting that "it is now his turn to present evidence, however, the Appellate
Division of the BIR has already recommended the approval of petitioner's claim for
refund subject matter of this petition. The examiner who examined this case has also
recommended the refund of petitioner's claim. Without prejudice to withdrawing this
case after the final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not
fashion any further issue into an apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to hold and deny the refund of the
 amount of prepaid income and common carrier's taxes for which petitioner could no
longer be made accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this
petition for review on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its claim of
refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it
suppressed evidence when it did not present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue
Code which at that time provides as follows:

A corporation organized, authorized, or existing under the laws of any foreign

country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income derived in the
preceding taxable year from all sources within the Philippines: Provided, however,
That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on
their gross Philippine billings: "Gross Philippine Billings" include gross revenue
realized from uplifts anywhere in the world by any international carrier doing business
in the Philippines of passage documents sold therein, whether for passenger, excess
baggage or mail, provided the cargo or mail originates from the Philippines. The
gross revenue realized from the said cargo or mail include the gross freight charge
up to final destination. Gross revenue from chartered flights originating from the
Philippines shall likewise form part of "Gross Philippine Billings" regardless of the
place or payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable
for taxes depending on the amount of income it derives from sources within the Philippines. Thus,
before such a tax liability can be enforced the taxpayer must be shown to have earned income
sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for exemption  and should
8

be construed in strictissimi juris against the taxpayer.  Likewise, there can be no disagreement with
9

petitioner's stance that private respondent has the burden of proof to establish the factual basis of its
claim for tax refund.

The pivotal issue involves a question of fact — whether or not the private respondent was able to
prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the
taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent
proving that it derived no receipt from its charter agreement with NASUTRA. This finding of fact rests
on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the
tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load
and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a
Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the
Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The
correctness of the contents of these documents regularly issued by officials of the Bureau of
Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records
also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed
when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner
and the appellate division of the BIR have both recommended the approval of private respondent's
claim for refund. The same counsel even represented that the government would withdraw its
opposition to the petition after final approval of private respondents' claim. The case dragged on but
petitioner never withdrew its opposition to the petition even if it did not present evidence at all. The
insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for
good reason. Taxpayers owe honesty to government just as government owes fairness to taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent, petitioner
contends that private respondent suppressed evidence when it did not present its charter agreement
with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter
agreement is prejudicial evidence against the private respondent.   Allegedly, it will show that private
10

respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan.
The allegation simply remained an allegation and no court of justice will regard it as truth. Moreover,
the charter agreement could have been presented by petitioner itself thru the proper use of
a subpoena duces tecum. It never did either because of neglect or because it knew it would be of no
help to bolster its position.   For whatever reason, the petitioner cannot take to task the private
11

respondent for not presenting what it mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum
of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY
FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way
back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded
in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation,
the money that will be finally refunded to the private respondent is just worth a damaged nickel. This
is not, however, the kind of success the government, especially the BIR, needs to increase its
collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that
BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling
in Roxas v. Court of Tax Appeals   is apropos to recall:
12

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.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15,
1983, is AFFIRMED in toto. No costs.

SO ORDERED.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant.

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

MARTIN, J.:

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

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.  otherwise known as the Local Autonomy
1

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."   For the purpose of computing the taxes due, the person, firm,
2

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."   For the purpose of computing the taxes due, the person, fun company, partnership,
4

corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of
the total number of gallons produced or manufactured during the month.  5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

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

and oppressive?

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

percentage or specific taxes?

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

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people.   It is a
6

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.   This is sanctioned by immemorial practice.   By necessary implication, the legislative
7 8

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.   Under the New Constitution, local
9

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.   This is not to say though that the
10

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.   Due process is usually violated where the tax imposed is
11

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.   The reason is
13

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.  Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
14

benefit of the same governmental entity   or by the same jurisdiction for the same purpose,   but not
15 16

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.   Plaintiff-appellant in its brief admitted that defendants-appellees
18

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   The limitation applies, particularly, to the prohibition against municipalities and municipal
19

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.   But, the imposition of
20

"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.   Soft
22

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,   cannot be
23

considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax
is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the reates of imposable taxes. 25 This is in line with the constutional policy of according
the widest possible autonomy to local governments in matters of local taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose
of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality,   appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities
29

are empowered to impose, not only municipal license taxes upon persons engaged in any business
or occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

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

Separate Opinions

 
FERNANDO, J., concurring:

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

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
by law.   That was not the case under the 1935 Charter. The only limitation then on the authority,
2

plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ...   As far as
3

legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
of the municipal taxing power.   Thereafter, in 1959 such competence was further expanded in the
4

Local Autonomy Act.   Nevertheless, as late as December of 1964, five years after its enactment of
5

the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan,   reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
6

corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,  "is an
8

attribute of sovereignty which municipal corporations do not enjoy."   That case left no doubt either
9

as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
no place in the interpretation of the power to tax of a municipal corporation."   As the conclusion
10

reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon.   Thus: "As to why double taxation is
11

not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results.  12

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

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

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
by law.   That was not the case under the 1935 Charter. The only limitation then on the authority,
2

plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ...   As far as
3

legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
of the municipal taxing power.   Thereafter, in 1959 such competence was further expanded in the
4

Local Autonomy Act.   Nevertheless, as late as December of 1964, five years after its enactment of
5

the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan,   reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
6

corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,  "is an
8

attribute of sovereignty which municipal corporations do not enjoy."   That case left no doubt either
9

as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
no place in the interpretation of the power to tax of a municipal corporation."   As the conclusion
10

reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon.   Thus: "As to why double taxation is
11

not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results.  12

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

G.R. No. 162015             March 6, 2006

THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY TREASURER OF QUEZON CITY,
DR. VICTOR B. ENRIGA, Petitioners,
vs.
BAYAN TELECOMMUNICATIONS, INC., Respondent.

DECISION

GARCIA,J.:

Before the Court, on pure questions of law, is this petition for review on certiorari under Rule 45 of
the Rules of Court to nullify and set aside the following issuances of the Regional Trial Court (RTC)
of Quezon City, Branch 227, in its Civil Case No. Q-02-47292, to wit:

1) Decision1 dated June 6, 2003, declaring respondent Bayan Telecommunications, Inc. exempt

from real estate taxation on its real properties located in Quezon City; and

2) Order2 dated December 30, 2003, denying petitioners’ motion for reconsideration.

The facts:

Respondent Bayan Telecommunications, Inc.3 (Bayantel) is a legislative franchise holder under

Republic Act (Rep. Act) No. 32594 to establish and operate radio stations for domestic
telecommunications, radiophone, broadcasting and telecasting.

Of relevance to this controversy is the tax provision of Rep. Act No. 3259, embodied in Section 14
thereof, which reads:

SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate, buildings and
personal property, exclusive of the franchise, as other persons or corporations are now or hereafter
may be required by law to pay. (b) The grantee shall further pay to the Treasurer of the Philippines
each year, within ten days after the audit and approval of the accounts as prescribed in this Act, one
and one-half per centum of all gross receipts from the business transacted under this franchise by
the said grantee (Emphasis supplied).

On January 1, 1992, Rep. Act No. 7160, otherwise known as the "Local Government Code of 1991"
(LGC), took effect. Section 232 of the Code grants local government units within the Metro Manila
Area the power to levy tax on real properties, thus:

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 hereinafter specifically exempted.

Complementing the aforequoted provision is the second paragraph of Section 234 of the same Code
which withdrew any exemption from realty tax heretofore granted to or enjoyed by all persons,
natural or juridical, to wit:

SEC. 234 - Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:

xxx xxx xxx

Except as provided herein, any exemption from payment of real property tax previously granted to,
or enjoyed by, all persons, whether natural or juridical, including government-owned-or-controlled
corporations is hereby withdrawn upon effectivity of this Code (Emphasis supplied).

On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act No.
7633, amending Bayantel’s original franchise. The amendatory law (Rep. Act No. 7633) contained
the following tax provision:

SEC. 11. The grantee, its successors or assigns shall be liable to pay the same taxes on their real
estate, buildings and personal property, exclusive of this franchise, as other persons or corporations
are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors
or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the
telephone or other telecommunications businesses transacted under this franchise by the grantee,
its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or
earnings thereof. Provided, That the grantee, its successors or assigns shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code …. xxx. [Emphasis
supplied]

It is undisputed that within the territorial boundary of Quezon City, Bayantel owned several real
properties on which it maintained various telecommunications facilities. These real properties, as
hereunder described, are covered by the following tax declarations:

(a) Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D-096-04073

pertaining to Bayantel’s Head Office and Operations Center in Roosevelt St., San Francisco
del Monte, Quezon City allegedly the nerve center of petitioner’s telecommunications
franchise operations, said Operation Center housing mainly petitioner’s Network Operations
Group and switching, transmission and related equipment;

(b) Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D-124-00941

covering Bayantel’s land, building and equipment in Maginhawa St., Barangay East
Teacher’s Village, Quezon City which houses telecommunications facilities; and

(c) Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D-011-11540

referring to Bayantel’s Exchange Center located in Proj. 8, Brgy. Bahay Toro, Tandang Sora,
Quezon City which houses the Network Operations Group and cover switching, transmission
and other related equipment.

In 1993, the government of Quezon City, pursuant to the taxing power vested on local government
units by Section 5, Article X of the 1987 Constitution, infra, in relation to Section 232 of the LGC,
supra, enacted City Ordinance No. SP-91, S-93, otherwise known as the Quezon City Revenue
Code (QCRC),5 imposing, under Section 5 thereof, a real property tax on all real properties in
Quezon City, and, reiterating in its Section 6, the withdrawal of exemption from real property tax
under Section 234 of the LGC, supra. Furthermore, much like the LGC, the QCRC, under its Section
230, withdrew tax exemption privileges in general, as follows:

SEC. 230. 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 RA 6938, non-stock and non-profit hospitals and educational institutions,
business enterprises certified by the Board of Investments (BOI) as pioneer or non-pioneer for a
period of six (6) and four (4) years, respectively, … are hereby withdrawn effective upon approval of
this Code (Emphasis supplied).
Conformably with the City’s Revenue Code, new tax declarations for Bayantel’s real properties in
Quezon City were issued by the City Assessor and were received by Bayantel on August 13, 1998,
except one (Tax Declaration No. 124-01013) which was received on July 14, 1999.

Meanwhile, on March 16, 1995, Rep. Act No. 7925,6 otherwise known as the "Public
Telecommunications Policy Act of the Philippines," envisaged to level the playing field among
telecommunications companies, took effect. Section 23 of the Act provides:

SEC. 23. Equality of Treatment in the Telecommunications Industry. – Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchises and shall be
accorded immediately and unconditionally to the grantees of such franchises: Provided, however,
That the foregoing shall neither apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of service
authorized by the franchise.

On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the exclusion of its real
properties in the city from the roll of taxable real properties. With its request having been denied,
Bayantel interposed an appeal with the Local Board of Assessment Appeals (LBAA). And, evidently
on its firm belief of its exempt status, Bayantel did not pay the real property taxes assessed against it
by the Quezon City government.

On account thereof, the Quezon City Treasurer sent out notices of delinquency for the total amount
of P43,878,208.18, followed by the issuance of several warrants of levy against Bayantel’s
properties preparatory to their sale at a public auction set on July 30, 2002.

Threatened with the imminent loss of its properties, Bayantel immediately withdrew its appeal with
the LBAA and instead filed with the RTC of Quezon City a petition for prohibition with an urgent
application for a temporary restraining order (TRO) and/or writ of preliminary injunction, thereat
docketed as Civil Case No. Q-02-47292, which was raffled to Branch 227 of the court.

On July 29, 2002, or in the eve of the public auction scheduled the following day, the lower court
issued a TRO, followed, after due hearing, by a writ of preliminary injunction via its order of August
20, 2002.

And, having heard the parties on the merits, the same court came out with its challenged Decision of
June 6, 2003, the dispositive portion of which reads:

WHEREFORE, premises considered, pursuant to the enabling franchise under Section 11 of

Republic Act No. 7633, the real estate properties and buildings of petitioner [now, respondent
Bayantel] which have been admitted to be used in the operation of petitioner’s franchise described in
the following tax declarations are hereby DECLARED exempt from real estate taxation:

(1) Tax Declaration No. D-096-04071 –

(2) Tax Declaration No. D-096-04074 –

(3) Tax Declaration No. D-124-01013 –

(4) Tax Declaration No. D-011-10810 –

 (5) Tax Declaration No. D-011-10811 –

(6) Tax Declaration No. D-011-10809 –

(7) Tax Declaration No. D-124-00941 –

(8) Tax Declaration No. D-124-00940 –

(9) Tax Declaration No. D-124-00939 –

(10) Tax Declaration No. D-096-04072 –

(11) Tax Declaration No. D-096-04073 –

(12) Tax Declaration No. D-011-11540 –

The preliminary prohibitory injunction issued in the August 20, 2002 Order of this Court is hereby
made permanent. Since this is a resolution of a purely legal issue, there is no pronouncement as to
costs.

SO ORDERED.

Their motion for reconsideration having been denied by the court in its Order dated December 30,
2003, petitioners elevated the case directly to this Court on pure questions of law, ascribing to the
lower court the following errors:

I. [I]n declaring the real properties of respondent exempt from real property taxes notwithstanding
the fact that the tax exemption granted to Bayantel in its original franchise had been withdrawn by
the [LGC] and that the said exemption was not restored by the enactment of RA 7633.

II. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the enactment of the [QCRC] which withdrew the tax exemption which may have been granted by
RA 7633.

III. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the vague and ambiguous grant of tax exemption provided under Section 11 of RA 7633.

IV. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding
the fact that [it] had failed to exhaust administrative remedies in its claim for real property tax
exemption. (Words in bracket added.)

As we see it, the errors assigned may ultimately be reduced to two (2) basic issues, namely:

1. Whether or not Bayantel’s real properties in Quezon City are exempt from real property
taxes under its legislative franchise; and

2. Whether or not Bayantel is required to exhaust administrative remedies before seeking

judicial relief with the trial court.

We shall first address the second issue, the same being procedural in nature.
Petitioners argue that Bayantel had failed to avail itself of the administrative remedies provided for
under the LGC, adding that the trial court erred in giving due course to Bayantel’s petition for
prohibition. To petitioners, the appeal mechanics under the LGC constitute Bayantel’s plain and
speedy remedy in this case.

The Court does not agree.

Petitions for prohibition are governed by the following provision of Rule 65 of the Rules of Court:

SEC. 2. Petition for prohibition. – When the proceedings of any tribunal, … are without or in excess
of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction,
and there is no appeal or any other plain, speedy, and adequate remedy in the ordinary course of
law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered commanding the respondent to desist from further
proceedings in the action or matter specified therein, or otherwise, granting such incidental reliefs as
law and justice may require.

With the reality that Bayantel’s real properties were already levied upon on account of its
nonpayment of real estate taxes thereon, the Court agrees with Bayantel that an appeal to the LBAA
is not a speedy and adequate remedy within the context of the aforequoted Section 2 of Rule 65.
This is not to mention of the auction sale of said properties already scheduled on July 30, 2002.

Moreover, one of the recognized exceptions to the exhaustion- of-administrative remedies rule is
when, as here, only legal issues are to be resolved. In fact, the Court, cognizant of the nature of the
questions presently involved, gave due course to the instant petition. As the Court has said in Ty vs.
Trampe:7

xxx. Although as a rule, administrative remedies must first be exhausted before resort to judicial
action can prosper, there is a well-settled exception in cases where the controversy does not involve
questions of fact but only of law. xxx.

Lest it be overlooked, an appeal to the LBAA, to be properly considered, required prior payment
under protest of the amount of P43,878,208.18, a figure which, in the light of the then prevailing
Asian financial crisis, may have been difficult to raise up. Given this reality, an appeal to the LBAA
may not be considered as a plain, speedy and adequate remedy. It is thus understandable why
Bayantel opted to withdraw its earlier appeal with the LBAA and, instead, filed its petition for
prohibition with urgent application for injunctive relief in Civil Case No. Q-02-47292. The remedy
availed of by Bayantel under Section 2, Rule 65 of the Rules of Court must be upheld.

This brings the Court to the more weighty question of whether or not Bayantel’s real properties in
Quezon City are, under its franchise, exempt from real property tax.

The lower court resolved the issue in the affirmative, basically owing to the phrase "exclusive of this
franchise" found in Section 11 of Bayantel’s amended franchise, Rep. Act No. 7633. To petitioners,
however, the language of Section 11 of Rep. Act No. 7633 is neither clear nor unequivocal. The
elaborate and extensive discussion devoted by the trial court on the meaning and import of said
phrase, they add, suggests as much. It is petitioners’ thesis that Bayantel was in no time given any
express exemption from the payment of real property tax under its amendatory franchise.

There seems to be no issue as to Bayantel’s exemption from real estate taxes by virtue of the term
"exclusive of the franchise" qualifying the phrase "same taxes on its real estate, buildings and
personal property," found in Section 14, supra, of its franchise, Rep. Act No. 3259, as originally
granted.

The legislative intent expressed in the phrase "exclusive of this franchise" cannot be construed other
than distinguishing between two (2) sets of properties, be they real or personal, owned by the
franchisee, namely, (a) those actually, directly and exclusively used in its radio or
telecommunications business, and (b) those properties which are not so used. It is worthy to note
that the properties subject of the present controversy are only those which are admittedly falling
under the first category.

To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or delegate to
local governments of Congress’ inherent power to tax the franchisee’s properties belonging to the
second group of properties indicated above, that is, all properties which, "exclusive of this franchise,"
are not actually and directly used in the pursuit of its franchise. As may be recalled, the taxing power
of local governments under both the 1935 and the 1973 Constitutions solely depended upon an
enabling law. Absent such enabling law, local government units were without authority to impose
and collect taxes on real properties within their respective territorial jurisdictions. While Section 14 of
Rep. Act No. 3259 may be validly viewed as an implied delegation of power to tax, the delegation
under that provision, as couched, is limited to impositions over properties of the franchisee which are
not actually, directly and exclusively used in the pursuit of its franchise. Necessarily, other properties
of Bayantel directly used in the pursuit of its business are beyond the pale of the delegated taxing
power of local governments. In a very real sense, therefore, real properties of Bayantel, save those
exclusive of its franchise, are subject to realty taxes. Ultimately, therefore, the inevitable result was
that all realties which are actually, directly and exclusively used in the operation of its franchise are
"exempted" from any property tax.

Bayantel’s franchise being national in character, the "exemption" thus granted under Section 14 of
Rep. Act No. 3259 applies to all its real or personal properties found anywhere within the Philippine
archipelago.

However, with the LGC’s taking effect on January 1, 1992, Bayantel’s "exemption" from real estate
taxes for properties of whatever kind located within the Metro Manila area was, by force of Section
234 of the Code, supra, expressly withdrawn. But, not long thereafter, however, or on July 20, 1992,
Congress passed Rep. Act No. 7633 amending Bayantel’s original franchise. Worthy of note is that
Section 11 of Rep. Act No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, supra,
of Bayantel’s original franchise under Rep. Act No. 3259. Stated otherwise, Section 14 of Rep. Act
No. 3259 which was deemed impliedly repealed by Section 234 of the LGC was expressly revived
under Section 14 of Rep. Act No. 7633. In concrete terms, the realty tax exemption heretofore
enjoyed by Bayantel under its original franchise, but subsequently withdrawn by force of Section 234
of the LGC, has been restored by Section 14 of Rep. Act No. 7633.

The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987
Constitution,8 local governments are empowered to levy taxes. And pursuant to this constitutional
empowerment, juxtaposed with Section 2329 of the LGC, the Quezon City government enacted in
1993 its local Revenue Code, imposing real property tax on all real properties found within its
territorial jurisdiction. And as earlier stated, the City’s Revenue Code, just like the LGC, expressly
withdrew, under Section 230 thereof, supra, all tax exemption privileges in general.

This thus raises the question of whether or not the City’s Revenue Code pursuant to which the city
treasurer of Quezon City levied real property taxes against Bayantel’s real properties located within
the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as
amended.
Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same
taxes, as any other persons or corporations on all its real or personal properties, exclusive of its
franchise."

Bayantel’s posture is well-taken. While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government units to tax is still limited. As we
explained in Mactan Cebu International Airport Authority:10

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy of local autonomy. (at p. 680;
Emphasis supplied.)

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the
former doctrine of local government units’ delegated power to tax had been effectively modified with
Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine on local taxation
remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still]
primarily vested in the Congress."

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of
the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:

What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not
change the doctrine that municipal corporations do not possess inherent powers of taxation. What it
does is to confer municipal corporations a general power to levy taxes and otherwise create sources
of revenue. They no longer have to wait for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local governments has been reduced to the
authority to impose limitations on municipal powers. Moreover, these limitations must be "consistent
with the basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse the
principle that doubts are resolved against municipal corporations. Henceforth, in interpreting
statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the
local unit to pass.11 (Emphasis supplied).

In net effect, the controversy presently before the Court involves, at bottom, a clash between the
inherent taxing power of the legislature, which necessarily includes the power to exempt, and the
local government’s delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real
properties within the city’s territory and removed exemptions theretofore "previously granted to, or
presently enjoyed by all persons, whether natural or juridical ….,"12 there can really be no dispute
that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which
expressly provides that "a province or city or municipality within the Metropolitan Manila Area may
levy an annual ad valorem tax on real property such as land, building, machinery, and other
improvement not hereinafter specifically exempted." Under this law, the Legislature highlighted its
power to thereafter exempt certain realties from the taxing power of local government units. An
interpretation denying Congress such power to exempt would reduce the phrase "not hereinafter
specifically exempted" as a pure jargon, without meaning whatsoever. Needless to state, such
absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao,13 this
Court has upheld the power of Congress to grant exemptions over the power of local government
units to impose taxes. There, the Court wrote:

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC
does not affect the power of Congress to grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the constitutional grant to local governments simply
means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved
in favor of municipal corporations. (Emphasis supplied.)

As we see it, then, the issue in this case no longer dwells on whether Congress has the power to
exempt Bayantel’s properties from realty taxes by its enactment of Rep. Act No. 7633 which
amended Bayantel’s original franchise. The more decisive question turns on whether Congress
actually did exempt Bayantel’s properties at all by virtue of Section 11 of Rep. Act No. 7633.

Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that the LGC
has already withdrawn Bayantel’s former exemption from realty taxes, Congress opted to pass Rep.
Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase "exclusive of this
franchise" which was the basis for Bayantel’s exemption from realty taxes prior to the LGC. In plain
language, Section 11 of Rep. Act No. 7633 states that "the grantee, its successors or assigns shall
be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now or hereafter may be required by law to pay." The
Court views this subsequent piece of legislation as an express and real intention on the part of
Congress to once again remove from the LGC’s delegated taxing power, all of the franchisee’s
(Bayantel’s) properties that are actually, directly and exclusively used in the pursuit of its franchise.

WHEREFORE, the petition is DENIED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 155650             July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and
CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order
No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with
respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid some
of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX TAXAB
DECLARAT LE TAX DUE PENALTY TOTAL
ION YEAR
E-016- 1992- 19,558,160. 11,201,083. 30,789,243.2
01370 2001 00 20 0
E-016- 1992- 111,689,424 68,149,479. 179,838,904.
01374 2001 .90 59 49
E-016- 1992- 20,276,058. 12,371,832. 32,647,890.0
01375 2001 00 00 0
E-016- 1992- 58,144,028. 35,477,712. 93,621,740.0
01376 2001 00 00 0
E-016- 1992- 18,134,614. 11,065,188. 29,199,803.2
01377 2001 65 59 4
E-016- 1992- 111,107,950 67,794,681. 178,902,631.
01378 2001 .40 59 99
E-016- 1992- 4,322,340.0 2,637,360.0 6,959,700.00
01379 2001 0 0
E-016- 1992- 7,776,436.0 4,744,944.0 12,521,380.0
01380 2001 0 0 0
*E-016-013- 1998- 6,444,810.0 2,900,164.5 9,344,974.50
85 2001 0 0
*E-016- 1998- 34,876,800. 5,694,560.0 50,571,360.0
01387 2001 00 0 0
*E-016- 1998- 75,240.00 33,858.00 109,098.00
01396 2001
GRAND P392,435,86 P232,070,86 P 624,506,72
TOTAL 1.95 3.47 5.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
 #9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened
to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the
proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Parañaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of Barangay
La Huerta; and in the main lobby of the Parañaque City Hall. The City of Parañaque published the
notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor General
subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234
of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.
To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public property is that its taxation would not inure to
any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule of statutory construction is
that the express mention of one person, thing, or act excludes all others. An international airport is
not among the exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from
real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the
real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt
from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or
controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National

Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as "one where no part of its income is distributable as
dividends to its members, trustees or officers." A non-stock corporation must have members. Even if
we assume that the Government is considered as the sole member of MIAA, this will not make MIAA
a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury.11 This prevents MIAA from qualifying as a non-stock
corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is
not organized for any of these purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-
owned or controlled corporation. What then is the legal status of MIAA within the National
Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its

governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within

the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers of
a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the

instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a government-owned or controlled corporation. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are sometimes loosely
called government corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
 into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the power
to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by
the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the Republic
of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those among
the public who actually use the road through the toll fees they pay upon using the road. The tollway
system is even a more efficient and equitable manner of taxing the public for the maintenance of
public roads.

The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed
user's tax. This means taxing those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular public facility. A user's tax is more
equitable — a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside
the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v.
Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters,
the promenades, and public works of general service supported by said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for
the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.
 The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which
says: "Communal things that cannot be sold because they are by their very nature
outside of commerce are those for public use, such as the plazas, streets, common
lands, rivers, fountains, etc." (Emphasis supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case of
war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and free
from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any
property of public dominion is void for being contrary to public policy. Essential public services will
stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-
hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the
Airport Lands and Buildings are inalienable in their present status as properties of public dominion,
they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and
Buildings are reserved for public use, their ownership remains with the State or the Republic of the
Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. —
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications.
The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned
 to the ownership and administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order
and the corresponding title to be issued in the name of the Authority. Any portion thereof
shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public

airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. — The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of

providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and
autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings.
MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's
assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x
x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not
own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and
Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National Government,
its agencies and instrumentalities x x x." The real properties owned by the Republic are titled either
in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real properties remain
owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that
real property owned by the Republic loses its tax exemption only if the "beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person." MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus,
even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use
of such land area for a consideration to a taxable person and therefore such land area is subject to
real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:
 Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or
juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this

Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions are hereby withdrawn upon effectivity of this
Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not
exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its
status — whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code."
Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. Local governments are devoid of power
to tax the national government, its agencies and instrumentalities. The taxing powers of local
governments do not extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause
refers to Section 234(a) on the exception to the exemption from real estate tax of real property
owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the national
government.

Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas,30 Philippine Rice Research Institute,31 Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) does not distinguish between national government instrumentalities with or without
juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus,
Section 133(o) applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government instrumentality under Section
133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting local
governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments may
tax the national government, its agencies and instrumentalities only if the Local Government Code
expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception
to the exemption applies only to real estate tax and not to any other tax. The justification for the
exception to the exemption is that the real property, although owned by the Republic, is not devoted
to public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has
any one presenteda persuasive argument that there is such a conflict. The minority's assumption of
an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of
the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193
prevails over the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and instrumentalities — a gross
absurdity.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling when
it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does not
apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
"unless the specific words x x x of a particular statute shall require a different meaning," the
definition in Section 2 of the Administrative Code shall apply. Thus, unless there is specific language
in the Local Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the Administrative Code
prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies to
the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus,
the Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides
for a different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law, and
not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special
charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty
million preferred shares with a par value of ten pesos each, which shall be issued in
accordance with the provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid
for by the Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters
are the Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and
the Philippine National Bank44 before it was reorganized as a stock corporation under the
Corporation Code. All these government-owned corporations organized under special charters as
stock corporations are subject to real estate tax on real properties owned by them. To rule that they
are not government-owned or controlled corporations because they are not registered with the
Securities and Exchange Commission would remove them from the reach of Section 234 of the
Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to comply
with the two conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic vehicles of the State
for the common good — meaning for economic development purposes — these government-owned
or controlled corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the
test of economic performance. We know what happened in the past. If a government
corporation loses, then it makes its claim upon the taxpayers' money through new equity
infusions from the government and what is always invoked is the common good. That is the
reason why this year, out of a budget of P115 billion for the entire government, about P28
billion of this will go into equity infusions to support a few government financial institutions.
And this is all taxpayers' money which could have been relocated to agrarian reform, to
social services like health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse
themselves from the responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committee's consideration and I am glad that I
am joined in this proposal by Commissioner Foz, the insertion of the standard of
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial
terms.46 (Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially

for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA
to compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:
 1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers
and airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative
fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code. More importantly, as long as MIAA renders essential public services, it need not comply with
the test of economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-
stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16,
Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic
viability. MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the exemption
in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local
Government Code. Such exception applies only if the beneficial use of real property owned by the
Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any
kind" by local governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real estate tax by the City of
Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not
subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of

Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Parañaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the
Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila
International Airport Authority.

No costs.

SO ORDERED.

Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,

Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr.,
J.J., concur.

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

DISSENTING OPINION

TINGA, J. :

The legally correct resolution of this petition would have had the added benefit of an utterly fair and
equitable result – a recognition of the constitutional and statutory power of the City of Parañaque to
impose real property taxes on the Manila International Airport Authority (MIAA), but at the same
time, upholding a statutory limitation that prevents the City of Parañaque from seizing and
conducting an execution sale over the real properties of MIAA. In the end, all that the City of
Parañaque would hold over the MIAA is a limited lien, unenforceable as it is through the sale or
disposition of MIAA properties. Not only is this the legal effect of all the relevant constitutional and
statutory provisions applied to this case, it also leaves the room for negotiation for a mutually
acceptable resolution between the City of Parañaque and MIAA.

Instead, with blind but measured rage, the majority today veers wildly off-course, shattering statutes
and judicial precedents left and right in order to protect the precious Ming vase that is the Manila
International Airport Authority (MIAA). While the MIAA is left unscathed, it is surrounded by the
wreckage that once was the constitutional policy, duly enacted into law, that was local autonomy.
Make no mistake, the majority has virtually declared war on the seventy nine (79) provinces, one
hundred seventeen (117) cities, and one thousand five hundred (1,500) municipalities of the
Philippines.1
The icing on this inedible cake is the strained and purposely vague rationale used to justify the
majority opinion. Decisions of the Supreme Court are expected to provide clarity to the parties and to
students of jurisprudence, as to what the law of the case is, especially when the doctrines of long
standing are modified or clarified. With all due respect, the decision in this case is plainly so, so
wrong on many levels. More egregious, in the majority's resolve to spare the Manila International
Airport Authority (MIAA) from liability for real estate taxes, no clear-cut rule emerges on the
important question of the power of local government units (LGUs) to tax government corporations,
instrumentalities or agencies.

The majority would overturn sub silencio, among others, at least one dozen precedents enumerated
below:

1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case penned in 1997 by
recently retired Chief Justice Davide, which held that the express withdrawal by the Local
Government Code of previously granted exemptions from realty taxes applied to instrumentalities
and government-owned or controlled corporations (GOCCs) such as the Mactan-Cebu International
Airport Authority (MCIAA). The majority invokes the ruling in Basco v. Pagcor,3 a precedent
discredited in Mactan, and a vanguard of a doctrine so noxious to the concept of local government
rule that the Local Government Code was drafted precisely to counter such philosophy. The efficacy
of several rulings that expressly rely on Mactan, such as PHILRECA v. DILG Secretary,4 City
Government of San Pablo v. Hon. Reyes5 is now put in question.

2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the Court, through
Justice Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes
under the Local Government Code, and succeeding cases that have relied on it such as Batangas
Power Corp. v. Batangas City7 The majority now states that deems instrumentalities as defined
under the Administrative Code of 1987 as purportedly beyond the reach of any form of taxation by
LGUs, stating "[l]ocal governments are devoid of power to tax the national government, its agencies
and instrumentalities."8 Unfortunately, using the definition employed by the majority, as provided by
Section 2(d) of the Administrative Code, GOCCs are also considered as instrumentalities, thus
leading to the astounding conclusion that GOCCs may not be taxed by LGUs under the Local
Government Code.

3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc Court held that the
Lung Center of the Philippines may be liable for real property taxes. Using the majority's reasoning,
the Lung Center would be properly classified as an instrumentality which the majority now holds as
exempt from all forms of local taxation.10

4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance System
(GSIS) was liable for real property taxes for the years 1992 to 1994, its previous exemption having
been withdrawn by the enactment of the Local Government Code.12 This decision, which expressly
relied on Mactan, would be directly though silently overruled by the majority.

5) The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on Mactan in
holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding the fact that it is a
GOCC. Based on the reasoning of the majority, the PPA cannot be considered a GOCC. The
reliance of these cases on Mactan, and its rationale for holding governmental entities like the PPA
liable for local government taxation is mooted by the majority.

6) The 1963 precedent of Social Security System Employees Association v. Soriano,14 which

declared the Social Security Commission (SSC) as a GOCC performing proprietary functions. Based
on the rationale employed by the majority, the Social Security System is not a GOCC. Or perhaps
more accurately, "no longer" a GOCC.

7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority v.
Central Board of Assessment.15 The characterization therein of the Light Rail Transit Authority
(LRTA) as a "service-oriented commercial endeavor" whose patrimonial property is subject to local
taxation is now rendered inconsequential, owing to the majority's thinking that an entity such as the
LRTA is itself exempt from local government taxation16, irrespective of the functions it performs.
Moreover, based on the majority's criteria, LRTA is not a GOCC.

8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics Administration v.

Court of Appeals.18 wherein the Court held that the predecessor agency of the MIAA, which was
similarly engaged in the operation, administration and management of the Manila International
Agency, was engaged in the exercise of proprietary, as opposed to sovereign functions. The majority
would hold otherwise that the property maintained by MIAA is actually patrimonial, thus implying that
MIAA is actually engaged in sovereign functions.

9) My own majority in Phividec Industrial Authority v. Capitol Steel,19 wherein the Court held that the
Phividec Industrial Authority, a GOCC, was required to secure the services of the Office of the
Government Corporate Counsel for legal representation.20 Based on the reasoning of the majority,
Phividec would not be a GOCC, and the mandate of the Office of the Government Corporate
Counsel extends only to GOCCs.

10) Two decisions promulgated by the Court just last month (June 2006), National Power
Corporation v. Province of Isabela21 and GSIS v. City Assessor of Iloilo City.22 In the former, the Court
pronounced that "[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges of any
kind on the National Government, its agencies and instrumentalities, this rule admits of an exception,
i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities." Yet the majority now rules that the exceptions in the LGC no longer hold,
since "local governments are devoid of power to tax the national government, its agencies and
instrumentalities."23 The ruling in the latter case, which held the GSIS as liable for real property
taxes, is now put in jeopardy by the majority's ruling.

There are certainly many other precedents affected, perhaps all previous jurisprudence regarding
local government taxation vis-a-vis government entities, as well as any previous definitions of
GOCCs, and previous distinctions between the exercise of governmental and proprietary functions
(a distinction laid down by this Court as far back as 191624). What is the reason offered by the
majority for overturning or modifying all these precedents and doctrines? None is given, for the
majority takes comfort instead in the pretense that these precedents never existed. Only children
should be permitted to subscribe to the theory that something bad will go away if you pretend hard
enough that it does not exist.

I.

Case Should Have Been Decided

Following Mactan Precedent

The core issue in this case, whether the MIAA is liable to the City of Parañaque for real property
taxes under the Local Government Code, has already been decided by this Court in the Mactan
case, and should have been resolved by simply applying precedent.
Mactan Explained

A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and its
status as an instrumentality of the government performing governmental functions.25 Particularly,
MCIAA invoked Section 133 of the Local Government Code, precisely the same provision utilized by
the majority as the basis for MIAA's exemption. Section 133 reads:

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units.— Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (emphasis and underscoring supplied).

However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless otherwise
provided herein." It then considered the other relevant provisions of the Local Government Code,
particularly the following:

SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax
exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical, including
government-owned and 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.26

SECTION 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.27

SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of
the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person:

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-
profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned and controlled corporations engaged in the 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.28

Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to tax
the National Government, its agencies and instrumentalities, as evidenced by these cited provisions
which "otherwise provided." But what was the extent of the limitation under Section 133? This is how
the Court, correctly to my mind, defined the parameters in Mactan:

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 judicial persons,

including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer
to Section 234 which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption insofar as real property
taxes are concerned by limiting the retention only to those enumerated therein; all others not
included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to
real property owned by the Republic of the Philippines or any of its political subdivisions covered by
item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such
property has been granted to a taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a 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 234.29

The Court in Mactan acknowledged that under Section 133, instrumentalities were generally exempt
from all forms of local government taxation, unless otherwise provided in the Code. On the other
hand, Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad valorem real
property tax, irrespective of who owned the property. At the same time, the imposition of real
property taxes under Section 232 is in turn qualified by the phrase "not hereinafter specifically
exempted." The exemptions from real property taxes are enumerated in Section 234, which
specifically states that only real properties owned "by the Republic of the Philippines or any of its
political subdivisions" are exempted from the payment of the tax. Clearly, instrumentalities or
GOCCs do not fall within the exceptions under Section 234.30

Mactan Overturned the

Precedents Now Relied

Upon by the Majority

But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR,31 decided before
the enactment of the Local Government Code. The Court in Basco declared the PAGCOR as
exempt from local taxes, justifying the exemption in this wise:

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. In addition to its corporate powers (Sec. 3, Title II,
PD 1869) it also exercises regulatory powers xxx

PAGCOR has a dual role, to operate and to 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. Marland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activates 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" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it.32

Basco is as strident a reiteration of the old guard view that frowned on the principle of local
autonomy, especially as it interfered with the prerogatives and privileges of the national government.
Also consider the following citation from Maceda v. Macaraig,33 decided the same year as Basco.
Discussing the rule of construction of tax exemptions on government instrumentalities, the
sentiments are of a similar vein.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case
of exemptions in favor of a government political subdivision or instrumentality.

The basis for applying the rule of strict construction to statutory provisions granting tax exemptions
or deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.

In the case of property owned by the state or a city or other public corporations, the express
exemption should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property "exemption is the rule and taxation the
exception."34

Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This
evinces the perspective from which the majority is coming from. It is admittedly a viewpoint once
shared by this Court, and en vogue prior to the enactment of the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of governance
should be practiced in the Philippines, conceding greater powers once held in the private reserve of
the national government to LGUs. The majority might have private qualms about the wisdom of the
policy of local autonomy, but the members of the Court are not expected to substitute their personal
biases for the legislative will, especially when the 1987 Constitution itself promotes the principle of
local autonomy.

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

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.

xxx

Section 5. Each local government unit shall have the power to create its own sources of revenues
and 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.

xxx

The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention of
the MCIAA that Basco was applicable to them. In doing so, the language of the Court was dramatic,
if only to emphasize how monumental the shift in philosophy was with the enactment of the Local
Government Code:

Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the
[Local Government Code]. 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.35 (emphasis supplied)

The Court Has Repeatedly

Reaffirmed Mactan Over the

Precedents Now Relied Upon

By the Majority

Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead.
The notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed in
National Power Corporation v. City of Cabanatuan,36 which was penned by Justice Puno. NPC or
Napocor, invoking its continued exemption from payment of franchise taxes to the City of
Cabanatuan, alleged that it was an instrumentality of the National Government which could not be
taxed by a city government. To that end, Basco was cited by NPC. The Court had this to say about
Basco.

xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation 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, nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. 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.37

In the 2003 case of Philippine Ports Authority v. City of Iloilo,38 the Court, in the able ponencia of
Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were assessed
under the old Real Property Tax Code and not the Local Government Code, the Court again cited
Mactan to refute PPA's invocation of Basco as the basis of its exemption.

[Basco] did not absolutely prohibit local governments from taxing government instrumentalities. In
fact we stated therein:

The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since P.D. 1869 remains an "operative" law until "amended, repealed
or revoked". . . its "exemption clause" remains an exemption to the exercise of the power of local
governments to impose taxes and fees.

Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos,
where the Basco case was similarly invoked for tax exemption, we stated: "[N]othing 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." The fact that tax exemptions of
government-owned or controlled corporations have been expressly withdrawn by the present Local
Government Code clearly attests against petitioner's claim of absolute exemption of government
instrumentalities from local taxation.39

Just last month, the Court in National Power Corporation v. Province of Isabela40 again rejected
Basco in emphatic terms. Held the Court, through Justice Callejo, Sr.:

Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the Court
noted primarily that 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. It further explained that in enacting the LGC, Congress empowered the LGUs to impose
certain taxes even on instrumentalities of the National Government.41

The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo42 case, a
decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's properties
at public auction for failure to pay realty taxes. The Court again reiterated that "it was the intention of
Congress to withdraw the tax exemptions granted to or presently enjoyed by all persons, including
government-owned or controlled corporations, upon the effectivity" of the Code.43 The Court in the
second Public Ports Authority case likewise cited Mactan as providing the "raison d'etre for the
withdrawal of the exemption," namely, "the State policy to ensure autonomy to local governments
and the objective of the [Local Government Code] that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities. . . . "44

Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated exemption from real
property taxes of the Government Service Insurance System (GSIS) was removed under the Local
Government Code. Again, Mactan was relied upon as the governing precedent. The removal of the
tax exemption stood even though the then GSIS law46 prohibited the removal of GSIS' tax
exemptions unless the exemption was specifically repealed, "and a provision is enacted to substitute
the declared policy of exemption from any and all taxes as an essential factor for the solvency of the
fund."47 The Court, citing established doctrines in statutory construction and Duarte v. Dade48 ruled
that such proscription on future legislation was itself prohibited, as "the legislature cannot bind a
future legislature to a particular mode of repeal."49

And most recently, just less than one month ago, the Court, through Justice Corona in Government
Service Insurance System v. City Assessor of Iloilo50 again affirmed that the Local Government Code
removed the previous exemption from real property taxes of the GSIS. Again Mactan was cited as
having "expressly withdrawn the [tax] exemption of the [GOCC].51

Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule
employed by the Court since its adoption, the doctrine therein consistent with the Local Government
Code. Corollarily, Basco, the polar opposite of Mactan has been emphatically rejected and declared
inconsistent with the Local Government Code.

II.

Majority, in Effectively Overturning Mactan,

Refuses to Say Why Mactan Is Wrong

The majority cites Basco in support. It does not cite Mactan, other than an incidental reference that it
is relied upon by the respondents.52 However, the ineluctable conclusion is that the majority rejects
the rationale and ruling in Mactan. The majority provides for a wildly different interpretation of
Section 133, 193 and 234 of the Local Government Code than that employed by the Court in
Mactan. Moreover, the parties in Mactan and in this case are similarly situated, as can be obviously
deducted from the fact that both petitioners are airport authorities operating under similarly worded
charters. And the fact that the majority cites doctrines contrapuntal to the Local Government Code
as in Basco and Maceda evinces an intent to go against the Court's jurisprudential trend adopting
the philosophy of expanded local government rule under the Local Government Code.

Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis-à-vis the Mactan precedent. The majority is obviously inconsistent
with Mactan and there is no way these two rulings can stand together. Following basic principles in
statutory construction, Mactan will be deemed as giving way to this new ruling.

However, the majority does not bother to explain why Mactan is wrong. The interpretation in Mactan
of the relevant provisions of the Local Government Code is elegant and rational, yet the majority
refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the majority does
not even engage Mactan in any meaningful way. If the majority believes that Mactan may still stand
despite this ruling, it remains silent as to the viable distinctions between these two cases.

The majority's silence on Mactan is baffling, considering how different this new ruling is with the
ostensible precedent. Perhaps the majority does not simply know how to dispense with the ruling in
Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more honorable end
than death by amnesia or ignonominous disregard. The majority could have devoted its discussion in
explaining why it thinks Mactan is wrong, instead of pretending that Mactan never existed at all.
Such an approach might not have won the votes of the minority, but at least it would provide some
degree of intellectual clarity for the parties, LGUs and the national government, students of
jurisprudence and practitioners. A more meaningful debate on the matter would have been possible,
enriching the study of law and the intellectual dynamic of this Court.

There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA
are similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the
business of operating an airport. They are the owners of airport properties they respectively maintain
and hold title over these properties in their name.53 These entities are both owned by the State, and
denied by their respective charters the absolute right to dispose of their properties without prior
approval elsewhere.54 Both of them are

not empowered to obtain loans or encumber their properties without prior approval the prior approval
of the President.55

III.

Instrumentalities, Agencies

And GOCCs Generally

Liable for Real Property Tax

I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my position
lies with Mactan, which will further demonstrate why the majority has found it inconvenient to even
grapple with the precedent that is Mactan in the first place.

Mactan held that the prohibition on taxing the national government, its agencies and
instrumentalities under Section 133 is qualified by Section 232 and Section 234, and accordingly, the
only relevant exemption now applicable to these bodies is as provided under Section 234(o), or on
"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."

It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a
governmental entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all
persons, including [GOCCs]", thus encompassing the two classes of persons recognized under our
laws, natural persons56 and juridical persons.57

The fact that the Local Government Code mandates the withdrawal of previously granted
exemptions evinces certain key points. If an entity was previously granted an express exemption
from real property taxes in the first place, the obvious conclusion would be that such entity would
ordinarily be liable for such taxes without the exemption. If such entities were already deemed
exempt due to some overarching principle of law, then it would be a redundancy or surplusage to
grant an exemption to an already exempt entity. This fact militates against the claim that MIAA is
preternaturally exempt from realty taxes, since it required the enactment of an express exemption
from such taxes in its charter.

Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person. The
general rule laid down in Section 232 is given short shrift. In arriving at this conclusion, several leaps
in reasoning are committed.

Majority's Flawed Definition

of GOCCs.

The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality.
However, and quite grievously, the supposed foundation of this assertion is an adulteration.

The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.58 Most tellingly, the majority selectively cites a portion of Section 2(10) of
the Administrative Code of 1987, as follows:

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. xxx59 (emphasis omitted)

However, Section 2(10) of the Administrative Code, when read in full, makes an important
clarification which the majority does not show. The portions omitted by the majority are highlighted
below:

(10)Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government—
owned or controlled corporations.60

Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is also
worth citing in full:

(4) 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. (emphasis supplied)61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an agency of
the National Government. Thus, there actually is no point in the majority's assertion that MIAA is not
a GOCC, since based on the majority's premise of Section 133 as the key provision, the material
question is whether MIAA is either an instrumentality, an agency, or the National Government itself.
The very provisions of the Administrative Code provide that a GOCC can be either an instrumentality
or an agency, so why even bother to extensively discuss whether or not MIAA is a GOCC?

Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer,62 the
Supreme Court already noted that a corporation of which the government is the majority stockholder
"remains an agency or instrumentality of government."63

Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal. However,
the entire discussion of the majority on the definition of a GOCC, obiter as it may ultimately be,
deserves emphatic refutation. The views of the majority on this matter are very dangerous, and
would lead to absurdities, perhaps unforeseen by the majority. For in fact, the majority effectively
declassifies many entities created and recognized as GOCCs and would give primacy to the
Administrative Code of 1987 rather than their respective charters as to the definition of these
entities.

Majority Ignores the Power

Of Congress to Legislate and

Define Chartered Corporations

First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must be
"organized as a stock or non-stock corporation," as defined under the Corporation Code. To insist on
this as an absolute rule fails on bare theory. Congress has the undeniable power to create a
corporation by legislative charter, and has been doing so throughout legislative history. There is no
constitutional prohibition on Congress as to what structure these chartered corporations should take
on. Clearly, Congress has the prerogative to create a corporation in whatever form it chooses, and it
is not bound by any traditional format. Even if there is a definition of what a corporation is under the
Corporation Code or the Administrative Code, these laws are by no means sacrosanct. It should be
remembered that these two statutes fall within the same level of hierarchy as a congressional
charter, since they all are legislative enactments. Certainly, Congress can choose to disregard either
the Corporation Code or the Administrative Code in defining the corporate structure of a GOCC,
utilizing the same extent of legislative powers similarly vesting it the putative ability to amend or
abolish the Corporation Code or the Administrative Code.

These principles are actually recognized by both the Administrative Code and the Corporation Code.
The definition of GOCCs, agencies and instrumentalities under the Administrative Code are laid
down in the section entitled "General Terms Defined," which qualifies:

Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context as a whole, or
a particular statute, shall require a different meaning: (emphasis supplied)

xxx

Similar in vein is Section 6 of the Corporation Code which provides:

SEC. 4. Corporations created by special laws or charters.— Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
(emphasis supplied)

Thus, the clear doctrine emerges – the law that governs the definition of a corporation or entity
created by Congress is its legislative charter. If the legislative enactment defines an entity as a
corporation, then it is a corporation, no matter if the Corporation Code or the Administrative Code
seemingly provides otherwise. In case of conflict between the legislative charter of a government
corporation, on one hand, and the Corporate Code and the Administrative Code, on the other, the
former always prevails.

Majority, in Ignoring the

Legislative Charters, Effectively

Classifies Duly Established GOCCs,

With Disastrous and Far Reaching

Legal Consequences

Second, the majority claims that MIAA does not qualify either as a stock or non-stock corporation, as
defined under the Corporation Code. It explains that the MIAA is not a stock corporation because it
does not have any capital stock divided into shares. Neither can it be considered as a non-stock
corporation because it has no members, and under Section 87, a non-stock corporation is one
where no part of its income is distributable as dividends to its members, trustees or officers.

This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of the
special law or charter, and not the Corporation Code.

That the MIAA cannot be considered a stock corporation if only because it does not have a stock
structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock
structure for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.

Admittedly, there are GOCCs established in such a manner, such as the National Power Corporation
(NPC), which is provided with authorized capital stock wholly subscribed and paid for by the
Government of the Philippines, divided into shares but at the same time, is prohibited from
transferring, negotiating, pledging, mortgaging or otherwise giving these shares as security for
payment of any obligation.64 However, based on the Corporation Code definition relied upon by the
majority, even the NPC cannot be considered as a stock corporation. Under Section 3 of the
Corporation Code, stock corporations are defined as being "authorized to distribute to the holders of
its shares dividends or allotments of the surplus profits on the basis of the shares held."65 On the
other hand, Section 13 of the NPC's charter states that "the Corporation shall be non-profit and shall
devote all its returns from its capital investment, as well as excess revenues from its operation, for
expansion."66 Can the holder of the shares of NPC, the National Government, receive its surplus
profits on the basis of its shares held? It cannot, according to the NPC charter, and hence, following
Section 3 of the Corporation Code, the NPC is not a stock corporation, if the majority is to be
believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income as
dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of its gross
operating income to the national government. How about the Philippine Health Insurance
Corporation, created with the "status of a tax-exempt government corporation attached to the
Department of Health" under Rep. Act No. 7875.67 It too cannot be considered as a stock corporation
because it has no capital stock structure. But using the criteria of the majority, it is doubtful if it would
pass muster as a non-stock corporation, since the PHIC or Philhealth, as it is commonly known, is
expressly empowered "to collect, deposit, invest, administer and disburse" the National Health
Insurance Fund.68 Or how about the Social Security System, which under its revised charter,
Republic Act No. 8282, is denominated as a "corporate body."69 The SSS has no capital stock
structure, but has capital comprised of contributions by its members, which are eventually remitted
back to its members. Does this disqualify the SSS from classification as a GOCC, notwithstanding
this Court's previous pronouncement in Social Security System Employees Association v. Soriano?70

In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or non-
stock,71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government.72 But according to the majority, non-stock
corporations are prohibited from declaring any part of its income as dividends. But if Republic Act
No. 7656 requires even non-stock corporations to declare dividends from income, should it not follow
that the prohibition against declaration of dividends by non-stock corporations under the Corporation
Code does not apply to government-owned or controlled corporations? For if not, and the majority's
illogic is pursued, Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would
contravene the Administrative Code of 1987 and the Corporation Code.

In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated by
Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance with
Republic Act No. 7656, here are but a few entities which are not obliged to remit fifty (50%) of its
annual net earnings to the National Government as they are excluded from the scope of Republic
Act No. 7656:

1) Philippine Ports Authority73 – has no capital stock74, no members, and obliged to apply the balance
of its income or revenue at the end of each year in a general reserve.75

2) Bases Conversion Development Authority76 - has no capital stock,77 no members.

3) Philippine Economic Zone Authority78 - no capital stock,79 no members.

4) Light Rail Transit Authority80 - no capital stock,81 no members.

5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty percent
(50%) of its net profits to the National Treasury.84

6) National Power Corporation85 - has capital stock but is prohibited from "distributing to the holders
of its shares dividends or allotments of the surplus profits on the basis of the shares held;"86 no
members.

7) Manila International Airport Authority – no capital stock87, no members88, mandated to remit twenty
percent (20%) of its annual gross operating income to the National Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as within the coverage
of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else then could
Executive Order No. 483, signed in 1998 by President Ramos, be explained? The issuance
provides:

WHEREAS, Section 1 of Republic Act No. 7656 provides that:

"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned and/or controlled
corporations, without impairing their viability and the purposes for which they have been established,
shall share a substantial amount of their net earnings to the National Government."

WHEREAS, to support the viability and mandate of government-owned and/or controlled

corporations [GOCCs], the liquidity, retained earnings position and medium-term plans and
programs of these GOCCs were considered in the determination of the reasonable dividend rates of
such corporations on their 1997 net earnings.

WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the

adjustment on the percentage of annual net earnings that shall be declared by the Manila
International Airport Authority [MIAA] and Phividec Industrial Authority [PIA] in the interest of national
economy and general welfare.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the powers
vested in me by law, do hereby order:

SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA as
dividends to the National Government as provided for under Section 3 of Republic Act No. 7656 is
adjusted from at least fifty percent [50%] to the rates specified hereunder:

1. Manila International Airport Authority - 35% [cash]

2. Phividec Industrial Authority - 25% [cash]

SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on 1997
net earnings of the concerned government-owned and/or controlled corporations.

Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a
GOCC, for how else could it have come under the coverage of Republic Act No. 7656, a law
applicable only to GOCCs? But, the majority apparently disagrees, and resultantly holds that MIAA is
not obliged to remit even the reduced rate of thirty five percent (35%) of its net earnings to the
national government, since it cannot be covered by Republic Act No. 7656.

All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I stated
earlier, I find it illogical that chartered corporations are compelled to comply with the templates of the
Corporation Code, especially when the Corporation Code itself states that these corporations are to
be governed by their own charters. This is especially true considering that the very provision cited by
the majority, Section 87 of the Corporation Code, expressly says that the definition provided therein
is laid down "for the purposes of this [Corporation] Code." Read in conjunction with Section 4 of the
Corporation Code which mandates that corporations created by charter be governed by the law
creating them, it is clear that contrary to the majority, MIAA is not disqualified from classification as a
non-stock corporation by reason of Section 87, the provision not being applicable to corporations
created by special laws or charters. In fact, I see no real impediment why the MIAA and similarly
situated corporations such as the PHIC, the SSS, the Philippine Deposit Insurance Commission, or
maybe even the NPC could at the very least, be deemed as no stock corporations (as differentiated
from non-stock corporations).

The point, stripped to bare simplicity, is that entity created by legislative enactment is a corporation if
the legislature says so. After all, it is the legislature that dictates what a corporation is in the first
place. This is better illustrated by another set of entities created before martial law. These include
the Mindanao Development Authority,90 the Northern Samar Development Authority,91 the Ilocos Sur
Development Authority,92 the Southeastern Samar Development Authority93 and the Mountain
Province Development Authority.94 An examination of the first section of the statutes creating these
entities reveal that they were established "to foster accelerated and balanced growth" of their
respective regions, and towards such end, the charters commonly provide that "it is recognized that
a government corporation should be created for the purpose," and accordingly, these charters
"hereby created a body corporate."95 However, these corporations do not have capital stock nor
members, and are obliged to return the unexpended balances of their appropriations and earnings to
a revolving fund in the National Treasury. The majority effectively declassifies these entities as
GOCCs, never mind the fact that their very charters declare them to be GOCCs.

I mention these entities not to bring an element of obscurantism into the fray. I cite them as
examples to emphasize my fundamental point—that it is the legislative charters of these entities, and
not the Administrative Code, which define the class of personality of these entities created by
Congress. To adopt the view of the majority would be, in effect, to sanction an implied repeal of
numerous congressional charters for the purpose of declassifying GOCCs. Certainly, this could not
have been the intent of the crafters of the Administrative Code when they drafted the "Definition of
Terms" incorporated therein.

MIAA Is Without

Doubt, A GOCC

Following the charters of government corporations, there are two kinds of GOCCs, namely: GOCCs
which are stock corporations and GOCCs which are no stock corporations (as distinguished from
non-stock corporation). Stock GOCCs are simply those which have capital stock while no stock
GOCCs are those which have no capital stock. Obviously these definitions are different from the
definitions of the terms in the Corporation Code. Verily, GOCCs which are not incorporated with the
Securities and Exchange Commission are not governed by the Corporation Code but by their
respective charters.

For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC.
Observe the following provisions from MIAA's charter:

SECTION 3. Creation of the Manila International Airport Authority.—There is hereby established a

body corporate to be known as the Manila International Airport Authority which shall be attached to
the Ministry of Transportation and Communications. The principal office of the Authority shall be
located at the New Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; Provided, That any subsidiary that
may be organized shall have the prior approval of the President.

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau of Lands
and other appropriate government agencies shall undertake an actual survey of the area transferred
within one year from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines.

xxx

SECTION 5. Functions, Powers, and Duties. — The Authority shall have the following functions,
powers and duties:

xxx

(d) To sue and be sued in its corporate name;

(e) To adopt and use a corporate seal;

(f) To succeed by its corporate name;

(g) To adopt its by-laws, and to amend or repeal the same from time to time;

(h) To execute or enter into contracts of any kind or nature;

(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein;

(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

xxx

(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order.

xxx

SECTION 16. Borrowing Power. — The Authority may, after consultation with the Minister of
Finance and with the approval of the President of the Philippines, as recommended by the Minister
of Transportation and Communications, raise funds, either from local or international sources, by
way of loans, credits or securities, and other borrowing instruments, with the power to create
pledges, mortgages and other voluntary liens or encumbrances on any of its assets or properties.

All loans contracted by the Authority under this Section, together with all interests and other sums
payable in respect thereof, shall constitute a charge upon all the revenues and assets of the
Authority and shall rank equally with one another, but shall have priority over any other claim or
charge on the revenue and assets of the Authority: Provided, That this provision shall not be
construed as a prohibition or restriction on the power of the Authority to create pledges, mortgages,
and other voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding
indebtedness of the Authority in the principal amount, in local and foreign currency, shall not at any
time exceed the net worth of the Authority at any given time.

xxx

The President or his duly authorized representative after consultation with the Minister of Finance
may guarantee, in the name and on behalf of the Republic of the Philippines, the payment of the
loans or other indebtedness of the Authority up to the amount herein authorized.

These cited provisions establish the fitness of MIAA to be the subject of legal relations.96 MIAA under
its charter may acquire and possess property, incur obligations, and bring civil or criminal actions. It
has the power to contract in its own name, and to acquire title to real or personal property. It likewise
may exercise a panoply of corporate powers and possesses all the trappings of corporate
personality, such as a corporate name, a corporate seal and by-laws. All these are contained in
MIAA's charter which, as conceded by the Corporation Code and even the Administrative Code, is
the primary law that governs the definition and organization of the MIAA.

In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the very
first paragraph of the present petition before this Court.97 So does, apparently, the Department of
Budget and Management, which classifies MIAA as a "government owned & controlled corporation"
on its internet website.98 There is also the matter of Executive Order No. 483, which evinces the
belief of the then-president of the Philippines that MIAA is a GOCC. And the Court before had
similarly characterized MIAA as a government-owned and controlled corporation in the earlier MIAA
case, Manila International Airport Authority v. Commission on Audit.99

Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is because
MIAA is actually an instrumentality. But the very definition relied upon by the majority of an
instrumentality under the Administrative Code clearly states that a GOCC is likewise an
instrumentality or an agency. The question of whether MIAA is a GOCC might not even be
determinative of this Petition, but the effect of the majority's disquisition on that matter may even be
more destructive than the ruling that MIAA is exempt from realty taxes. Is the majority ready to live
up to the momentous consequences of its flawed reasoning?

Novel Proviso in 1987 Constitution

Prescribing Standards in the

Creation of GOCCs Necessarily

Applies only to GOCCs Created

After 1987.

One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs through
special charters be "in the interest of the common good and subject to the test of economic viability."
For the majority, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. But this test of "economic viability" is
new to the constitutional framework. No such test was imposed in previous Constitutions, including
the 1973 Constitution which was the fundamental law in force when the MIAA was created. How
then could the MIAA, or any GOCC created before 1987 be expected to meet this new precondition
to the creation of a GOCC? Does the dissent seriously suggest that GOCCs created before 1987
may be declassified on account of their failure to meet this "economic viability test"?

Instrumentalities and Agencies

Also Generally Liable For

Real Property Taxes

Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then argues
that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of Section 2(10)
of the Administrative Code. A more convincing view offered during deliberations, but which was not
adopted by the ponencia, argued that MIAA is not an instrumentality but an agency, considering the
fact that under the Administrative Code, the MIAA is attached within the department framework of
the Department of Transportation and Communications.100 Interestingly, Executive Order No. 341,
enacted by President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are
expressly defined as "an agency not integrated within the department framework," that view
concluded that MIAA cannot be deemed an instrumentality.

Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies,101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption on
Section 133 of the Local Government Code, which similarly situates "agencies and instrumentalities"
as generally exempt from the taxation powers of LGUs. And on this point, the majority again evades
Mactan and somehow concludes that Section 133 is the general rule, notwithstanding Sections 232
and 234(a) of the Local Government Code. And the majority's ultimate conclusion? "By express
mandate of the Local Government Code, local governments cannot impose any kind of tax on
national government instrumentalities like the MIAA. Local governments are devoid of power to tax
the national government, its agencies and instrumentalities."102

The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and
LGUs. Sections 133 and 234(a) ensure that the Republic of the Philippines or its political
subdivisions shall not be subjected to any form of local government taxation, except realty taxes if
the beneficial use of the property owned has been granted for consideration to a taxable entity or
person. On the other hand, Section 133 likewise assures that government instrumentalities such as
GOCCs may not be arbitrarily taxed by LGUs, since they could be subjected to local taxation if there
is a specific proviso thereon in the Code. One such proviso is Section 137, which as the Court found
in National Power Corporation,103 permits the imposition of a franchise tax on businesses enjoying a
franchise, even if it be a GOCC such as NPC. And, as the Court acknowledged in Mactan, Section
232 provides another exception on the taxability of instrumentalities.

The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvements not hereafter specifically exempted." The
specific exemptions are provided by Section 234. Section 232 comes sequentially after Section
133(o),104 and even if the sequencing is irrelevant, Section 232 would fall under the qualifying phrase
of Section 133, "Unless otherwise provided herein." It is sad, but not surprising that the majority is
not willing to consider or even discuss the general rule, but only the exemptions under Section 133
and Section 234. After all, if the majority is dead set in ruling for MIAA no matter what the law says,
why bother citing what the law does say.
Constitution, Laws and

Jurisprudence Have Long

Explained the Rationale

Behind the Local Taxation

Of GOCCs.

This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more
evident than in the succeeding discussion of the majority, which asserts that the power of local
governments to tax national government instrumentalities be construed strictly against local
governments. The Maceda case, decided before the Local Government Code, is cited, as is Basco.
This section of the majority employs deliberate pretense that the Code never existed, or that the
fundamentals of local autonomy are of limited effect in our country. Why is it that the Local
Government Code is barely mentioned in this section of the majority? Because Section 5 of the
Code, purposely omitted by the majority provides for a different rule of interpretation than that
asserted:

Section 5. Rules of Interpretation. – In the interpretation of the provisions of this Code, the following
rules shall apply:

(a) Any provision on a power of a local government unit shall be liberally interpreted in its favor, and
in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the
lower local government unit. Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;

(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the
local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive
or relief granted by any local government unit pursuant to the provisions of this Code shall be
construed strictly against the person claiming it; xxx

Yet the majority insists that "there is no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one government
pocket to another."105 I wonder whether the Constitution satisfies the majority's desire for "a sound
and compelling policy." To repeat:

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues
and 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.

Or how about the Local Government Code, presumably an expression of sound and compelling
policy considering that it was enacted by the legislature, that veritable source of all statutes:

SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its
power to create its own sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government units.

Justice Puno, in National Power Corporation v. City of Cabanatuan,106 provides a more "sound and
compelling policy considerations" that would warrant sustaining the taxability of government-owned
entities by local government units under the Local Government Code.

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." 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.107

I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential shift
brought about the acceptance of the principles of local autonomy:

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. 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 charges 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, 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, the Local Autonomy Act of 1959, the Decentralization Act of 1967
and the Local Government Code of 1983. 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.

Considered as the most revolutionary piece of legislation on local autonomy, 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.108

And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo109, provides
especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled corporations, the State

ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we
elucidated:

Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real
property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the local government level.

xxxxxxxxx

To all intents and purposes, real property taxes are funds taken by the State with one hand and
given to the other. In no measure can the government be said to have lost anything.

Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of
government was that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence resulting in the need for these entities to share in
the requirements of development, fiscal or otherwise, by paying the taxes and other charges due
from them.110
How does the majority counter these seemingly valid rationales which establish the soundness of a
policy consideration subjecting national instrumentalities to local taxation? Again, by simply ignoring
that these doctrines exist. It is unfortunate if the majority deems these cases or the principles of
devolution and local autonomy as simply too inconvenient, and relies instead on discredited
precedents. Of course, if the majority faces the issues squarely, and expressly discusses why Basco
was right and Mactan was wrong, then this entire endeavor of the Court would be more intellectually
satisfying. But, this is not a game the majority wants to play.

Mischaracterization of My

Views on the Tax Exemption

Enjoyed by the National Government

Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing my
views on that provision as if I had been interpreting the provision as making "the national
government, which itself is a juridical person, subject to tax by local governments since the national
government is not included in the enumeration of exempt entities in Section 193."111

Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the
majority. My main thesis on the matter merely echoes the explicit provision of Section 193 that
unless otherwise provided in the Local Government Code (LGC) all tax exemptions enjoyed by all
persons, whether natural or juridical, including GOCCs, were withdrawn upon the effectivity of the
Code. Since the provision speaks of withdrawal of tax exemptions of persons, it follows that the
exemptions theretofore enjoyed by MIAA which is definitely a person are deemed withdrawn upon
the advent of the Code.

On the other hand, the provision does not address the question of who are beyond the reach of the
taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes that the
person or entity involved is subject to tax. Thus, Section 193 does not apply to entities which were
never given any tax exemption. This would include the national government and its political
subdivisions which, as a general rule, are not subjected to tax in the first place.112 Corollarily, the
national government and its political subdivisions do not need tax exemptions. And Section 193
which ordains the withdrawal of tax exemptions is obviously irrelevant to them.

Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of tax
exemption to MIAA on Section 21 of its charter. Even the majority should concede that the charter
section is now ineffectual, as Section 193 withdraws the tax exemptions previously enjoyed by all
juridical persons.

With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to rely on
a basis other than Section 21 of its charter.

Lung Center of the Philippines v. Quezon City113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC.114 There is no
doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is also
considered as an agency, the term encompassing even GOCCs. Yet since the Administrative Code
definition of "instrumentalities" encompasses agencies, especially those not attached to a line
department such as the Lung Center, it also follows that the Lung Center is an instrumentality, which
for the majority is exempt from all local government taxes, especially real estate taxes. Yet just in
2004, the Court unanimously held that the Lung Center was not exempt from real property taxes.
Can the majority and Lung Center be reconciled? I do not see how, and no attempt is made to
demonstrate otherwise.

Another key point. The last paragraph of Section 234 specifically asserts that any previous
exemptions from realty taxes granted to or enjoyed by all persons, including all GOCCs, are thereby
withdrawn. The majority's interpretation of Sections 133 and 234(a) however necessarily implies that
all instrumentalities, including GOCCs, can never be subjected to real property taxation under the
Code. If that is so, what then is the sense of the last paragraph specifically withdrawing previous tax
exemptions to all persons, including GOCCs when juridical persons such as MIAA are anyway, to
his view, already exempt from such taxes under Section 133? The majority's interpretation would
effectively render the express and emphatic withdrawal of previous exemptions to GOCCs inutile. Ut
magis valeat quam pereat. Hence, where a statute is susceptible of more than one interpretation, the
court should adopt such reasonable and beneficial construction which will render the provision
thereof operative and effective, as well as harmonious with each other.115

But, the majority seems content rendering as absurd the Local Government Code, since it does not
have much use anyway for the Code's general philosophy of fiscal autonomy, as evidently seen by
the continued reliance on Basco or Maceda. Local government rule has never been a grant of
emancipation from the national government. This is the favorite bugaboo of the opponents of local
autonomy—the fallacy that autonomy equates to independence.

Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or
charges of any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs
should be strictly construed against the LGUs, citing Maceda and Basco. No mention is made of the
subsequent rejection of these cases in jurisprudence following the Local Government Code,
including Mactan. The majority is similarly silent on the general rule under Section 232 on real
property taxation or Section 5 on the rules of construction of the Local Government Code.

V.

MIAA, and not the National Government

Is the Owner of the Subject Taxable Properties

Section 232 of the Local Government Code explicitly provides that there are exceptions to the
general rule on rule property taxation, as "hereafter specifically exempted." Section 234, certainly
"hereafter," provides indubitable basis for exempting entities from real property taxation. It provides
the most viable legal support for any claim that an governmental entity such as the MIAA is exempt
from real property taxes. To repeat:

SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of
the real property tax:

xxx

(f) 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:
The majority asserts that the properties owned by MIAA are owned by the Republic of the
Philippines, thus placing them under the exemption under Section 234. To arrive at this conclusion,
the majority employs four main arguments.

MIAA Property Is Patrimonial

And Not Part of Public Dominion

The majority claims that the Airport Lands and Buildings are property of public dominion as defined
by the Civil Code, and therefore owned by the State or the Republic of the Philippines. But as
pointed out by Justice Azcuna in the first PPA case, if indeed a property is considered part of the
public dominion, such property is "owned by the general public and cannot be declared to be owned
by a public corporation, such as [the PPA]."

Relevant on this point are the following provisions of the MIAA charter:

Section 3. Creation of the Manila International Airport Authority. – xxx

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. xxx Any portion
thereof shall not be disposed through sale or through any other mode unless specifically approved
by the President of the Philippines.

Section 22. Transfer of Existing Facilities and Intangible Assets. – All existing public airport facilities,
runways, lands, buildings and other property, movable or immovable, belonging to the Airport, and
all assets, powers rights, interests and privileges belonging to the Bureau of Air Transportation
relating to airport works or air operations, including all equipment which are necessary for the
operation of crash fire and rescue facilities, are hereby transferred to the Authority.

Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express
transfer of ownership between the MIAA and the national government. If the distinction is to be
blurred, as the majority does, between the State/Republic/Government and a body corporate such
as the MIAA, then the MIAA charter showcases the remarkable absurdity of an entity transferring
property to itself.

Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership over
property of public dominion to an entity that it similarly owns. It is just like a family transferring
ownership over the properties its members own into a family corporation. The family exercises
effective control over the administration and disposition of these properties. Yet for several purposes
under the law, such as taxation, it is the corporation that is deemed to own those properties. A
similar situation obtains with MIAA, the State, and the Airport Lands and Buildings.

The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the claim that the properties of the PPA were owned by
the Republic of the Philippines, noting that PPA's charter expressly transferred ownership over these
properties to the PPA, a situation which similarly obtains with MIAA. The Court even went as far as
saying that the fact that the PPA "had not been issued any torrens title over the port and port
facilities and appurtenances is of no legal consequence. A torrens title does not, by itself, vest
ownership; it is merely an evidence of title over properties. xxx It has never been recognized as a
mode of acquiring ownership over real properties."116

The Court further added:

xxx The bare fact that the port and its facilities and appurtenances are accessible to the general
public does not exempt it from the payment of real property taxes. It must be stressed that the said
port facilities and appurtenances are the petitioner's corporate patrimonial properties, not for public
use, and that the operation of the port and its facilities and the administration of its buildings are in
the nature of ordinary business. The petitioner is clothed, under P.D. No. 857, with corporate status
and corporate powers in the furtherance of its proprietary interests xxx The petitioner is even
empowered to invest its funds in such government securities approved by the Board of Directors,
and derives its income from rates, charges or fees for the use by vessels of the port premises,
appliances or equipment. xxx Clearly then, the petitioner is a profit-earning corporation; hence, its
patrimonial properties are subject to tax.117

There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use. A
similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit Authority v.
Central Board of Assessment,118 which was cited in Philippine Ports Authority and deserves renewed
emphasis. The Light Rail Transit Authority (LRTA), a body corporate, "provides valuable
transportation facilities to the paying public."119 It claimed that its carriage-ways and terminal stations
are immovably attached to government-owned national roads, and to impose real property taxes
thereupon would be to impose taxes on public roads. This view did not persuade the Court, whose
decision was penned by Justice (now Chief Justice) Panganiban. It was noted:

Though the creation of the LRTA was impelled by public service — to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila — its operation undeniably partakes
of ordinary business. Petitioner is clothed with corporate status and corporate powers in the
furtherance of its proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to tax,
notwithstanding its claim of being a government-owned or controlled corporation.

xxx

Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of
the carriageways and terminal stations are the commuting public. It adds that the public use
character of the LRT is not negated by the fact that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible
only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for
public service, and that the LRT carriageways and terminal stations are not exclusively for public
use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom.120

xxx

Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable
entity.121
There is no substantial distinction between the properties held by the PPA, the LRTA, and the MIAA.
These three entities are in the business of operating facilities that promote public transportation.

The majority further asserts that MIAA's properties, being part of the public dominion, are outside the
commerce of man. But if this is so, then why does Section 3 of MIAA's charter authorize the
President of the Philippines to approve the sale of any of these properties? In fact, why does MIAA's
charter in the first place authorize the transfer of these airport properties, assuming that indeed
these are beyond the commerce of man?

No Trust Has Been Created

Over MIAA Properties For

The Benefit of the Republic

The majority posits that while MIAA might be holding title over the Airport Lands and Buildings, it is
holding it in trust for the Republic. A provision of the Administrative Code is cited, but said provision
does not expressly provide that the property is held in trust. Trusts are either express or implied, and
only those situations enumerated under the Civil Code would constitute an implied trust. MIAA does
not fall within this enumeration, and neither is there a provision in MIAA's charter expressly stating
that these properties are being held in trust. In fact, under its charter, MIAA is obligated to retain up
to eighty percent (80%) of its gross operating income, not an inconsequential sum assuming that the
beneficial owner of MIAA's properties is actually the Republic, and not the MIAA.

Also, the claim that beneficial ownership over the MIAA remains with the government and not MIAA
is ultimately irrelevant. Section 234(a) of the Local Government Code provides among those
exempted from paying real property taxes are "[r]eal property owned by the [Republic]… except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." In the context of Section 234(a), the identity of the beneficial owner over the properties is
not determinative as to whether the exemption avails. It is the identity of the beneficial user of the
property owned by the Republic or its political subdivisions that is crucial, for if said beneficial user is
a taxable person, then the exemption does not lie.

I fear the majority confuses the notion of what might be construed as "beneficial ownership" of the
Republic over the properties of MIAA as nothing more than what arises as a consequence of the fact
that the capital of MIAA is contributed by the National Government.122 If so, then there is no
difference between the State's ownership rights over MIAA properties than those of a majority
stockholder over the properties of a corporation. Even if such shareholder effectively owns the
corporation and controls the disposition of its assets, the personality of the stockholder remains
separately distinct from that of the corporation. A brief recall of the entrenched rule in corporate law
is in order:

The first consequence of the doctrine of legal entity regarding the separate identity of the corporation
and its stockholders insofar as their obligations and liabilities are concerned, is spelled out in this
general rule deeply entrenched in American jurisprudence:

Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or
by special agreement of the stockholders, stockholders are not personally liable for debts of the
corporation either at law or equity. The reason is that the corporation is a legal entity or artificial
person, distinct from the members who compose it, in their individual capacity; and when it contracts
a debt, it is the debt of the legal entity or artificial person – the corporation – and not the debt of the
individual members. (13A Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the
Supreme Court declared that a corporation may not be made to answer for acts or liabilities of its
stockholders or those of legal entities to which it may be connected, or vice versa. (Palay Inc. v.
Clave et. al. 124 SCRA 638) It was likewise declared in a similar case that a bonafide corporation
should alone be liable for corporate acts duly authorized by its officers and directors. (Caram Jr. v.
Court of Appeals et.al. 151 SCRA, p. 372)123

It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession, and
the right to sue and be sued in its corporate name.124 The national government made a particular
choice to divest ownership and operation of the Manila International Airport and transfer the same to
such an empowered entity due to perceived advantages. Yet such transfer cannot be deemed
consequence free merely because it was the State which contributed the operating capital of this
body corporate.

The majority claims that the transfer the assets of MIAA was meant merely to effect a reorganization.
The imputed rationale for such transfer does not serve to militate against the legal consequences of
such assignment. Certainly, if it was intended that the transfer should be free of consequence, then
why was it effected to a body corporate, with a distinct legal personality from that of the State or
Republic? The stated aims of the MIAA could have very well been accomplished by creating an
agency without independent juridical personality.

VI.

MIAA Performs Proprietary Functions

Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the Republic of
the Philippines." I think the key to understanding the scope of "the Republic" is the phrase "political
subdivisions." Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays."125 In correlation, the Administrative Code of 1987 defines "local
government" as referring to "the political subdivisions established by or in accordance with the
Constitution."

Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and are
accordingly exempt. The same could be said generally of the national government, which would be
similarly exempt. After all, even with the principle of local autonomy, it is inherently noxious and self-
defeatist for local taxation to interfere with the sovereign exercise of functions. However, the
exercise of proprietary functions is a different matter altogether.

Sovereign and Proprietary

Functions Distinguished

Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional.126 An exhaustive discussion on
the matter was provided by the Court in Bacani v. NACOCO:127
xxx This institution, when referring to the national government, has reference to what our
Constitution has established composed of three great departments, the legislative, executive, and
the judicial, through which the powers and functions of government are exercised. These functions
are twofold: constituent and ministrant. The former are those which constitute the very bonds of
society and are compulsory in nature; the latter are those that are undertaken only by way of
advancing the general interests of society, and are merely optional. President Wilson enumerates
the constituent functions as follows:

"'(1) The keeping of order and providing for the protection of persons and property from violence and
robbery.

'(2) The fixing of the legal relations between man and wife and between parents and children.

'(3) The regulation of the holding, transmission, and interchange of property, and the determination
of its liabilities for debt or for crime.

'(4) The determination of contract rights between individuals.

'(5) The definition and punishment of crime.

'(6) The administration of justice in civil cases.

'(7) The determination of the political duties, privileges, and relations of citizens.

'(8) Dealings of the state with foreign powers: the preservation of the state from external danger or
encroachment and the advancement of its international interests.'" (Malcolm, The Government of the
Philippine Islands, p. 19.)

The most important of the ministrant functions are: public works, public education, public charity,
health and safety regulations, and regulations of trade and industry. The principles determining
whether or not a government shall exercise certain of these optional functions are: (1) that a
government should do for the public welfare those things which private capital would not naturally
undertake and (2) that a government should do these things which by its very nature it is better
equipped to administer for the public welfare than is any private individual or group of individuals.
(Malcolm, The Government of the Philippine Islands, pp. 19-20.)

From the above we may infer that, strictly speaking, there are functions which our government is
required to exercise to promote its objectives as expressed in our Constitution and which are
exercised by it as an attribute of sovereignty, and those which it may exercise to promote merely the
welfare, progress and prosperity of the people. To this latter class belongs the organization of those
corporations owned or controlled by the government to promote certain aspects of the economic life
of our people such as the National Coconut Corporation. These are what we call government-owned
or controlled corporations which may take on the form of a private enterprise or one organized with
powers and formal characteristics of a private corporations under the Corporation Law.128

The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:

Does the fact that these corporations perform certain functions of government make them a part of
the Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that they do not come
under the classification of municipal or public corporation. Take for instance the National Coconut
Corporation. While it was organized with the purpose of "adjusting the coconut industry to a position
independent of trade preferences in the United States" and of providing "Facilities for the better
curing of copra products and the proper utilization of coconut by-products," a function which our
government has chosen to exercise to promote the coconut industry, however, it was given a
corporate power separate and distinct from our government, for it was made subject to the
provisions of our Corporation Law in so far as its corporate existence and the powers that it may
exercise are concerned (sections 2 and 4, Commonwealth Act No. 518). It may sue and be sued in
the same manner as any other private corporations, and in this sense it is an entity different from our
government. As this Court has aptly said, "The mere fact that the Government happens to be a
majority stockholder does not make it a public corporation" (National Coal Co. vs. Collector of
Internal Revenue, 46 Phil., 586-587). "By becoming a stockholder in the National Coal Company, the
Government divested itself of its sovereign character so far as respects the transactions of the
corporation. . . . Unlike the Government, the corporation may be sued without its consent, and is
subject to taxation. Yet the National Coal Company remains an agency or instrumentality of
government." (Government of the Philippine Islands vs. Springer, 50 Phil., 288.)

The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez bears
noting:

The fact that government corporations are instrumentalities of the State does not divest them with
immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the government
engages in a particular business through the instrumentality of a corporation, it divests itself pro hoc
vice of its sovereign character so as to subject itself to the rules governing private corporations,
(PNB v. Pabolan 82 SCRA 595) and is to be treated like any other corporation. (PNR v. Union de
Maquinistas Fogonero y Motormen, 84 SCRA 223)

In the same vein, when the government becomes a stockholder in a corporation, it does not exercise
sovereignty as such. It acts merely as a corporator and exercises no other power in the
management of the affairs of the corporation than are expressly given by the incorporating act. Nor
does the fact that the government may own all or a majority of the capital stock take from the
corporation its character as such, or make the government the real party in interest. (Amtorg Trading
Corp. v. US 71 F2d 524, 528)129

MIAA Performs Proprietary

Functions No Matter How

Vital to the Public Interest

The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary
functions. The operation of an airport facility by the State may be imbued with public interest, but it is
by no means indispensable or obligatory on the national government. In fact, as demonstrated in
other countries, it makes a lot of economic sense to leave the operation of airports to the private
sector.

The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that
MIAA performs an essential public service as the primary domestic and international airport of the
Philippines. This premise is false, for one. On a local scale, MIAA competes with other international
airports situated in the Philippines, such as Davao International Airport and MCIAA. More pertinently,
MIAA also competes with other international airports in Asia, at least. International airlines take into
account the quality and conditions of various international airports in determining the number of
flights it would assign to a particular airport, or even in choosing a hub through which destinations
necessitating connecting flights would pass through.

Even if it could be conceded that MIAA does not compete in the market place, the example of the
Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways,130 held that it was not.131

Even more relevant to this particular case is Teodoro v. National Airports Corporation,132 concerning
the proper appreciation of the functions performed by the Civil Aeronautics Administration (CAA),
which had succeeded the defunction National Airports Corporation. The CAA claimed that as an
unincorporated agency of the Republic of the Philippines, it was incapable of suing and being sued.
The Court noted:

Among the general powers of the Civil Aeronautics Administration are, under Section 3, to execute
contracts of any kind, to purchase property, and to grant concession rights, and under Section 4, to
charge landing fees, royalties on sales to aircraft of aviation gasoline, accessories and supplies, and
rentals for the use of any property under its management.

These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to sue
and be sued. The power to sue and be sued is implied from the power to transact private business.
And if it has the power to sue and be sued on its behalf, the Civil Aeronautics Administration with
greater reason should have the power to prosecute and defend suits for and against the National
Airports Corporation, having acquired all the properties, funds and choses in action and assumed all
the liabilities of the latter. To deny the National Airports Corporation's creditors access to the courts
of justice against the Civil Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into unincorporated
agencies. 133

xxx

Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International
Airport."134 Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals135 the Court
reaffirmed the ruling that the CAA was engaged in "private or non-governmental functions."136 Thus,
the Court had already ruled that the predecessor agency of MIAA, the CAA was engaged in private
or non-governmental functions. These are more precedents ignored by the majority. The following
observation from the Teodoro case very well applies to MIAA.

The Civil Aeronautics Administration comes under the category of a private entity. Although not a
body corporate it was created, like the National Airports Corporation, not to maintain a necessary
function of government, but to run what is essentially a business, even if revenues be not its prime
objective but rather the promotion of travel and the convenience of the traveling public. It is engaged
in an enterprise which, far from being the exclusive prerogative of state, may, more than the
construction of public roads, be undertaken by private concerns.137

If the determinative point in distinguishing between sovereign functions and proprietary functions is
the vitality of the public service being performed, then it should be noted that there is no more
important public service performed than that engaged in by public utilities. But notably, the
Constitution itself authorizes private persons to exercise these functions as it allows them to operate
public utilities in this country138 If indeed such functions are actually sovereign and belonging properly
to the government, shouldn't it follow that the exercise of these tasks remain within the exclusive
preserve of the State?

There really is no prohibition against the government taxing itself,139 and nothing obscene with
allowing government entities exercising proprietary functions to be taxed for the purpose of raising
the coffers of LGUs. On the other hand, it would be an even more noxious proposition that the
government or the instrumentalities that it owns are above the law and may refuse to pay a validly
imposed tax. MIAA, or any similar entity engaged in the exercise of proprietary, and not sovereign
functions, cannot avoid the adverse-effects of tax evasion simply on the claim that it is imbued with
some of the attributes of government.

VII.

MIAA Property Not Subject to

Execution Sale Without Consent

Of the President.

Despite the fact that the City of Parañaque ineluctably has the power to impose real property taxes
over the MIAA, there is an equally relevant statutory limitation on this power that must be fully
upheld. Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred, conveyed
and assigned to the ownership and administration of the MIAA] shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines."140

Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be deemed
as repealing this prohibition under Section 3, even if it effectively forecloses one possible remedy of
the LGU in the collection of delinquent real property taxes. While the Local Government Code
withdrew all previous local tax exemptions of the MIAA and other natural and juridical persons, it did
not similarly withdraw any previously enacted prohibitions on properties owned by GOCCs, agencies
or instrumentalities. Moreover, the resulting legal effect, subjecting on one hand the MIAA to local
taxes but on the other hand shielding its properties from any form of sale or disposition, is not
contradictory or paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU
has to find another way to collect the taxes due from MIAA, thus paving the way for a mutually
acceptable negotiated solution.141

There are several other reasons this statutory limitation should be upheld and applied to this case. It
is at this juncture that the importance of the Manila Airport to our national life and commerce may be
accorded proper consideration. The closure of the airport, even by reason of MIAA's legal omission
to pay its taxes, will have an injurious effect to our national economy, which is ever reliant on air
travel and traffic. The same effect would obtain if ownership and administration of the airport were to
be transferred to an LGU or some other entity which were not specifically chartered or tasked to
perform such vital function. It is for this reason that the MIAA charter specifically forbids the sale or
disposition of MIAA properties without the consent of the President. The prohibition prevents the
peremptory closure of the MIAA or the hampering of its operations on account of the demands of its
creditors. The airport is important enough to be sheltered by legislation from ordinary legal
processes.

Section 3 of the MIAA charter may also be appreciated as within the proper exercise of executive
control by the President over the MIAA, a GOCC which despite its separate legal personality, is still
subsumed within the executive branch of government. The power of executive control by the
President should be upheld so long as such exercise does not contravene the Constitution or the
law, the President having the corollary duty to faithfully execute the Constitution and the laws of the
land.142 In this case, the exercise of executive control is precisely recognized and authorized by the
legislature, and it should be upheld even if it comes at the expense of limiting the power of local
government units to collect real property taxes.

Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect that
the parties would feel little distress. Through such action, both the Local Government Code and the
MIAA charter would have been upheld. The prerogatives of LGUs in real property taxation, as
guaranteed by the Local Government Code, would have been preserved, yet the concerns about the
ruinous effects of having to close the Manila International Airport would have been averted. The
parties would then be compelled to try harder at working out a compromise, a task, if I might add,
they are all too willing to engage in.143 Unfortunately, the majority will cause precisely the opposite
result of unremitting hostility, not only to the City of Parañaque, but to the thousands of LGUs in the
country.

VIII.

Summary of Points

My points may be summarized as follows:

1) Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural and
juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt from
local taxes even if previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted through subsequent
legislation.

2) Under the Local Government Code, particularly Section 232, instrumentalities, agencies and
GOCCs are generally liable for real property taxes. The only exemptions therefrom under the same
Code are provided in Section 234, which include real property owned by the Republic of the
Philippines or any of its political subdivisions.

3) The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a
separate legal entity from the Republic of the Philippines, is the legal owner of the properties, and is
thus liable for real property taxes, as it does not fall within the exemptions under Section 234 of the
Local Government Code.

4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the City
of Parañaque is prohibited from seizing or selling these properties by public auction in order to
satisfy MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed by the
City of Parañaque.

On the other hand, the majority's flaws are summarized as follows:

1) The majority deliberately ignores all precedents which run counter to its hypothesis, including
Mactan. Instead, it relies and directly cites those doctrines and precedents which were overturned by
Mactan. By imposing a different result than that warranted by the precedents without explaining why
Mactan or the other precedents are wrong, the majority attempts to overturn all these ruling sub
silencio and without legal justification, in a manner that is not sanctioned by the practices and
traditions of this Court.

2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as mandated
by the Constitution, enacted under the Local Government Code, and affirmed by precedents.
Instead, the majority asserts that there is no sound rationale for local governments to tax national
government instrumentalities, despite the blunt existence of such rationales in the Constitution, the
Local Government Code, and precedents.

3) The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of the
Administrative Code above and beyond the Corporation Code and the various legislative charters, in
order to impose a wholly absurd definition of GOCCs that effectively declassifies innumerable
existing GOCCs, to catastrophic legal consequences.

4) The majority asserts that by virtue of Section 133(o) of the Local Government Code, all national
government agencies and instrumentalities are exempt from any form of local taxation, in
contravention of several precedents to the contrary and the proviso under Section 133, "unless
otherwise provided herein [the Local Government Code]."

5) The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has
been created to benefit the national government. The legal distinction between sovereign and
proprietary functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA
properties as patrimonial.

IX.

Epilogue

If my previous discussion still fails to convince on how wrong the majority is, then the following points
are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko Sentral) as a
government instrumentality that exercises corporate powers but not organized as a stock or non-
stock corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt from all forms
of local taxation by LGUs by virtue of the Local Government Code.

Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:

SECTION 125. Tax Exemptions. — The Bangko Sentral shall be exempt for a period of five (5)
years from the approval of this Act from all national, provincial, municipal and city taxes, fees,
charges and assessments.

The New Central Bank Act was promulgated after the Local Government Code if the BSP is already
preternaturally exempt from local taxation owing to its personality as an "government
instrumentality," why then the need to make a new grant of exemption, which if the majority is to be
believed, is actually a redundancy. But even more tellingly, does not this provision evince a clear
intent that after the lapse of five (5) years, that the Bangko Sentral will be liable for provincial,
municipal and city taxes? This is the clear congressional intent, and it is Congress, not this Court
which dictates which entities are subject to taxation and which are exempt.
Perhaps this notion will offend the majority, because the Bangko Sentral is not even a government
owned corporation, but a government instrumentality, or perhaps "loosely", a "government corporate
entity." How could such an entity like the Bangko Sentral , which is not even a government owned
corporation, be subjected to local taxation like any mere mortal? But then, see Section 1 of the New
Central Bank Act:

SECTION 1. Declaration of Policy. — The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established
under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative
autonomy.

Apparently, the clear legislative intent was to create a government corporation known as the Bangko
Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of the provision
and not the one that needs to be unearthed from the bowels of the archival offices of the House and
the Senate, is for naught to the majority, as it contravenes the Administrative Code of 1987, which
after all, is "the governing law defining the status and relationship of government agencies and
instrumentalities" and thus superior to the legislative charter in determining the personality of a
chartered entity. Its like saying that the architect who designed a school building is better equipped
to teach than the professor because at least the architect is familiar with the geometry of the
classroom.

Consider further the example of the Philippine Institute of Traditional and Alternative Health Care
(PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as MIAA in that it
is established as a body corporate,144 and empowered with the attributes of a corporation,145 including
the power to purchase or acquire real properties.146 However the PITAHC has no capital stock and
no members, thus following the majority, it is not a GOCC.

The state policy that guides PITAHC is the development of traditional and alternative health
care,147 and its objectives include the promotion and advocacy of alternative, preventive and curative
health care modalities that have been proven safe, effective and cost effective.148 "Alternative health
care modalities" include "other forms of non-allophatic, occasionally non-indigenous or imported
healing methods" which include, among others "reflexology, acupuncture, massage, acupressure"
and chiropractics.149

Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that have
proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC and with
state policy. Is such massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is
an instrumentality or agency exempt from local government taxation, which does not fall under the
exceptions under Section 234 of the Local Government Code. Hence, this massage parlor would not
just be a shelter for frazzled nerves, but for taxes as well.

Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to
promote an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself up
to all sorts of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils that
could arise from the majority ruling. This is indeed a very strange and very wrong decision.

I dissent.

DANTE O. TINGA
Associate Justice

G.R. No. L-52019 August 19, 1988

ILOILO BOTTLERS, INC., plaintiff-appellee,

vs.
CITY OF ILOILO, defendant-appellant.

Efrain B. Trenas for plaintiff-appellee.

Diosdado Garingalao for defendant-appellant.

CORTES, J.:

The fundamental issue in this appeal is whether the Iloilo Bottlers, Inc. which had its bottling plant in Pavia, Iloilo, but which sold softdrinks in
Iloilo City, is liable under Iloilo City tax Ordinance No. 5, series of 1960, as amended, which imposes a municipal license tax on distributors of
soft-drinks.

On July 12,1972, Iloilo Bottlers, Inc. filed a complaint docketed as Civil Case No. 9046 with the Court
of First Instance of Iloilo praying for the recovery of the sum of P3,329.20, which amount allegedly
constituted payments of municipal license taxes under Ordinance No. 5 series of 1960, as amended,
that the company paid under protest.

On November 15,1972, the parties submitted a partial stipulation of facts, the material portions of
which state

xxx xxx xxx

2. That plaintiff is engaged in the business of bottling softdrinks under the trade name
of Pepsi Cola And 7-up and selling the same to its customers, with a bottling plant
situated at Barrio Ungca Municipality of Pavia, Iloilo, Philippines and which is outside
the jurisdiction of defendant;

3. That defendant enacted an ordinance on January 11, 1960 known as Ordinance

No. 5, Series of 1960 which ordinance was successively amended by Ordinance No.
28, Series of 1960; Ordinance No. 15, Series of 1964; and Ordinance No. 45, Series
of 1964; which provides as follows:

Section l. — Any person, firm or corporation engaged in the distribution, manufacture

or bottling of coca-cola, pepsi cola, tru-orange, seven-up and other soft drinks within
the jurisdiction of the City of Iloilo, shall pay a municipal license tax of ten (P0.10)
centavos for every case of twenty-four bottles; PROVIDED, HOWEVER, that
softdrinks sold to the public at not more than five (P0.05) centavos per bottle shall
pay a tax of one and one half (P0.015) (centavos) per case of twenty four bottles.
Section 1-A—For purposes of this Ordinance, all deliveries and/or dispatches
emanating or made at the plant and all goods or stocks taken out of the plant for
distribution, sale or exchange irrespective (of) where it would take place shall be
covered by the operation of this Ordinance.

4. That prior to September, 1966, Santiago Syjuco Inc., owned and operated a
bottling plant at Muelle Loney Street, Iloilo City, which was doing business under the
name of Seven-up Bottling Company of the Philippines and bottled the soft-drinks
Pepsi-Cola and 7-up; however sometime on September 14,1966, Santiago Syjuco,
Inc., informed all its employees that it (was) closing its Iloilo Plant due to financial
losses and in fact closed the same and later sold the plant to the plaintiff Iloilo
Bottlers, Inc.

5. That thereafter, plaintiff operated the said plant by bottling the soft drinks Pepsi-
Cola and 7-up; however, sometime in July 1968, plaintiff closed said bottling plant at
Muelle Loney, Iloilo City, and transferred its bottling operations to its new plant in
Barrio Ungca, Municipality of Pavia, Province of Iloilo, and which is outside the
jurisdiction of the City of Iloilo;

6. That from the time of (the) enactment (of the ordinance), the Seven Up Bottling
Company of the Philippines under Santiago Syjuco Inc., had been religiously paying
the defendant City of Iloilo the above- mentioned municipal license tax due therefrom
for bottler because its bottling plant was then still situated at Muelle Loney St., Iloilo
City; but the plaintiff stopped paying the municipal license tax (after) October 21,
1968 (when) it transferred its plant to Barrio Ungca Municipality of Pavia, Iloilo which
is outside the jurisdiction of the City of Iloilo;

7. That sometime on July 31, 1969, the defendant demanded from the plaintiff the
payment of the municipal license tax under the above-mentioned ordinance, a xerox
copy of the said letter is attached to the complaint as Annex "A" and made an
integral part hereof by reference.

8. That plaintiff explained in a letter to the defendant that it could not anymore be
liable to pay the municipal license fee because its bottling plant (was) not anymore
inside the City of Iloilo, and that moreover, since it itself (sold) its own products to its
(customers) directly, it could not be considered as a distributor in line with the
doctrines enunciated by the Supreme Court in the cases of City of Manila vs. Bugsuk
Lumber Co., L- 8255, July 11, 1957; Manila Trading & Supply Co., Inc. vs. City of
Manila L-1 2156, April 29, 1959; Central Azucarera de Don Pedro vs. City of Manila
et al., G.R. No. L7679, September 29,1955; Cebu Portland Cement vs. City of Manila
and City Treasurer of Manila, L-1 4229,July 26,1960. A xerox copy of the said letter
is attached as Annex "B" to the complaint and made an integral part hereof by
reference. As a result of the said letter of the plaintiff, the defendant did not anymore
press the plaintiff to pay the said municipal license tax;

9. That sometime on January 25, 1972, the defendant demanded from the plaintiff
compliance with the said ordinance for 1972 in view of the fact that it was engaged in
distribution of the softdrinks in the City of Iloilo, and it further demanded from the
plaintiff payment of back taxes from the time it transferred its bottling plant to the
Municipality of Pavia, Iloilo;
 10. That the plaintiff demurred to the said demand of the defendant raising as its
jurisdiction the reason that its bottling plant is situated outside the City of Iloilo and as
bottler could not be considered as distributor under the said ordinance although it
sells its product directly to the consumer, in line with the jurisprudence enunciated by
the Supreme Court but due to insistence of the defendant, the plaintiff paid on April
20, 1972, the first quarter payment of the municipal licence tax in the sum of
P3,329.20, under protest, and thereafter has been paying defendant every quarter
under protest;

11. That on June l5, 1972,the defendant informed the plaintiff that it must pay all the
taxes due since July, 1968 up to the last quarter of 1971, otherwise it shall be
constrained to cancel the operation of the business of the plaintiff, and because of
this threat, and so as not to occasion disruption of its business operation, the plaintiff
under protest agreed to the payment of the back taxes, on staggered basis, which
was acceded to by the defendant;

12. That as computed by the plaintiff the following are its softdrinks sold in Iloilo City
since it transferred its bottling plant from the City of Iloilo to Barrio Ungca Pavia, Iloilo
in July 1968, to wit:

No. of Cases sold

   
1 J
9 u
6 l
8 t
o 0
D
e
c
1 J
9 a
6 n
9 .
t 0
o 0
D
e
c
.
1 J
S P T T
E E O A
V P T X
E S A
N I- L D
- C U
U O E
P L
A
3 4 8 P
9, 9 8 8
3 , , ,
4 0 4 8
6 0 4
0 0 0
8 8 1 1
1, 7 6 6
2 , 8 ,
4 6 , 8
6 9 9
0 0
0
7 8 1 1
 9 a 9, 9 6 6
7 n 3 , 8 ,
0 . 8 2 , 6
t 9 1 6 0
o 1 0 0
0
D
e
c
.
1 J 8 8 1 1
9 a 0, 8 6 6
7 n 6 , 9 ,
1 . 7 4 , 9
t 0 8 1 1
o 0 5 5
0
D
e
c
.
  T 2 3 5 P
O 8 1 9
T 0, 4 5 5
A 6 , , 9
L 3 4 0 ,
9 1 5 5
1 0 0
5

13. That the plaintiff does not maintain any store or commercial establishment in the
City of Iloilo from which it distributes its products, but by means of a fleet of delivery
trucks, plaintiff distributes its products from its bottling plant at Barrio Ungca
Municipality of Pavia, Iloilo, directly to its customers in the different towns of the
Province of Iloilo as well as the City of Iloilo;

14. That the plaintiff is already paying the National Government a percentage Tax of
71/t, as manufacturer's sales tax on all the softdrinks it manufactures as follows:

O.R. No. 4683995 - January, 1972 Sales P17,222.90

O.R. No. 5614767 - February " " 17,024.81

O.R. No. .5614870 - March " " 17,589.19

O.R. No. 5614891 - April " " 18,726.77

O.R. No. 5614897 - May " " 16,710.99

O.R. No. 5614935 - June " " 14,791.20

 O.R. No. 5614967 - July " " 13,952.00

O.R. No. 5614973 - August " " 15,726.16

O.R. No. 56'L4999 - September " " 19,159.54

and is also paying the municipal license tax to the municipality of Pavia, Iloilo in the
amount of P l0,000.00 every year, plus a municipal license tax for engaging in its
business to the municipality of Pavia in its amount of P2,000.00 every year.

xxx xxx xxx

[Rollo, P. 10 (Record on Appeal, pp. 25-31)]

On the basis of the above stipulations, the court a quo rendered on January 26, 1973 a decision in
favor of Iloilo Bottlers, Inc. declaring the Corporation not liable under the ordinance and directing the
City of Iloilo to pay the sum of' P3,329.20. The decision was amended in an Order dated March 15,
1973, so as to include the amounts paid by the company after the filing of the complaint. The City of
Iloilo appealed to the Court of Appeals which certified the case to this Court.

The tax ordinance imposes a tax on persons, firms, and corporations engaged in the business of:

1. distribution of soft-drinks

2. manufacture of soft-drinks, and

3. bottling of softdrinks within the territorial jurisdiction of the City of Iloilo.

There is no question that after it transferred its plant to Pavia, Iloilo province, Iloilo Bottlers, Inc. no
longer manufactured/bottled its softdrinks within Iloilo City. Thus, it cannot be taxed as one falling
under the second or the third type of business. The resolution of this case therefore hinges on
whether the company may be considered engaged in the distribution of softdrinks in Iloilo City, even
after it had transferred its bottling plant to Pavia, so as to be within the purview of the ordinance.

Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it contends that since it is not engaged in
the independent business of distributing soft-drinks, but that its activity of selling is merely an
incident to, or is a necessary consequence of its main or principal business of bottling, then it is NOT
liable under the city tax ordinance. Second, it claims that only manufacturers or bottlers having their
plants inside the territorial jurisdiction of the city are covered by the ordinance.

The second ground is manifestly devoid of merit. It is clear from the ordinance that three types of
activities are covered: (1) distribution, (2) manufacture and (3) bottling of softdrinks. A person
engaged in any or all of these activities is subject to the tax.

The first ground, however, merits serious consideration.

This Court has always recognized that the right to manufacture implies the right to sell/distribute the
manufactured products [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento, 97
Phil. 627 (1955); Caltex (Philippines), Inc. v. City of Manila and Cudiamat, G.R. No. L-22764, July
28, 1969, 28 SCRA 840, 843.] Hence, for tax purposes, a manufacturer does not necessarily
become engaged in the separate business of selling simply because it sells the products it
manufactures. In certain cases, however, a manufacturer may also be considered as engaged in the
separate business of selling its products.

To determine whether an entity engaged in the principal business of manufacturing, is likewise

engaged in the separate business of selling, its marketing system or sales operations must be
looked into.

In several cases [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento, supra; Cebu
Portland Cement Co. v. City of Manila and the City Treasurer, 108 Phil. 1063 (1960); Caltex
(Philippines), Inc. v. City of Manila and Cudiamat, supra], this Court had occasion to distinguish two
marketing systems:

Under the first system, the manufacturer enters into sales transactions and invoices the sales at its
main office where purchase orders are received and approved before delivery orders are sent to the
company's warehouses, where in turn actual deliveries are made. No warehouse sales are made;
nor are separate stores maintained where products may be sold independently from the main office.
The warehouses only serve as storage sites and delivery points of the products earlier sold at the
main office. Under the second system, sales transactions are entered into and perfected at stores or
warehouses maintained by the company. Any one who desires to purchase the product may go to
the store or warehouse and there purchase the merchandise. The stores and warehouses serve as
selling centers.

Entities operating under the first system are NOT considered engaged in the separate business of
selling or dealing in their products, independent of their manufacturing business. Entities operating
under the second system are considered engaged in the separate business of selling.

In the case at bar, the company distributed its softdrinks by means of a fleet of delivery trucks which
went directly to customers in the different places in lloilo province. Sales transactions with customers
were entered into and sales were perfected and consummated by route salesmen. Truck sales were
made independently of transactions in the main office. The delivery trucks were not used solely for
the purpose of delivering softdrinks previously sold at Pavia. They served as selling units. They were
what were called, until recently, "rolling stores". The delivery trucks were therefore much the same
as the stores and warehouses under the second marketing system. Iloilo Bottlers, Inc. thus falls
under the second category above. That is, the corporation was engaged in the separate business of
selling or distributing soft-drinks, independently of its business of bottling them.

The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing,
manufacturing or bottling softdrinks. Being an excise tax, it can be levied by the taxing authority only
when the acts, privileges or businesses are done or performed within the jurisdiction of said authority
[Commissioner of Internal Revenue v. British Overseas Airways Corp. and Court of Appeals, G.R.
Nos. 65773-74, April 30, 1987, 149 SCRA 395, 410.] Specifically, the situs of the act of distributing,
bottling or manufacturing softdrinks must be within city limits, before an entity engaged in any of the
activities may be taxed in Iloilo City.

As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no option but
to declare the company liable under the tax ordinance.

With the foregoing discussion, it becomes unnecessary to discuss the other issues raised by the
parties.

WHEREFORE, the appealed decision is hereby REVERSED. The complaint in Civil Case No. 9046
is ordered DISMISSED. No Costs.
SO ORDERED.

G.R. No. 137377            December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated January
15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July
29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the
Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have
properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It
is duly registered to engage in such business in the Philippines and maintains a branch office in
Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of

authority to examine the books of accounts of the Manila branch office of respondent corporation for
the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to
have undeclared income from two (2) contracts in the Philippines, both of which were completed in
1984. One of the contracts was with the National Development Company (NDC) in connection with
the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate
in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate
Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

     FY ended March 31, 1985
Undeclared gross P967,269,811.14
income (Philphos and
NDC construction
projects)
Less: Cost and
expenses (50%) 483,634,905.57
Net undeclared
income 483,634,905.57
Income tax due
thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr.
7-15-85 to 8-15-
86 36,675,646.90
TOTAL AMOUNT
DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT
REMITTANCE TAX
     FY ended March 31, 1985
Undeclared gross
income from Philphos
and NDC construction
projects P483,634,905.57
Less: Income tax
thereon 169,272,217.00
Amount subject to
Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr.
4-26-85 to 8-15-
86 12,305,360.66
TOTAL AMOUNT
DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
     FY ended March
31, 1985
Undeclared gross
receipts/gross income
from Philphos and
NDC construction
projects P967,269,811.14
Contractor's tax due
thereon (4%) 38,690,792.00
50% surcharge
for non-
Add: declaration 19,345,396.00
20% surcharge
for late payment 9,672,698.00
 Sub-total 67,708,886.00
20% int. p.a.fr.
4-21-85 to 8-15-
Add: 86 17,854,739.46
TOTAL AMOUNT
DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL
BROKER'S TAX
     FY ended March 31, 1985
Undeclared share
from commission
income
(denominated as
"subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge
for non-
Add: declaration 814,284.50
20% surcharge
for late payment    407,142.25
Sub-total 2,849,995.75
20% int. p.a.fr.
4-21-85 to 8-15-
Add: 86    751,539.98
TOTAL AMOUNT
DUE      P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid
taxable revenues while the 25% surcharge was imposed because of your client's failure to pay on
time the above deficiency percentage taxes.

xxx           xxx           xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the
gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and installation of facilities in the Philippines,
the entire income therefrom constituted income from Philippine sources, hence, subject to internal
revenue taxes. The assessment letter further stated that the same was petitioner's final decision and
that if respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals
within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals.
The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance
and contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No.
4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty covering
unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished
to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement
declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue
(BIR), or if no such record exists, file a statement of said net worth subject to verification by the BIR;
and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from
December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October
30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and
respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5,
1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order
(E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on business under
Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985.
E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended to
the foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O.
No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the
new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to
cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of
E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of
the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as
deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the
same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive Order No. 41, as amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the
Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

 "(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished
upon respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage
of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch
profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in court
as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised
Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA
Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as of
the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of
income tax cases in court must have been made before and as of the date of effectivity of E.O. No.
41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no income
tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when the
taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for
filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22,
1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not disqualified from availing of the
amnesty for income tax under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch
profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a
tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed for
amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of
the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including
estate and donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax
Code while business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided
in Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the title on
business taxes, and is therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64
provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent
with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in
particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases
already filed in court as of the effectivity hereof." As to what Executive Order the exception refers to,
respondent argues that because of the words "income" and "hereof," they refer to Executive Order
No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to
E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original act as
if it had always been contained therein,10 it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or obligations of contract are
thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O.
No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its
provisions should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O.
No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original act by
adding other taxes not covered in the first.12 It has been held that where a statute amending a tax law
is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect
so as to subject to tax past transactions not subject to tax under the original act.13 In an amendatory
act, every case of doubt must be resolved against its retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance
to start with a clean slate.16 A tax amnesty, much like a tax exemption, is never favored nor
presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.18 For the right of
taxation is inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon
a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved
in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to
estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since
Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in
E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should
be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already
fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of
the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the two
Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the
projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two
parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract
under the "Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and
are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-scale
manufacture of phosphatic fertilizer for the local and foreign markets.20 The Philphos plant complex
which was envisioned to be the largest phosphatic fertilizer operation in Asia, and among the largest
in the world, covered an area of 180 hectares within the 435-hectare Leyte Industrial Development
Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the Leyte
Industrial Development Estate. It was to be specifically adapted to the site for the handling of
phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of Philphos,
the Philippine Associated Smelting and Refining Corporation (Pasar),21 and other industrial plants
within the Estate. The bidding was participated in by Marubeni Head Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation."22 The Port Development Project would
consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel
oil depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting, mobile equipment, spare parts and other
related facilities.23 The scope of the works under the contract covered turn-key supply, which
included grants of licenses and the transfer of technology and know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex
as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries
and schedule of the use of a part or the whole of the Wharf/Port Complex through the
Owner, with the design and construction of other facilities around the site. The scope of
works shall also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial port practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen
Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as
the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a)
by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by
supplier's credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese government as assistance to
foreign governments to promote economic development.26 The OECF extended to the Philippine
Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development Project
and authorized the NDC to implement the same.27 The other type of financing is an indirect type
where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to advance
payment to its sub-contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion
were further broken down and subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the corresponding materials, equipment and
services were contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni
Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and
respondent corporation entered into an agreement entitled "Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation."30 The
object of the contract was to establish and place in operating condition a modern, reliable, efficient
and integrated ammonia storage complex adapted to the site for the receipt and storage of liquid
anhydrous ammonia31 and for the delivery of ammonia to an integrated fertilizer plant adjacent to the
storage complex and to vessels at the dock.32 The storage complex was to consist of ammonia
storage tanks, refrigeration system, ship unloading system, transfer pumps, ammonia heating
system, fire-fighting system, area lighting, spare parts, and other related facilities.33 The scope of the
works required for the completion of the ammonia storage complex covered the supply, including
grants of licenses and transfer of technology and know-how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage
Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex
through the Owner with the design and construction of other facilities at and around the Site.
The scope of works shall also include any activity, work and supply necessary for, incidental
to or appropriate under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine currency
was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed
by supplier's credit from the Export-Import Bank of Japan. The price stated in the three portions were
further broken down into the corresponding materials, equipment and services required for the
project and their individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under
the two contracts corresponds to the two parts into which the contracts were classified — the
Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen
Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax
on the income from the two projects. In fact respondent claims, which petitioner has not denied, that
the income it derived from the Onshore Portion of the two projects had been declared for tax
purposes and the taxes thereon already paid to the Philippine government.39 It is with regard to the
gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in
the assessments subject of this case arose. Petitioner argues that since the two agreements are
turn-key,40 they call for the supply of both materials and services to the client, they are contracts for a
piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial jurisdiction of the
Philippines.41 Accordingly, respondent's entire receipts from the contracts, including its receipts from
the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering
both labor and materials should be subjected to contractor's tax in accordance with the ruling
in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co. 42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A contractor's

tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the
following business establishments and/or persons engaged in the business of selling or
rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;
 xxx           xxx           xxx

(q) Other independent contractors. The term "independent contractors" includes

persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
essentially of the sale of all kinds of services for a fee regardless of whether or not
the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. It does not include regional or area
headquarters established in the Philippines by multinational corporations, including
their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating centers
for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

xxx           xxx           xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. The word "contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising the privilege.47 Being an excise tax, it
can be levied by the taxing authority only when the acts, privileges or business are done or
performed within the jurisdiction of said authority.48 Like property taxes, it cannot be imposed on an
occupation or privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of
the two subject contracts. Respondent, however, argues that the work therein were not all performed
in the Philippines because some of them were completed in Japan in accordance with the provisions
of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to be
made and the works and services to be performed by respondent are indeed classified into two. The
first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:

xxx           xxx           xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation of
the two projects, testified that all the machines and equipment listed under Japanese Yen Portion I in
Annex III were manufactured in Japan.51 The machines and equipment were designed, engineered
and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors in the
technical appendices to each contract.52 Marubeni sub-contracted a majority of the equipment and
supplies to Kawasaki Steel Corporation which did the design, fabrication, engineering and
manufacture thereof;53 Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone
which provided the rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of radio
equipment.55 The engineering and design works made by Kawasaki Steel Corporation included the
lay-out of the plant facility and calculation of the design in accordance with the specifications given
by respondent.56 All sub-contractors and manufacturers are Japanese corporations and are based in
Japan and all engineering and design works were performed in that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of two
(2) sets of ship unloader and loader; several boats and mobile equipment.58 The ship unloader
unloads bags or bulk products from the ship to the port while the ship loader loads products from the
port to the ship. The unloader and loader are big steel structures on top of each is a large crane and
a compartment for operation of the crane. Two sets of these equipment were completely
manufactured in Japan according to the specifications of the project. After manufacture, they were
rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the spot where they were installed.60 Their
installation simply consisted of bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured
in Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three
to four sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and
completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port.
These pieces of equipment were all on wheels and self-propelled. Once unloaded at the port, they
were ready to be driven and perform what they were designed to do.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the
NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads,
a causeway, a warehouse, a transit shed, an administration building and a security building. Most of
the materials consist of steel sheets, steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to Isabel.
Once there, respondent's employees put the steel plates together to form the storage tank. As to the
refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel.
The units were simply installed there. 65 Annex III to the Philphos contract lists down under the
Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping
facilities, electrical and instrumental apparatus, foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan
prior to shipment in accordance with the terms of the contracts.66 The inspection was made by
representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the
services of a private consultancy firm to verify the correctness of the tests on the machines and
equipment67 while Philphos sent a representative to Japan to inspect the storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the
Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering &
Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the
two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan.
Receipts for such payments were duly issued by Kawasaki in Japanese and English.69 Yashima &
Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all materials and equipment
under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The
NDC, through the Philippine National Bank, established letters of credit in favor of respondent
through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by
the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent
documents, released the amount in the letters of credit in favor of respondent and credited the
amount therein to respondent's account within the same bank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . "72 of the
two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and
engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for
the NDC project and the ammonia storage tanks and refrigeration units were made and completed in
Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical
and instrumental apparatus, these were not finished products when shipped to the Philippines. They,
however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services
for the design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered outside
the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering Equipment,
although an independent contractor, was not engaged in the manufacture of air conditioning units in
the Philippines. Engineering Equipment designed, supplied and installed centralized air-conditioning
systems for clients who contracted its services. Engineering, however, did not manufacture all the
materials for the air-conditioning system. It imported some items for the system it designed and
installed.74 The issues in that case dealt with services performed within the local taxing jurisdiction.
There was no foreign element involved in the supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.

G.R. No. 158540. August 3, 2005

SOUTHERN CROSS CEMENT CORPORATION, Petitioners,

vs.
CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, THE SECRETARY OF THE
DEPARTMENT OF TRADE AND INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF
FINANCE and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, Respondent.
 RESOLUTION

TINGA, J.:

Cement is hardly an exciting subject for litigation. Still, the parties in this case have done their best to
put up a spirited advocacy of their respective positions, throwing in everything including the
proverbial kitchen sink. At present, the burden of passion, if not proof, has shifted to public
respondents Department of Trade and Industry (DTI) and private respondent Philippine Cement
Manufacturers Corporation (Philcemcor), who now seek reconsideration of our Decision dated 8 July
1 

2004 (Decision), which granted the petition of petitioner Southern Cross Cement Corporation
(Southern Cross).

This case, of course, is ultimately not just about cement. For respondents, it is about love of country
and the future of the domestic industry in the face of foreign competition. For this Court, it is about
elementary statutory construction, constitutional limitations on the executive power to impose tariffs
and similar measures, and obedience to the law. Just as much was asserted in the Decision, and the
same holds true with this present Resolution.

An extensive narration of facts can be found in the Decision. As can well be recalled, the case
2 

centers on the interpretation of provisions of Republic Act No. 8800, the Safeguard Measures Act
("SMA"), which was one of the laws enacted by Congress soon after the Philippines ratified the
General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO)
Agreement. The SMA provides the structure and mechanics for the imposition of emergency
3 

measures, including tariffs, to protect domestic industries and producers from increased imports
which inflict or could inflict serious injury on them.
4

A brief summary as to how the present petition came to be filed by Southern Cross. Philcemcor, an
association of at least eighteen (18) domestic cement manufacturers filed with the DTI a petition
seeking the imposition of safeguard measures on gray Portland cement, in accordance with the
5 

SMA. After the DTI issued a provisional safeguard measure, the application was referred to the
6 

Tariff Commission for a formal investigation pursuant to Section 9 of the SMA and its Implementing
Rules and Regulations, in order to determine whether or not to impose a definitive safeguard
measure on imports of gray Portland cement. The Tariff Commission held public hearings and
conducted its own investigation, then on 13 March 2002, issued its Formal Investigation Report
("Report"). The Report determined as follows:

The elements of serious injury and imminent threat of serious injury not having been established, it is
hereby recommended that no definitive general safeguard measure be imposed on the importation
of gray Portland cement. 7

The DTI sought the opinion of the Secretary of Justice whether it could still impose a definitive
safeguard measure notwithstanding the negative finding of the Tariff Commission. After the
Secretary of Justice opined that the DTI could not do so under the SMA, the DTI Secretary then
8 

promulgated a Decision wherein he expressed the DTI’s disagreement with the conclusions of the
9 

Tariff Commission, but at the same time, ultimately denying Philcemcor’s application for safeguard
measures on the ground that the he was bound to do so in light of the Tariff Commission’s negative
findings.10

Philcemcor challenged this Decision of the DTI Secretary by filing with the Court of Appeals
a Petition for Certiorari, Prohibition and Mandamus seeking to set aside the DTI Decision, as well as
11 

the Tariff Commission’s Report. It prayed that the Court of Appeals direct the DTI Secretary to
disregard the Report and to render judgment independently of the Report. Philcemcor argued that
the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the
recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a
flawed framework, inconsistent inferences and erroneous methodology. 12

The Court of Appeals Twelfth Division, in a Decision penned by Court of Appeals Associate Justice
13 

Elvi John Asuncion, partially granted Philcemcor’s petition. The appellate court ruled that it had
14 

jurisdiction over the petition for certiorari since it alleged grave abuse of discretion. While it refused
to annul the findings of the Tariff Commission, it also held that the DTI Secretary was not bound by
15 

the factual findings of the Tariff Commission since such findings are merely recommendatory and
they fall within the ambit of the Secretary’s discretionary review. It determined that the legislative
intent is to grant the DTI Secretary the power to make a final decision on the Tariff Commission’s
recommendation. 16

On 23 June 2003, Southern Cross filed the present petition, arguing that the Court of Appeals has
no jurisdiction over Philcemcor’s petition, as the proper remedy is a petition for review with the CTA
conformably with the SMA, and; that the factual findings of the Tariff Commission on the existence or
non-existence of conditions warranting the imposition of general safeguard measures are binding
upon the DTI Secretary.

Despite the fact that the Court of Appeals’ Decision had not yet become final, its binding force was
cited by the DTI Secretary when he issued a new Decision on 25 June 2003, wherein he ruled that
that in light of the appellate court’s Decision, there was no longer any legal impediment to his
deciding Philcemcor’s application for definitive safeguard measures. He made a determination that,
17 

contrary to the findings of the Tariff Commission, the local cement industry had suffered serious
injury as a result of the import surges. Accordingly, he imposed a definitive safeguard measure on
18 

the importation of gray Portland cement, in the form of a definitive safeguard duty in the amount of
₱20.60/40 kg. bag for three years on imported gray Portland Cement. 19

On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the
DTI Secretary from enforcing his Decision of 25 June 2003 in view of the pending petition before this
Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA
that has jurisdiction over the application under the law.

On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI
Secretary’s 25 June 2003 Decision which imposed the definite safeguard measure. Yet Southern
Cross did not promptly inform this Court about this filing. The first time the Court would learn about
this Petition with the CTA was when Southern Cross mentioned such fact in a pleading dated 11
August 2003 and filed the next day with this Court. 20

Philcemcor argued before this Court that Southern Cross had deliberately and willfully resorted to
forum-shopping; that the CTA, being a special court of limited jurisdiction, could only review the
ruling of the DTI Secretary when a safeguard measure is imposed; and that the factual findings of
the Tariff Commission are not binding on the DTI Secretary. 21

After giving due course to Southern Cross’s Petition, the Court called the case for oral argument on
18 February 2004. At the oral argument, attended by the counsel for Philcemcor and Southern
22 

Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether
the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming
that the Court of Appeals has jurisdiction, whether its Decision is in accordance with law; and,
whether a Temporary Restraining Order is warranted. 23
After the parties had filed their respective memoranda, the Court’s Second Division, to which the
case had been assigned, promulgated its Decision granting Southern
Cross’s Petition. The Decision was unanimous, without any separate or concurring opinion.
24 

The Court ruled that the Court of Appeals had no jurisdiction over Philcemcor’s Petition, the proper
remedy under Section 29 of the SMA being a petition for review with the CTA; and that the Court of
Appeals erred in ruling that the DTI Secretary was not bound by the negative determination of the
Tariff Commission and could therefore impose the general safeguard measures, since Section 5 of
the SMA precisely required that the Tariff Commission make a positive final determination before the
DTI Secretary could impose these measures. Anent the argument that Southern Cross had
committed forum-shopping, the Court concluded that there was no evident malicious intent to
subvert procedural rules so as to match the standard under Section 5, Rule 7 of the Rules of Court
of willful and deliberate forum shopping. Accordingly, the Decision of the Court of Appeals dated 5
June 2003 was declared null and void.

The Court likewise found it necessary to nullify the Decision of the DTI Secretary dated 25 June
2003, rendered after the filing of this present Petition. This Decision by the DTI Secretary had cited
the obligatory force of the null and void Court of Appeals’ Decision, notwithstanding the fact that the
decision of the appellate court was not yet final and executory. Considering that the decision of the
Court of Appeals was a nullity to begin with, the inescapable conclusion was that the new decision of
the DTI Secretary, prescinding as it did from the imprimatur of the decision of the Court of Appeals,
was a nullity as well.

After the Decision was reported in the media, there was a flurry of newspaper articles citing alleged
negative reactions to the ruling by the counsel for Philcemcor, the DTI Secretary, and others. Both
25 

respondents promptly filed their respective motions for reconsideration.

On 21 September 2004, the Court En Banc resolved, upon motion of respondents, to accept the
petition and resolve the Motions for Reconsideration. The case was then reheard on oral argument
26  27 

on 1 March 2005. During the hearing, the Court elicited from the parties their arguments on the two
central issues as discussed in the assailed Decision, pertaining to the jurisdictional aspect and to the
substantive aspect of whether the DTI Secretary may impose a general safeguard measure despite
a negative determination by the Tariff Commission. The Court chose not to hear argumentation on
the peripheral issue of forum-shopping, although this question shall be tackled herein shortly.
28 

Another point of concern emerged during oral arguments on the exercise of quasi-judicial powers by
the Tariff Commission, and the parties were required by the Court to discuss in their respective
memoranda whether the Tariff Commission could validly exercise quasi-judicial powers in the
exercise of its mandate under the SMA.

The Court has likewise been notified that subsequent to the rendition of the Court’s Decision,
Philcemcor filed a Petition for Extension of the Safeguard Measure with the DTI, which has been
referred to the Tariff Commission. In an Urgent Motion dated 21 December 2004, Southern Cross
29 

prayed that Philcemcor, the DTI, the Bureau of Customs, and the Tariff Commission be directed to
"cease and desist from taking any and all actions pursuant to or under the null and void CA Decision
and DTI Decision, including proceedings to extend the safeguard measure. In a Manifestation and
30 

Motion dated 23 June 2004, the Tariff Commission informed the Court that since no prohibitory
injunction or order of such nature had been issued by any court against the Tariff Commission, the
Commission proceeded to complete its investigation on the petition for extension, pursuant to
Section 9 of the SMA, but opted to defer transmittal of its report to the DTI Secretary pending
"guidance" from this Court on the propriety of such a step considering this pending Motion for
Reconsideration. In a Resolution dated 5 July 2005, the Court directed the parties to maintain the
status quo effective of even date, and until further orders from this Court. The denial of the pending
motions for reconsideration will obviously render the pending petition for extension academic.

I. Jurisdiction of the Court of Tax Appeals

Under Section 29 of the SMA

The first core issue resolved in the assailed Decision was whether the Court of Appeals had
jurisdiction over the special civil action for certiorari filed by Philcemcor assailing the 5 April
2002 Decision of the DTI Secretary. The general jurisdiction of the Court of Appeals over special civil
actions for certiorari is beyond doubt. The Constitution itself assures that judicial review avails to
determine whether or not there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the Government. At the same time, the
special civil action of certiorari is available only when there is no plain, speedy and adequate remedy
in the ordinary course of law. Philcemcor’s recourse of special civil action before the Court of
31 

Appeals to challenge the Decision of the DTI Secretary not to impose the general safeguard
measures is not based on the SMA, but on the general rule on certiorari. Thus, the Court proceeded
to inquire whether indeed there was no other plain, speedy and adequate remedy in the ordinary
course of law that would warrant the allowance of Philcemcor’s special civil action.

The answer hinged on the proper interpretation of Section 29 of the SMA, which reads:

Section 29. Judicial Review. – Any interested party who is adversely affected by the ruling of the
Secretary in connection with the imposition of a safeguard measure may file with the CTA, a
petition for review of such ruling within thirty (30) days from receipt thereof. Provided, however, that
the filing of such petition for review shall not in any way stop, suspend or otherwise toll the
imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard
measures, as the case may be.

The petition for review shall comply with the same requirements and shall follow the same rules of
procedure and shall be subject to the same disposition as in appeals in connection with adverse
rulings on tax matters to the Court of Appeals. (Emphasis supplied)
32 

The matter is crucial for if the CTA properly had jurisdiction over the petition challenging the DTI
Secretary’s ruling not to impose a safeguard measure, then the special civil action of certiorari
resorted to instead by Philcemcor would not avail, owing to the existence of a plain, speedy and
adequate remedy in the ordinary course of law. The Court of Appeals, in asserting that it had
33 

jurisdiction, merely cited the general rule on certiorari jurisdiction without bothering to refer to, or
possibly even study, the import of Section 29. In contrast, this Court duly considered the meaning
and ramifications of Section 29, concluding that it provided for a plain, speedy and adequate remedy
that Philcemcor could have resorted to instead of filing the special civil action before the Court of
Appeals.

Philcemcor still holds on to its hypothesis that the petition for review allowed under Section 29 lies
only if the DTI Secretary’s ruling imposes a safeguard measure. If, on the other hand, the DTI
Secretary’s ruling is not to impose a safeguard measure, judicial review under Section 29 could not
be resorted to since the provision refers to rulings "in connection with the imposition" of the
safeguard measure, as opposed to the non-imposition. Since the Decision dated 5 April 2002
resolved against imposing a safeguard measure, Philcemcor claims that the proper remedial
recourse is a petition for certiorari with the Court of Appeals.
Interestingly, Republic Act No. 9282, promulgated on 30 March 2004, expressly vests unto the CTA
jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural
product, commodity or article . . . involving . . . safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to impose or not to impose said duties." It is clear
34 

that any future attempts to advance the literalist position of the respondents would consequently fail.
However, since Republic Act No. 9282 has no retroactive effect, this Court had to decide whether
Section 29 vests jurisdiction on the CTA over rulings of the DTI Secretary not to impose a safeguard
measure. And the Court, in its assailed Decision, ruled that the CTA is endowed with such
jurisdiction.

Both respondents reiterate their fundamentalist reading that Section 29 authorizes the petition for
review before the CTA only when the DTI Secretary decides to impose a safeguard measure, but not
when he decides not to. In doing so, they fail to address what the Court earlier pointed out would be
the absurd consequences if their interpretation is followed to its logical end. But in affirming, as the
Court now does, its previous holding that the CTA has jurisdiction over petitions for review
questioning the non-imposition of safeguard measures by the DTI Secretary, the Court relies on the
plain reading that Section 29 explicitly vests jurisdiction over such petitions on the CTA.

Under Section 29, there are three requisites to enable the CTA to acquire jurisdiction over the
petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the
petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling
must be "in connection with the imposition of a safeguard measure." Obviously, there are differences
between "a ruling for the imposition of a safeguard measure," and one issued "in connection with the
imposition of a safeguard measure." The first adverts to a singular type of ruling, namely one that
imposes a safeguard measure. The second does not contemplate only one kind of ruling, but a
myriad of rulings issued "in connection with the imposition of a safeguard measure."

Respondents argue that the Court has given an expansive interpretation to Section 29, contrary to
the established rule requiring strict construction against the existence of jurisdiction in specialized
courts. But it is the express provision of Section 29, and not this Court, that mandates CTA
35 

jurisdiction to be broad enough to encompass more than just a ruling imposing the
safeguard measure.

The key phrase remains "in connection with." It has connotations that are obvious even to the
layman. A ruling issued "in connection with" the imposition of a safeguard measure would be one
that bears some relation to the imposition of a safeguard measure. Obviously, a ruling imposing a
safeguard measure is covered by the phrase "in connection with," but such ruling is by no means
exclusive. Rulings which modify, suspend or terminate a safeguard measure are necessarily in
connection with the imposition of a safeguard measure. So does a ruling allowing for a provisional
safeguard measure. So too, a ruling by the DTI Secretary refusing to refer the application for a
safeguard measure to the Tariff Commission. It is clear that there is an entire subset of rulings that
the DTI Secretary may issue in connection with the imposition of a safeguard measure, including
those that are provisional, interlocutory, or dispositive in character. By the same token, a ruling not
36 

to impose a safeguard measure is also issued in connection with the imposition of a safeguard
measure.

In arriving at the proper interpretation of "in connection with," the Court referred to the U.S. Supreme
Court cases of Shaw v. Delta Air Lines, Inc. and New York State Blue Cross Plans v. Travelers
37 

Ins. Both cases considered the interpretation of the phrase "relates to" as used in a federal statute,
38 

the Employee Retirement Security Act of 1974. Respondents criticize the citations on the premise
that the cases are not binding in our jurisdiction and do not involve safeguard measures. The
criticisms are off-tangent considering that our ruling did not call for the application of the Employee
Retirement Security Act of 1974 in the Philippine milieu. The American cases are not relied upon as
precedents, but as guides of interpretation. Certainly, if there are applicable local precedents
pertaining to the interpretation of the phrase "in connection with," then these certainly would have
some binding force. But none avail, and neither do the respondents demonstrate a countervailing
holding in Philippine jurisprudence.

Yet we should consider the claim that an "expansive interpretation" was favored in Shaw because
the law in question was an employee’s benefit law that had to be given an interpretation favorable to
its intended beneficiaries. In the next breath, Philcemcor notes that the U.S. Supreme Court itself
39 

was alarmed by the expansive interpretation in Shaw and thus in Blue Cross, the Shaw ruling was
reversed and a more restrictive interpretation was applied based on congressional intent. 40

Respondents would like to make it appear that the Court acted rashly in applying a discarded
precedent in Shaw, a non-binding foreign precedent nonetheless. But the Court did make the
following observation in its Decision pertaining to Blue Cross:

Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in
Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the U.S.
Supreme Court in New York State Blue Cross Plans v. Travelers Ins. conceded that the phrases
41 

"relate to" or "in connection with" may be extended to the farthest stretch of indeterminacy for,
universally, relations or connections are infinite and stop nowhere. Thus, in the case the U.S. High
42 

Court, examining the same phrase of the same provision of law involved in Shaw, resorted to
looking at the statute and its objectives as the alternative to an "uncritical literalism." A
similar inquiry into the other provisions of the SMA is in order to determine the scope of
review accorded therein to the CTA. 43

In the next four paragraphs of the Decision, encompassing four pages, the Court proceeded to
inquire into the SMA and its objectives as a means to determine the scope of rulings to be deemed
as "in connection with the imposition of a safeguard measure." Certainly, this Court did not resort to
the broadest interpretation possible of the phrase "in connection with," but instead sought to bring it
into the context of the scope and objectives of the SMA. The ultimate conclusion of the Court was
that the phrase includes all rulings of the DTI Secretary which arise from the time an application
or motu proprio initiation for the imposition of a safeguard measure is taken. This conclusion was
44 

derived from the observation that the imposition of a general safeguard measure is a process,
initiated motu proprio or through application, which undergoes several stages upon which the DTI
Secretary is obliged or may be called upon to issue a ruling.

It should be emphasized again that by utilizing the phrase "in connection with," it is the SMA that
expressly vests jurisdiction on the CTA over petitions questioning the non-imposition by the DTI
Secretary of safeguard measures. The Court is simply asserting, as it should, the clear intent of the
legislature in enacting the SMA. Without "in connection with" or a synonymous phrase, the Court
would be compelled to favor the respondents’ position that only rulings imposing safeguard
measures may be elevated on appeal to the CTA. But considering that the statute does make use of
the phrase, there is little sense in delving into alternate scenarios.

Respondents fail to convincingly address the absurd consequences pointed out by the Decision had
their proposed interpretation been adopted. Indeed, suffocated beneath the respondents’ legalistic
tinsel is the elemental question¾what sense is there in vesting jurisdiction on the CTA over a
decision to impose a safeguard measure, but not on one choosing not to impose. Of course, it is not
for the Court to inquire into the wisdom of legislative acts, hence the rule that jurisdiction must be
expressly vested and not presumed. Yet ultimately, respondents muddle the issue by making it
appear that the Decision has uniquely expanded the jurisdictional rules. For the respondents, the
proper statutory interpretation of the crucial phrase "in connection with" is to pretend that the phrase
did not exist at all in the statute. The Court, in taking the effort to examine the meaning and extent of
the phrase, is merely giving breath to the legislative will.

The Court likewise stated that the respondents’ position calls for split jurisdiction, which is judicially
abhorred. In rebuttal, the public respondents cite Sections 2313 and 2402 of the Tariff and Customs
Code (TCC), which allegedly provide for a splitting of jurisdiction of the CTA. According to public
respondents, under Section 2313 of the TCC, a decision of the Commissioner of Customs affirming
a decision of the Collector of Customs adverse to the government is elevated for review to the
Secretary of Finance. However, under Section 2402 of the TCC, a ruling of the Commissioner of the
Bureau of Customs against a taxpayer must be appealed to the Court of Tax Appeals, and not to the
Secretary of Finance.

Strictly speaking, the review by the Secretary of Finance of the decision of the Commissioner of
Customs is not judicial review, since the Secretary of Finance holds an executive and not a judicial
office. The contrast is apparent with the situation in this case, wherein the interpretation favored by
the respondents calls for the exercise of judicial review by two different courts over essentially the
same question¾whether the DTI Secretary should impose general safeguard measures. Moreover,
as petitioner points out, the executive department cannot appeal against itself. The Collector of
Customs, the Commissioner of Customs and the Secretary of Finance are all part of the executive
branch. If the Collector of Customs rules against the government, the executive cannot very well
bring suit in courts against itself. On the other hand, if a private person is aggrieved by the decision
of the Collector of Customs, he can have proper recourse before the courts, which now would be
called upon to exercise judicial review over the action of the executive branch.

More fundamentally, the situation involving split review of the decision of the Collector of Customs
under the TCC is not apropos to the case at bar. The TCC in that instance is quite explicit on the
divergent reviewing body or official depending on which party prevailed at the Collector of Customs’
level. On the other hand, there is no such explicit expression of bifurcated appeals in Section 29 of
the SMA.

Public respondents likewise cite Fabian v. Ombudsman as another instance wherein the Court
45 

purportedly allowed split jurisdiction. It is argued that the Court, in ruling that it was the Court of
Appeals which possessed appellate authority to review decisions of the Ombudsman in
administrative cases while the Court retaining appellate jurisdiction of decisions of the Ombudsman
in non-administrative cases, effectively sanctioned split jurisdiction between the Court and the Court
of Appeals.46

Nonetheless, this argument is successfully undercut by Southern Cross, which points out the
essential differences in the power exercised by the Ombudsman in administrative cases and non-
administrative cases relating to criminal complaints. In the former, the Ombudsman may impose an
administrative penalty, while in acting upon a criminal complaint what the Ombudsman undertakes is
a preliminary investigation. Clearly, the capacity in which the Ombudsman takes on in deciding an
administrative complaint is wholly different from that in conducting a preliminary investigation. In
contrast, in ruling upon a safeguard measure, the DTI Secretary acts in one and the same role. The
variance between an order granting or denying an application for a safeguard measure is polar
though emanating from the same equator, and does not arise from the distinct character of the
putative actions involved.

Philcemcor imputes intelligent design behind the alleged intent of Congress to limit CTA review only
to impositions of the general safeguard measures. It claims that there is a necessary tax implication
in case of an imposition of a tariff where the CTA’s expertise is necessary, but there is no such tax
implication, hence no need for the assumption of jurisdiction by a specialized agency, when the
ruling rejects the imposition of a safeguard measure. But of course, whether the ruling under review
calls for the imposition or non-imposition of the safeguard measure, the common question for
resolution still is whether or not the tariff should be imposed — an issue definitely fraught with a tax
dimension. The determination of the question will call upon the same kind of expertise that a
specialized body as the CTA presumably possesses.

In response to the Court’s observation that the setup proposed by respondents was novel, unusual,
cumbersome and unwise, public respondents invoke the maxim that courts should not be concerned
with the wisdom and efficacy of legislation. But this prescinds from the bogus claim that the CTA
47 

may not exercise judicial review over a decision not to impose a safeguard measure, a prohibition
that finds no statutory support. It is likewise settled in statutory construction that an interpretation that
would cause inconvenience and absurdity is not favored. Respondents do not address the particular
illogic that the Court pointed out would ensue if their position on judicial review were adopted.
According to the respondents, while a ruling by the DTI Secretary imposing a safeguard measure
may be elevated on review to the CTA and assailed on the ground of errors in fact and in law, a
ruling denying the imposition of safeguard measures may be assailed only on the ground that the
DTI Secretary committed grave abuse of discretion. As stressed in the Decision, "[c]ertiorari is a
remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the legal
workshop." 48

It is incorrect to say that the Decision bars any effective remedy should the Tariff Commission act or
conclude erroneously in making its determination whether the factual conditions exist which
necessitate the imposition of the general safeguard measure. If the Tariff Commission makes a
negative final determination, the DTI Secretary, bound as he is by this negative determination, has to
render a decision denying the application for safeguard measures citing the Tariff Commission’s
findings as basis. Necessarily then, such negative determination of the Tariff Commission being an
integral part of the DTI Secretary’s ruling would be open for review before the CTA, which again is
especially qualified by reason of its expertise to examine the findings of the Tariff Commission.
Moreover, considering that the Tariff Commission is an instrumentality of the government, its actions
(as opposed to those undertaken by the DTI Secretary under the SMA) are not beyond the pale of
certiorari jurisdiction. Unfortunately for Philcemcor, it hinged its cause on the claim that the DTI
Secretary’s actions may be annulled on certiorari, notwithstanding the explicit grant of judicial review
over that cabinet member’s actions under the SMA to the CTA.

Finally on this point, Philcemcor argues that assuming this Court’s interpretation of Section 29 is
correct, such ruling should not be given retroactive effect, otherwise, a gross violation of the right to
due process would be had. This erroneously presumes that it was this Court, and not Congress,
which vested jurisdiction on the CTA over rulings of non-imposition rendered by the DTI Secretary.
We have repeatedly stressed that Section 29 expressly confers CTA jurisdiction over rulings in
connection with the imposition of the safeguard measure, and the reassertion of this point in
the Decision was a matter of emphasis, not of contrivance. The due process protection does not
shield those who remain purposely blind to the express rules that ensure the sporting play of
procedural law.

Besides, respondents’ claim would also apply every time this Court is compelled to settle a novel
question of law, or to reverse precedent. In such cases, there would always be litigants whose
causes of action might be vitiated by the application of newly formulated judicial doctrines. Adopting
their claim would unwisely force this Court to treat its dispositions in unprecedented, sometimes
landmark decisions not as resolutions to the live cases or controversies, but as legal doctrine
applicable only to future litigations.
II. Positive Final Determination

By the Tariff Commission an

Indispensable Requisite to the

Imposition of General Safeguard Measures

The second core ruling in the Decision was that contrary to the holding of the Court of Appeals, the
DTI Secretary was barred from imposing a general safeguard measure absent a positive final
determination rendered by the Tariff Commission. The fundamental premise rooted in this ruling is
based on the acknowledgment that the required positive final determination of the Tariff Commission
exists as a properly enacted constitutional limitation imposed on the delegation of the legislative
power to impose tariffs and imposts to the President under Section 28(2), Article VI of the
Constitution.

Congressional Limitations Pursuant

To Constitutional Authority on the

Delegated Power to Impose

Safeguard Measures

The safeguard measures imposable under the SMA generally involve duties on imported products,
tariff rate quotas, or quantitative restrictions on the importation of a product into the country.
Concerning as they do the foreign importation of products into the Philippines, these safeguard
measures fall within the ambit of Section 28(2), Article VI of the Constitution, which states:

The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government. 49

The Court acknowledges the basic postulates ingrained in the provision, and, hence, governing in
this case. They are:

(1) It is Congress which authorizes the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts. Thus, the authority cannot
come from the Finance Department, the National Economic Development Authority, or the World
Trade Organization, no matter how insistent or persistent these bodies may be.

(2) The authorization granted to the President must be embodied in a law. Hence, the
justification cannot be supplied simply by inherent executive powers. It cannot arise from
administrative or executive orders promulgated by the executive branch or from the wisdom or whim
of the President.

(3) The authorization to the President can be exercised only within the specified limits set in
the law and is further subject to limitations and restrictions which Congress may
impose. Consequently, if Congress specifies that the tariff rates should not exceed a given amount,
the President cannot impose a tariff rate that exceeds such amount. If Congress stipulates that no
duties may be imposed on the importation of corn, the President cannot impose duties on corn, no
matter how actively the local corn producers lobby the President. Even the most picayune of limits or
restrictions imposed by Congress must be observed by the President.

There is one fundamental principle that animates these constitutional postulates. These

impositions under Section 28(2), Article VI fall within the realm of the power of taxation, a
power which is within the sole province of the legislature under the Constitution.

Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and
other similar tax levies involving the importation of foreign goods. Assuming that Section 28(2)
Article VI did not exist, the enactment of the SMA by Congress would be voided on the ground that it
would constitute an undue delegation of the legislative power to tax. The constitutional provision
shields such delegation from constitutional infirmity, and should be recognized as an exceptional
grant of legislative power to the President, rather than the affirmation of an inherent executive power.

This being the case, the qualifiers mandated by the Constitution on this presidential authority attain
primordial consideration. First, there must be a law, such as the SMA. Second, there must be
specified limits, a detail which would be filled in by the law. And further, Congress is further
empowered to impose limitations and restrictions on this presidential authority. On this last power,
the provision does not provide for specified conditions, such as that the limitations and restrictions
must conform to prior statutes, internationally accepted practices, accepted jurisprudence, or the
considered opinion of members of the executive branch.

The Court recognizes that the authority delegated to the President under Section 28(2), Article VI
may be exercised, in accordance with legislative sanction, by the alter egos of the President, such
as department secretaries. Indeed, for purposes of the President’s exercise of power to impose
tariffs under Article VI, Section 28(2), it is generally the Secretary of Finance who acts as alter ego of
the President. The SMA provides an exceptional instance wherein it is the DTI or Agriculture
Secretary who is tasked by Congress, in their capacities as alter egos of the President, to impose
such measures. Certainly, the DTI Secretary has no inherent power, even as alter ego of the
President, to levy tariffs and imports.

Concurrently, the tasking of the Tariff Commission under the SMA should be likewise construed
within the same context as part and parcel of the legislative delegation of its inherent power to
impose tariffs and imposts to the executive branch, subject to limitations and restrictions. In that
regard, both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress
within their limited respective spheres, as ordained in the SMA, in the implementation of the said law
which significantly draws its strength from the plenary legislative power of taxation. Indeed, even
the President may be considered as an agent of Congress for the purpose of imposing
safeguard measures. It is Congress, not the President, which possesses inherent powers to
impose tariffs and imposts. Without legislative authorization through statute, the President
has no power, authority or right to impose such safeguard measures because taxation is
inherently legislative, not executive.

When Congress tasks the President or his/her alter egos to impose safeguard measures
under the delineated conditions, the President or the alter egos may be properly deemed as
agents of Congress to perform an act that inherently belongs as a matter of right to the
legislature. It is basic agency law that the agent may not act beyond the specifically delegated
powers or disregard the restrictions imposed by the principal. In short, Congress may establish the
procedural framework under which such safeguard measures may be imposed, and assign the
various offices in the government bureaucracy respective tasks pursuant to the imposition of such
measures, the task assignment including the factual determination of whether the necessary
conditions exists to warrant such impositions. Under the SMA, Congress assigned the DTI Secretary
and the Tariff Commission their respective functions in the legislature’s scheme of things.
50 

There is only one viable ground for challenging the legality of the limitations and restrictions imposed
by Congress under Section 28(2) Article VI, and that is such limitations and restrictions are
themselves violative of the Constitution. Thus, no matter how distasteful or noxious these limitations
and restrictions may seem, the Court has no choice but to uphold their validity unless their
constitutional infirmity can be demonstrated.

What are these limitations and restrictions that are material to the present case? The entire SMA
provides for a limited framework under which the President, through the DTI and Agriculture
Secretaries, may impose safeguard measures in the form of tariffs and similar imposts. The
limitation most relevant to this case is contained in Section 5 of the SMA, captioned "Conditions for
the Application of General Safeguard Measures," and stating:

The Secretary shall apply a general safeguard measure upon a positive final determination of
the [Tariff] Commission that a product is being imported into the country in increased quantities,
whether absolute or relative to the domestic production, as to be a substantial cause of serious injury
or threat thereof to the domestic industry; however, in the case of non-agricultural products, the
Secretary shall first establish that the application of such safeguard measures will be in the public
interest.
51

Positive Final Determination

By Tariff Commission Plainly

Required by Section 5 of SMA

There is no question that Section 5 of the SMA operates as a limitation validly imposed by Congress
on the presidential authority under the SMA to impose tariffs and imposts. That the positive final
52 

determination operates as an indispensable requisite to the imposition of the safeguard measure,

and that it is the Tariff Commission which makes such determination, are legal propositions plainly
expressed in Section 5 for the easy comprehension for everyone but respondents.

Philcemcor attributes this Court’s conclusion on the indispensability of the positive final
determination to flawed syllogism in that we read the proposition "if A then B" as if it stated "if A, and
only A, then B." Translated in practical terms, our conclusion, according to Philcemcor, would have
53 

only been justified had Section 5 read "shall apply a general safeguard measure upon, and only
upon, a positive final determination of the Tariff Commission."

Statutes are not designed for the easy comprehension of the five-year old child. Certainly, general
propositions laid down in statutes need not be expressly qualified by clauses denoting exclusivity in
order that they gain efficacy. Indeed, applying this argument, the President would, under the
Constitution, be authorized to declare martial law despite the absence of the invasion, rebellion or
public safety requirement just because the first paragraph of Section 18, Article VII fails to state the
magic word "only." 54

But let us for the nonce pursue Philcemcor’s logic further. It claims that since Section 5 does not
allegedly limit the circumstances upon which the DTI Secretary may impose general safeguard
measures, it is a worthy pursuit to determine whether the entire context of the SMA, as discerned by
all the other familiar indicators of legislative intent supplied by norms of statutory interpretation,
would justify safeguard measures absent a positive final determination by the Tariff Commission.

The first line of attack employed is on Section 5 itself, it allegedly not being as clear as it sounds. It is
advanced that Section 5 does not relate to the legal ability of either the Tariff Commission or the DTI
Secretary to bind or foreclose review and reversal by one or the other. Such relationship should
instead be governed by domestic administrative law and remedial law. Philcemcor thus would like to
cast the proposition in this manner: Does it run contrary to our legal order to assert, as the Court did
in its Decision, that a body of relative junior competence as the Tariff Commission can bind an
administrative superior and cabinet officer, the DTI Secretary? It is easy to see why Philcemcor
would like to divorce this DTI Secretary-Tariff Commission interaction from the confines of the SMA.
Shorn of context, the notion would seem radical and unjustifiable that the lowly Tariff Commission
can bind the hands and feet of the DTI Secretary.

It can be surmised at once that respondents’ preferred interpretation is based not on the express
language of the SMA, but from implications derived in a roundabout manner. Certainly, no provision
in the SMA expressly authorizes the DTI Secretary to impose a general safeguard measure despite
the absence of a positive final recommendation of the Tariff Commission. On the other hand, Section
5 expressly states that the DTI Secretary "shall apply a general safeguard measure upon a positive
final determination of the [Tariff] Commission." The causal connection in Section 5 between the
imposition by the DTI Secretary of the general safeguard measure and the positive final
determination of the Tariff Commission is patent, and even respondents do not dispute such
connection.

As stated earlier, the Court in its Decision found Section 5 to be clear, plain and free from ambiguity
so as to render unnecessary resort to the congressional records to ascertain legislative intent. Yet
respondents, on the dubitable premise that Section 5 is not as express as it seems, again latch on to
the record of legislative deliberations in asserting that there was no legislative intent to bar the DTI
Secretary from imposing the general safeguard measure anyway despite the absence of a positive
final determination by the Tariff Commission.

Let us take the bait for a moment, and examine respondents’ commonly cited portion of the
legislative record. One would presume, given the intense advocacy for the efficacy of these citations,
that they contain a "smoking gun" ¾ express declarations from the legislators that the DTI Secretary
may impose a general safeguard measure even if the Tariff Commission refuses to render a positive
final determination. Such "smoking gun," if it exists, would characterize our Decision as
disingenuous for ignoring such contrary expression of intent from the legislators who enacted the
SMA. But as with many things, the anticipation is more dramatic than the truth.

The excerpts cited by respondents are derived from the interpellation of the late Congressman
Marcial Punzalan Jr., by then (and still is) Congressman Simeon Datumanong. Nowhere in these
55 

records is the view expressed that the DTI Secretary may impose the general safeguard measures if
the Tariff Commission issues a negative final determination or otherwise is unable to make a positive
final determination. Instead, respondents hitch on the observations of Congressman Punzalan Jr.,
that "the results of the [Tariff] Commission’s findings . . . is subsequently submitted to [the DTI
Secretary] for the [DTI Secretary] to impose or not to impose;" and that "the [DTI Secretary] here is…
who would make the final decision on the recommendation that is made by a more technical body
[such as the Tariff Commission]." 56

There is nothing in the remarks of Congressman Punzalan which contradict our Decision. His
observations fall in accord with the respective roles of the Tariff Commission and the DTI Secretary
under the SMA. Under the SMA, it is the Tariff Commission that conducts an investigation as to
whether the conditions exist to warrant the imposition of the safeguard measures. These conditions
are enumerated in Section 5, namely; that a product is being imported into the country in increased
quantities, whether absolute or relative to the domestic production, as to be a substantial cause of
serious injury or threat thereof to the domestic industry. After the investigation of the Tariff
Commission, it submits a report to the DTI Secretary which states, among others, whether the
above-stated conditions for the imposition of the general safeguard measures exist. Upon a positive
final determination that these conditions are present, the Tariff Commission then is mandated to
recommend what appropriate safeguard measures should be undertaken by the DTI Secretary.
Section 13 of the SMA gives five (5) specific options on the type of safeguard measures the Tariff
Commission recommends to the DTI Secretary.

At the same time, nothing in the SMA obliges the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the
application of such safeguard measures is in the public interest, notwithstanding the Tariff
Commission’s recommendation on the appropriate safeguard measure upon its positive final
determination. Thus, even if the Tariff Commission makes a positive final determination, the DTI
Secretary may opt not to impose a general safeguard measure, or choose a different type of
safeguard measure other than that recommended by the Tariff Commission.

Congressman Punzalan was cited as saying that the DTI Secretary makes the decision "to impose
or not to impose," which is correct since the DTI Secretary may choose not to impose a safeguard
measure in spite of a positive final determination by the Tariff Commission. Congressman Punzalan
also correctly stated that it is the DTI Secretary who makes the final decision "on the
recommendation that is made [by the Tariff Commission]," since the DTI Secretary may choose to
impose a general safeguard measure different from that recommended by the Tariff Commission or
not to impose a safeguard measure at all. Nowhere in these cited deliberations was Congressman
Punzalan, or any other member of Congress for that matter, quoted as saying that the DTI Secretary
may ignore a negative determination by the Tariff Commission as to the existence of the conditions
warranting the imposition of general safeguard measures, and thereafter proceed to impose these
measures nonetheless. It is too late in the day to ascertain from the late Congressman Punzalan
himself whether he had made these remarks in order to assure the other legislators that the DTI
Secretary may impose the general safeguard measures notwithstanding a negative determination by
the Tariff Commission. But certainly, the language of Section 5 is more resolutory to that question
than the recorded remarks of Congressman Punzalan.

Respondents employed considerable effort to becloud Section 5 with undeserved ambiguity in order
that a proper resort to the legislative deliberations may be had. Yet assuming that Section 5
deserves to be clarified through an inquiry into the legislative record, the excerpts cited by the
respondents are far more ambiguous than the language of the assailed provision regarding the key
question of whether the DTI Secretary may impose safeguard measures in the face of a negative
determination by the Tariff Commission. Moreover, even Southern Cross counters with its own
excerpts of the legislative record in support of their own view. 57

It will not be difficult, especially as to heavily-debated legislation, for two sides with contrapuntal
interpretations of a statute to highlight their respective citations from the legislative debate in support
of their particular views. A futile exercise of second-guessing is happily avoided if the meaning of
58 

the statute is clear on its face. It is evident from the text of Section 5 that there must be a
positive final determination by the Tariff Commission that a product is being imported into
the country in increased quantities (whether absolute or relative to domestic production), as
to be a substantial cause of serious injury or threat to the domestic industry. Any disputation
to the contrary is, at best, the product of wishful thinking.
For the same reason that Section 5 is explicit as regards the essentiality of a positive final
determination by the Tariff Commission, there is no need to refer to the Implementing Rules of the
SMA to ascertain a contrary intent. If there is indeed a provision in the Implementing Rules that
allows the DTI Secretary to impose a general safeguard measure even without the positive final
determination by the Tariff Commission, said rule is void as it cannot supplant the express language
of the legislature. Respondents essentially rehash their previous arguments on this point, and there
is no reason to consider them anew. The Decision made it clear that nothing in Rule 13.2 of the
Implementing Rules, even though captioned "Final Determination by the Secretary," authorizes the
DTI Secretary to impose a general safeguard measure in the absence of a positive final
determination by the Tariff Commission. Similarly, the "Rules and Regulations to Govern the
59 

Conduct of Investigation by the Tariff Commission Pursuant to Republic Act No. 8800" now cited by
the respondent does not contain any provision that the DTI Secretary may impose the general
safeguard measures in the absence of a positive final determination by the Tariff Commission.

Section 13 of the SMA further bolsters the interpretation as argued by Southern Cross and upheld by
the Decision. The first paragraph thereof states that "[u]pon its positive determination, the [Tariff]
Commission shall recommend to the Secretary an appropriate definitive measure…", clearly
referring to the Tariff Commission as the entity that makes the positive determination. On the other
hand, the penultimate paragraph of the same provision states that "[i]n the event of a negative final
determination", the DTI Secretary is to immediately issue through the Secretary of Finance, a written
instruction to the Commissioner of Customs authorizing the return of the cash bonds previously
collected as a provisional safeguard measure. Since the first paragraph of the same provision states
that it is the Tariff Commission which makes the positive determination, it necessarily follows that it,
and not the DTI Secretary, makes the negative final determination as referred to in the penultimate
paragraph of Section 13. 60

The Separate Opinion considers as highly persuasive of former Tariff Commission Chairman Abon,

who stated that the Commission’s findings are merely recommendatory. Again, the considered
61 

opinion of Chairman Abon is of no operative effect if the statute plainly states otherwise, and Section
5 bluntly does require a positive final determination by the Tariff Commission before the DTI
Secretary may impose a general safeguard measure. Certainly, the Court cannot give controlling
62 

effect to the statements of any public officer in serious denial of his duties if the law otherwise
imposes the duty on the public office or officer.

Nonetheless, if we are to render persuasive effect on the considered opinion of the members of the
Executive Branch, it bears noting that the Secretary of the Department of Justice rendered an
Opinion wherein he concluded that the DTI Secretary could not impose a general safeguard
measure if the Tariff Commission made a negative final determination. Unlike Chairman Abon’s
63 

impromptu remarks made during a hearing, the DOJ Opinion was rendered only after a thorough
study of the question after referral to it by the DTI. The DOJ Secretary is the alter ego of the
President with a stated mandate as the head of the principal law agency of the government. As the
64 

DOJ Secretary has no denominated role in the SMA, he was able to render his Opinion from the
vantage of judicious distance. Should not his Opinion, studied and direct to the point as it is, carry
greater weight than the spontaneous remarks of the Tariff Commission’s Chairman which do not
even expressly disavow the binding power of the Commission’s positive final determination?

III. DTI Secretary has No Power of Review

Over Final Determination of the Tariff Commission

We should reemphasize that it is only because of the SMA, a legislative enactment, that the
executive branch has the power to impose safeguard measures. At the same time, by constitutional
fiat, the exercise of such power is subjected to the limitations and restrictions similarly enforced by
the SMA. In examining the relationship of the DTI and the Tariff Commission as established in the
SMA, it is essential to acknowledge and consider these predicates.

It is necessary to clarify the paradigm established by the SMA and affirmed by the Constitution under
which the Tariff Commission and the DTI operate, especially in light of the suggestions that the
Court’s rulings on the functions of quasi-judicial power find application in this case. Perhaps the
reflexive application of the quasi-judicial doctrine in this case, rooted as it is in jurisprudence, might
allow for some convenience in ruling, yet doing so ultimately betrays ignorance of the fundamental
power of Congress to reorganize the administrative structure of governance in ways it sees fit.

The Separate Opinion operates from wholly different premises which are incomplete. Its main
stance, similar to that of respondents, is that the DTI Secretary, acting as alter ego of the President,
may modify and alter the findings of the Tariff Commission, including the latter’s negative final
determination by substituting it with his own negative final determination to pave the way for his
imposition of a safeguard measure. Fatally, this conclusion is arrived at without considering the
65 

fundamental constitutional precept under Section 28(2), Article VI, on the ability of Congress to
impose restrictions and limitations in its delegation to the President to impose tariffs and imposts, as
well as the express condition of Section 5 of the SMA requiring a positive final determination of the
Tariff Commission.

Absent Section 5 of the SMA, the President has no inherent, constitutional, or statutory
power to impose a general safeguard measure. Tellingly, the Separate Opinion does not directly
confront the inevitable question as to how the DTI Secretary may get away with imposing a general
safeguard measure absent a positive final determination from the Tariff Commission without violating
Section 5 of the SMA, which along with Section 13 of the same law, stands as the only direct legal
authority for the DTI Secretary to impose such measures. This is a constitutionally guaranteed
limitation of the highest order, considering that the presidential authority exercised under the SMA is
inherently legislative.

Nonetheless, the Separate Opinion brings to fore the issue of whether the DTI Secretary, acting
either as alter ego of the President or in his capacity as head of an executive department, may
review, modify or otherwise alter the final determination of the Tariff Commission under the SMA.
The succeeding discussion shall focus on that question.

Preliminarily, we should note that none of the parties question the designation of the DTI or
Agriculture secretaries under the SMA as the imposing authorities of the safeguard measures, even
though Section 28(2) Article VI states that it is the President to whom the power to impose tariffs and
imposts may be delegated by Congress. The validity of such designation under the SMA should not
be in doubt. We recognize that the authorization made by Congress in the SMA to the DTI and
Agriculture Secretaries was made in contemplation of their capacities as alter egos of the President.

Indeed, in Marc Donnelly & Associates v. Agregado the Court upheld the validity of a Cabinet
66 

resolution fixing the schedule of royalty rates on metal exports and providing for their collection even
though Congress, under Commonwealth Act No. 728, had specifically empowered the President and
not any other official of the executive branch, to regulate and curtail the export of metals. In so ruling,
the Court held that the members of the Cabinet were acting as alter egos of the President. In this
67 

case, Congress itself authorized the DTI Secretary as alter ego of the President to impose the
safeguard measures. If the Court was previously willing to uphold the alter ego’s tariff authority
despite the absence of explicit legislative grant of such authority on the alter ego, all the more
reason now when Congress itself expressly authorized the alter ego to exercise these powers to
impose safeguard measures.
Notwithstanding, Congress in enacting the SMA and prescribing the roles to be played therein by the
Tariff Commission and the DTI Secretary did not envision that the President, or his/her alter ego,
could exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow
the traditional "alter ego" principle to come to fore in the peculiar setup established by the SMA, it
would have assigned the role now played by the DTI Secretary under the law instead to the NEDA.
The Tariff Commission is an attached agency of the National Economic Development
Authority, which in turn is the independent planning agency of the government.
68  69

The Tariff Commission does not fall under the administrative supervision of the DTI. On the other
70 

hand, the administrative relationship between the NEDA and the Tariff Commission is established
not only by the Administrative Code, but similarly affirmed by the Tariff and Customs Code.

Justice Florentino Feliciano, in his ponencia in Garcia v. Executive Secretary , acknowledged the

71 

interplay between the NEDA and the Tariff Commission under the Tariff and Customs Code when he
cited the relevant provisions of that law evidencing such setup. Indeed, under Section 104 of the
Tariff and Customs Code, the rates of duty fixed therein are subject to periodic investigation by the
Tariff Commission and may be revised by the President upon recommendation of the
NEDA. Moreover, under Section 401 of the same law, it is upon periodic investigations by the Tariff
72 

Commission and recommendation of the NEDA that the President may cause a gradual reduction of
protection levels granted under the law. 73

At the same time, under the Tariff and Customs Code, no similar role or influence is allocated to the
DTI in the matter of imposing tariff duties. In fact, the long-standing tradition has been for the Tariff
Commission and the DTI to proceed independently in the exercise of their respective functions. Only
very recently have our statutes directed any significant interplay between the Tariff Commission and
the DTI, with the enactment in 1999 of Republic Act No. 8751 on the imposition of countervailing
duties and Republic Act No. 8752 on the imposition of anti-dumping duties, and of course the
promulgation a year later of the SMA. In all these three laws, the Tariff Commission is tasked, upon
referral of the matter by the DTI, to determine whether the factual conditions exist to warrant the
imposition by the DTI of a countervailing duty, an anti-dumping duty, or a general safeguard
measure, respectively. In all three laws, the determination by the Tariff Commission that these
required factual conditions exist is necessary before the DTI Secretary may impose the
corresponding duty or safeguard measure. And in all three laws, there is no express provision
authorizing the DTI Secretary to reverse the factual determination of the Tariff Commission. 74

In fact, the SMA indubitably establishes that the Tariff Commission is no mere flunky of the DTI
Secretary when it mandates that the positive final recommendation of the former be indispensable to
the latter’s imposition of a general safeguard measure. What the law indicates instead is a
relationship of interdependence between two bodies independent of each other under the
Administrative Code and the SMA alike. Indeed, even the ability of the DTI Secretary to disregard
the Tariff Commission’s recommendations as to the particular safeguard measures to be imposed
evinces the independence from each other of these two bodies. This is properly so for two reasons –
the DTI and the Tariff Commission are independent of each other under the Administrative Code;
and impropriety is avoided in cases wherein the DTI itself is the one seeking the imposition of the
general safeguard measures, pursuant to Section 6 of the SMA.

Thus, in ascertaining the appropriate legal milieu governing the relationship between the DTI and the
Tariff Commission, it is imperative to apply foremost, if not exclusively, the provisions of the SMA.
The argument that the usual rules on administrative control and supervision apply between the Tariff
Commission and the DTI as regards safeguard measures is severely undercut by the plain fact that
there is no long-standing tradition of administrative interplay between these two entities.
Within the administrative apparatus, the Tariff Commission appears to be a lower rank relative to the
DTI. But does this necessarily mean that the DTI has the intrinsic right, absent statutory authority, to
reverse the findings of the Tariff Commission? To insist that it does, one would have to concede for
instance that, applying the same doctrinal guide, the Secretary of the Department of Science and
Technology (DOST) has the right to reverse the rulings of the Civil Aeronautics Board (CAB) or the
issuances of the Philippine Coconut Authority (PCA). As with the Tariff Commission-DTI, there is no
statutory authority granting the DOST Secretary the right to overrule the CAB or the PCA, such right
presumably arising only from the position of subordinacy of these bodies to the DOST. To insist on
such a right would be to invite department secretaries to interfere in the exercise of functions by
administrative agencies, even in areas wherein such secretaries are bereft of specialized
competencies.

The Separate Opinion notes that notwithstanding above, the Secretary of Department of

Transportation and Communication may review the findings of the CAB, the Agriculture Secretary
may review those of the PCA, and that the Secretary of the Department of Environment and Natural
Resources may pass upon decisions of the Mines and Geosciences Board. These three officers
75 

may be alter egos of the President, yet their authority to review is limited to those agencies or
bureaus which are, pursuant to statutes such as the Administrative Code of 1987, under the
administrative control and supervision of their respective departments. Thus, under the express
provision of the Administrative Code expressly provides that the CAB is an attached agency of the
DOTC , and that the PCA is an attached agency of the Department of Agriculture. The same law
76  77 

establishes the Mines and Geo-Sciences Bureau as one of the Sectoral Staff Bureaus that forms
78 

part of the organizational structure of the DENR. 79

As repeatedly stated, the Tariff Commission does not fall under the administrative control of the DTI,
but under the NEDA, pursuant to the Administrative Code. The reliance made by the Separate
Opinion to those three examples are thus misplaced.

Nonetheless, the Separate Opinion asserts that the SMA created a functional relationship between
the Tariff Commission and the DTI Secretary, sufficient to allow the DTI Secretary to exercise alter
ego powers to reverse the determination of the Tariff Commission. Again, considering that the power
to impose tariffs in the first place is not inherent in the President but arises only from congressional
grant, we should affirm the congressional prerogative to impose limitations and restrictions on such
powers which do not normally belong to the executive in the first place. Nowhere in the SMA does it
state that the DTI Secretary may impose general safeguard measures without a positive final
determination by the Tariff Commission, or that the DTI Secretary may reverse or even review the
factual determination made by the Tariff Commission.

Congress in enacting the SMA and prescribing the roles to be played therein by the Tariff
Commission and the DTI Secretary did not envision that the President, or his/her alter ego could
exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow the
traditional alter ego principle to come to fore in the peculiar setup established by the SMA, it would
have assigned the role now played by the DTI Secretary under the law instead to the NEDA, the
body to which the Tariff Commission is attached under the Administrative Code.

The Court has no issue with upholding administrative control and supervision exercised by the head
of an executive department, but only over those subordinate offices that are attached to the
department, or which are, under statute, relegated under its supervision and control. To declare that
a department secretary, even if acting as alter ego of the President, may exercise such control or
supervision over all executive offices below cabinet rank would lead to absurd results such as those
adverted to above. As applied to this case, there is no legal justification for the DTI Secretary to
exercise control, supervision, review or amendatory powers over the Tariff Commission and its
positive final determination. In passing, we note that there is, admittedly, a feasible mode by which
administrative review of the Tariff Commission’s final determination could be had, but it is not the
procedure adopted by respondents and now suggested for affirmation. This mode shall be discussed
in a forthcoming section.

The Separate Opinion asserts that the President, or his/her alter ego cannot be made a mere rubber
stamp of the Tariff Commission since Section 17, Article VII of the Constitution denominates the
Chief Executive exercises control over all executive departments, bureaus and offices. But let us be
80 

clear that such "executive control" is not absolute. The definition of the structure of the executive
branch of government, and the corresponding degrees of administrative control and supervision, is
not the exclusive preserve of the executive. It may be effectively be limited by the Constitution, by
law, or by judicial decisions.

The Separate Opinion cites the respected constitutional law authority Fr. Joaquin Bernas, in support
of the proposition that such plenary power of executive control of the President cannot be restricted
by a mere statute passed by Congress. However, the cited passage from Fr. Bernas actually states,
"Since the Constitution has given the President the power of control, with all its awesome
implications, it is the Constitution alone which can curtail such power." Does the President have
81 

such tariff powers under the Constitution in the first place which may be curtailed by the executive
power of control? At the risk of redundancy, we quote Section 28(2), Article VI: "The Congress may,
by law, authorize the President to fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national development program of the
Government." Clearly the power to impose tariffs belongs to Congress and not to the President.

It is within reason to assume the framers of the Constitution deemed it too onerous to spell out all
the possible limitations and restrictions on this presidential authority to impose tariffs. Hence, the
Constitution especially allowed Congress itself to prescribe such limitations and restrictions itself, a
prudent move considering that such authority inherently belongs to Congress and not the President.
Since Congress has no power to amend the Constitution, it should be taken to mean that such
limitations and restrictions should be provided "by mere statute". Then again, even the presidential
authority to impose tariffs arises only "by mere statute." Indeed, this presidential privilege is both
contingent in nature and legislative in origin. These characteristics, when weighed against
the aspect of executive control and supervision, cannot militate against Congress’s exercise
of its inherent power to tax.

The bare fact is that the administrative superstructure, for all its unwieldiness, is mere putty in the
hands of Congress. The functions and mandates of the particular executive departments and
bureaus are not created by the President, but by the legislative branch through the Administrative
Code.  The President is the administrative head of the executive department, as such obliged to see
82 

that every government office is managed and maintained properly by the persons in charge of it in
accordance with pertinent laws and regulations, and empowered to promulgate rules and issuances
that would ensure a more efficient management of the executive branch, for so long as such
issuances are not contrary to law. Yet the legislature has the concurrent power to reclassify or
83 

redefine the executive bureaucracy, including the relationship between various administrative
agencies, bureaus and departments, and ultimately, even the power to abolish executive
departments and their components, hamstrung only by constitutional limitations. The DTI itself can
be abolished with ease by Congress through deleting Title X, Book IV of the Administrative Code.
The Tariff Commission can similarly be abolished through legislative enactment.  84

At the same time, Congress can enact additional tasks or responsibilities on either the Tariff
Commission or the DTI Secretary, such as their respective roles on the imposition of general
safeguard measures under the SMA. In doing so, the same Congress, which has the putative
authority to abolish the Tariff Commission or the DTI, is similarly empowered to alter or
expand its functions through modalities which do not align with established norms in the
bureaucratic structure. The Court is bound to recognize the legislative prerogative to prescribe
such modalities, no matter how atypical they may be, in affirmation of the legislative power to
restructure the executive branch of government.

There are further limitations on the "executive control" adverted to by the Separate Opinion. The
President, in the exercise of executive control, cannot order a subordinate to disobey a final decision
of this Court or any court’s. If the subordinate chooses to disobey, invoking sole allegiance to the
President, the judicial processes can be utilized to compel obeisance. Indeed, when public officers of
the executive department take their oath of office, they swear allegiance and obedience not to the
President, but to the Constitution and the laws of the land. The invocation of executive control must
yield when under its subsumption includes an act that violates the law.

The Separate Opinion concedes that the exercise of executive control and supervision by the
President is bound by the Constitution and law. Still, just three sentences after asserting that the
85 

exercise of executive control must be within the bounds of the Constitution and law, the Separate
Opinion asserts, "the control power of the Chief Executive emanates from the Constitution; no act of
Congress may validly curtail it." Laws are acts of Congress, hence valid confusion arises whether
86 

the Separate Opinion truly believes the first proposition that executive control is bound by law. This
is a quagmire for the Separate Opinion to resolve for itself

The Separate Opinion unduly considers executive control as the ne plus ultra constitutional standard

which must govern in this case. But while the President may generally have the power to control,
modify or set aside the actions of a subordinate, such powers may be constricted by the
Constitution, the legislature, and the judiciary. This is one of the essences of the check-and-balance
system in our tri-partite constitutional democracy. Not one head of a branch of government may
operate as a Caesar within his/her particular fiefdom.

Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the
Constitution and the general executive power of control and supervision, the former prevails in the
specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify
the general grant to the President of the power to exercise control and supervision over his/her
subalterns.

Thus, if the Congress enacted the law so that the DTI Secretary is "bound" by the Tariff Commission
in the sense the former cannot impose general safeguard measures absent a final positive
determination from the latter the Court is obliged to respect such legislative prerogative, no matter
how such arrangement deviates from traditional norms as may have been enshrined in
jurisprudence. The only ground under which such legislative determination as expressed in statute
may be successfully challenged is if such legislation contravenes the Constitution. No such
argument is posed by the respondents, who do not challenge the validity or constitutionality of the
SMA.

Given these premises, it is utterly reckless to examine the interrelationship between the Tariff
Commission and the DTI Secretary beyond the context of the SMA, applying instead traditional
precepts on administrative control, review and supervision. For that reason, the Decision deemed
inapplicable respondents’ previous citations of Cariño v. Commissioner on Human Rights and Lamb
v. Phipps, since the executive power adverted to in those cases had not been limited by
constitutional restrictions such as those imposed under Section 28(2), Article VI.
87
A similar observation can be made on the case of Sharp International Marketing v. Court of
Appeals, now cited by Philcemcor, wherein the Court asserted that the Land Bank of the Philippines
88 

was required to exercise independent judgment and not merely rubber-stamp deeds of sale entered
into by the Department of Agrarian Reform in connection with the agrarian reform program.
Philcemcor attempts to demonstrate that the DTI Secretary, as with the Land Bank of the
Philippines, is required to exercise independent discretion and is not expected to just merely accede
to DAR-approved compensation packages. Yet again, such grant of independent discretion is
expressly called for by statute, particularly Section 18 of Rep. Act No. 6657 which specifically
requires the joint concurrence of "the landowner and the DAR and the [Land Bank of the
Philippines]" on the amount of compensation. Such power of review by the Land Bank is a
consequence of clear statutory language, as is our holding in the Decision that Section 5 explicitly
requires a positive final determination by the Tariff Commission before a general safeguard measure
may be imposed. Moreover, such limitations under the SMA are coated by the constitutional
authority of Section 28(2), Article VI of the Constitution.

Nonetheless, is this administrative setup, as envisioned by Congress and enshrined into the SMA,
truly noxious to existing legal standards? The Decision acknowledged the internal logic of the
statutory framework, considering that the DTI cannot exercise review powers over an agency such
as the Tariff Commission which is not within its administrative jurisdiction; that the mechanism
employed establishes a measure of check and balance involving two government offices with
different specializations; and that safeguard measures are the exception rather than the rule,
pursuant to our treaty obligations.89

We see no reason to deviate from these observations, and indeed can add similarly oriented
comments. Corollary to the legislative power to decree policies through legislation is the ability of the
legislature to provide for means in the statute itself to ensure that the said policy is strictly
implemented by the body or office tasked so tasked with the duty. As earlier stated, our treaty
obligations dissuade the State for now from implementing default protectionist trade measures such
as tariffs, and allow the same only under specified conditions. The conditions enumerated under the
90 

GATT Agreement on Safeguards for the application of safeguard measures by a member country
are the same as the requisites laid down in Section 5 of the SMA. To insulate the factual
91 

determination from political pressure, and to assure that it be conducted by an entity especially
qualified by reason of its general functions to undertake such investigation, Congress deemed it
necessary to delegate to the Tariff Commission the function of ascertaining whether or not the those
factual conditions exist to warrant the atypical imposition of safeguard measures. After all, the Tariff
Commission retains a degree of relative independence by virtue of its attachment to the National
Economic Development Authority, "an independent planning agency of the government," and also92 

owing to its vaunted expertise and specialization.

The matter of imposing a safeguard measure almost always involves not just one industry, but the
national interest as it encompasses other industries as well. Yet in all candor, any decision to impose
a safeguard measure is susceptible to all sorts of external pressures, especially if the domestic
industry concerned is well-organized. Unwarranted impositions of safeguard measures may similarly
be detrimental to the national interest. Congress could not be blamed if it desired to insulate the
investigatory process by assigning it to a body with a putative degree of independence and
traditional expertise in ascertaining factual conditions. Affected industries would have cause to lobby
for or against the safeguard measures. The decision-maker is in the unenviable position of having to
bend an ear to listen to all concerned voices, including those which may speak softly but carry a big
stick. Had the law mandated that the decision be made on the sole discretion of an executive officer,
such as the DTI Secretary, it would be markedly easier for safeguard measures to be imposed or
withheld based solely on political considerations and not on the factual conditions that are supposed
to predicate the decision.
Reference of the binding positive final determination to the Tariff Commission is of course, not a fail-
safe means to ensure a bias-free determination. But at least the legislated involvement of the
Commission in the process assures some measure of measure of check and balance involving two
different governmental agencies with disparate specializations. There is no legal or constitutional
demand for such a setup, but its wisdom as policy should be acknowledged. As prescribed by
Congress, both the Tariff Commission and the DTI Secretary operate within limited frameworks,
under which nobody acquires an undue advantage over the other.

We recognize that Congress deemed it necessary to insulate the process in requiring that the factual
determination to be made by an ostensibly independent body of specialized competence, the Tariff
Commission. This prescribed framework, constitutionally sanctioned, is intended to prevent the
baseless, whimsical, or consideration-induced imposition of safeguard measures. It removes from
the DTI Secretary jurisdiction over a matter beyond his putative specialized aptitude, the compilation
and analysis of picayune facts and determination of their limited causal relations, and instead vests
in the Secretary the broad choice on a matter within his unquestionable competence, the selection of
what particular safeguard measure would assist the duly beleaguered local industry yet at the same
time conform to national trade policy. Indeed, the SMA recognizes, and places primary importance
on the DTI Secretary’s mandate to formulate trade policy, in his capacity as the President’s alter
ego on trade, industry and investment-related matters.

At the same time, the statutory limitations on this authorized power of the DTI Secretary must prevail
since the Constitution itself demands the enforceability of those limitations and restrictions as
imposed by Congress. Policy wisdom will not save a law from infirmity if the statutory provisions
violate the Constitution. But since the Constitution itself provides that the President shall be
constrained by the limits and restrictions imposed by Congress and since these limits and
restrictions are so clear and categorical, then the Court has no choice but to uphold the reins.

Even assuming that this prescribed setup made little sense, or seemed "uncommonly silly," the 93 

Court is bound by propriety not to dispute the wisdom of the legislature as long as its acts do not
violate the Constitution. Since there is no convincing demonstration that the SMA contravenes the
Constitution, the Court is wont to respect the administrative regimen propounded by the law, even if
it allots the Tariff Commission a higher degree of puissance than normally expected. It is for this
reason that the traditional conceptions of administrative review or quasi-judicial power cannot control
in this case.

Indeed, to apply the latter concept would cause the Court to fall into a linguistic trap owing to the
multi-faceted denotations the term "quasi-judicial" has come to acquire.

Under the SMA, the Tariff Commission undertakes formal hearings, receives and evaluates
94 

testimony and evidence by interested parties, and renders a decision is rendered on the basis of the
95 

evidence presented, in the form of the final determination. The final determination requires a
conclusion whether the importation of the product under consideration is causing serious injury or
threat to a domestic industry producing like products or directly competitive products, while
evaluating all relevant factors having a bearing on the situation of the domestic industry. This96 

process aligns conformably with definition provided by Black’s Law Dictionary of "quasi-judicial" as
the "action, discretion, etc., of public administrative officers or bodies, who are required to investigate
facts, or ascertain the existence of facts, hold hearings, weigh evidence, and draw conclusions from
them, as a basis for their official action, and to exercise discretion of a judicial nature."
97

However, the Tariff Commission is not empowered to hear actual cases or controversies lodged
directly before it by private parties. It does not have the power to issue writs of injunction or
enforcement of its determination. These considerations militate against a finding of quasi-judicial
powers attributable to the Tariff Commission, considering the pronouncement that "quasi-judicial
adjudication would mean a determination of rights privileges and duties resulting in a decision or
order which applies to a specific situation."
98

Indeed, a declaration that the Tariff Commission possesses quasi-judicial powers, even if
ascertained for the limited purpose of exercising its functions under the SMA, may have the
unfortunate effect of expanding the Commission’s powers beyond that contemplated by law. After
all, the Tariff Commission is by convention, a fact-finding body, and its role under the SMA,
burdened as it is with factual determination, is but a mere continuance of this tradition. However,
Congress through the SMA offers a significant deviation from this traditional role by tying the
decision by the DTI Secretary to impose a safeguard measure to the required positive factual
determination by the Tariff Commission. Congress is not bound by past traditions, or even by the
jurisprudence of this Court, in enacting legislation it may deem as suited for the times. The sole
benchmark for judicial substitution of congressional wisdom is constitutional transgression, a
standard which the respondents do not even attempt to match.

Respondents’ Suggested Interpretation

Of the SMA Transgresses Fair Play

Respondents have belabored the argument that the Decision’s interpretation of the SMA, particularly
of the role of the Tariff Commission vis-à-vis the DTI Secretary, is noxious to traditional notions of
administrative control and supervision. But in doing so, they have failed to acknowledge the
congressional prerogative to redefine administrative relationships, a license which falls within the
plenary province of Congress under our representative system of democracy. Moreover,
respondents’ own suggested interpretation falls wayward of expectations of practical fair play.

Adopting respondents’ suggestion that the DTI Secretary may disregard the factual findings of the
Tariff Commission and investigatory process that preceded it, it would seem that the elaborate
procedure undertaken by the Commission under the SMA, with all the attendant guarantees of due
process, is but an inutile spectacle. As Justice Garcia noted during the oral arguments, why would
the DTI Secretary bother with the Tariff Commission and instead conduct the investigation himself. 99

Certainly, nothing in the SMA authorizes the DTI Secretary, after making the preliminary
determination, to personally oversee the investigation, hear out the interested parties, or receive
evidence. In fact, the SMA does not even require the Tariff Commission, which is tasked with the
100 

custody of the submitted evidence, to turn over to the DTI Secretary such evidence it had evaluated
101 

in order to make its factual determination. Clearly, as Congress tasked it to be, it is the Tariff
102 

Commission and not the DTI Secretary which acquires the necessary intimate acquaintance with the
factual conditions and evidence necessary for the imposition of the general safeguard measure. Why
then favor an interpretation of the SMA that leaves the findings of the Tariff Commission bereft of
operative effect and makes them subservient to the wishes of the DTI Secretary, a personage with
lesser working familiarity with the relevant factual milieu? In fact, the bare theory of the respondents
would effectively allow the DTI Secretary to adopt, under the subterfuge of his "discretion", the
factual determination of a private investigative group hired by the industry concerned, and reject the
investigative findings of the Tariff Commission as mandated by the SMA. It would be highly irregular
to substitute what the law clearly provides for a dubious setup of no statutory basis that would be
readily susceptible to rank chicanery.

Moreover, the SMA guarantees the right of all concerned parties to be heard, an elemental
requirement of due process, by the Tariff Commission in the context of its investigation. The DTI
Secretary is not similarly empowered or tasked to hear out the concerns of other interested parties,
and if he/she does so, it arises purely out of volition and not compulsion under law.

Indeed, in this case, it is essential that the position of other than that of the local cement industry
should be given due consideration, cement being an indispensable need for the operation of other
industries such as housing and construction. While the general safeguard measures may operate to
the better interests of the domestic cement industries, its deprivation of cheaper cement imports may
similarly work to the detriment of these other domestic industries and correspondingly, the national
interest. Notably, the Tariff Commission in this case heard the views on the application of
representatives of other allied industries such as the housing, construction, and cement-bag
industries, and other interested parties such as consumer groups and foreign governments. It is
103 

only before the Tariff Commission that their views had been heard, and this is because it is only the
Tariff Commission which is empowered to hear their positions. Since due process requires a
judicious consideration of all relevant factors, the Tariff Commission, which is in a better position to
hear these parties than the DTI Secretary, is similarly more capable to render a determination
conformably with the due process requirements than the DTI Secretary.

In a similar vein, Southern Cross aptly notes that in instances when it is the DTI Secretary who
initiates motu proprio the application for the safeguard measure pursuant to Section 6 of the SMA,
respondents’ suggested interpretation would result in the awkward situation wherein the DTI
Secretary would rule upon his own application after it had been evaluated by the Tariff Commission.
Pertinently cited is our ruling in Corona v. Court of Appeals that "no man can be at once a litigant
104 

and judge." Certainly, this anomalous situation is avoided if it is the Tariff Commission which is
105 

tasked with arriving at the final determination whether the conditions exist to warrant the general
safeguard measures. This is the setup provided for by the express provisions of the SMA, and the
problem would arise only if we adopt the interpretation urged upon by respondents.

The Possibility for Administrative Review

Of the Tariff Commission’s Determination

The Court has been emphatic that a positive final determination from the Tariff Commission is
required in order that the DTI Secretary may impose a general safeguard measure, and that the DTI
Secretary has no power to exercise control and supervision over the Tariff Commission and its final
determination. These conclusions are the necessary consequences of the applicable provisions of
the Constitution, the SMA, and laws such as the Administrative Code. However, the law is silent
though on whether this positive final determination may otherwise be subjected to administrative
review.

There is no evident legislative intent by the authors of the SMA to provide for a procedure of
administrative review. If ever there is a procedure for administrative review over the final
determination of the Tariff Commission, such procedure must be done in a manner that does not
contravene or disregard legislative prerogatives as expressed in the SMA or the Administrative
Code, or fundamental constitutional limitations.

In order that such procedure of administrative review would not contravene the law and the
constitutional scheme provided by Section 28(2), Article VI, it is essential to assert that the positive
final determination by the Tariff Commission is indispensable as a requisite for the imposition of a
general safeguard measure. The submissions of private respondents and the Separate
Opinion cannot be sustained insofar as they hold that the DTI Secretary can peremptorily ignore or
disregard the determinations made by the Tariff Commission. However, if the mode of administrative
review were in such a manner that the administrative superior of the Tariff Commission were to
modify or alter its determination, then such "reversal" may still be valid within the confines of Section
5 of the SMA, for technically it is still the Tariff Commission’s determination, administratively revised
as it may be, that would serve as the basis for the DTI Secretary’s action.

However, and fatally for the present petitions, such administrative review cannot be conducted by
the DTI Secretary. Even if conceding that the Tariff Commission’s findings may be administratively
reviewed, the DTI Secretary has no authority to review or modify the same. We have been emphatic
on the reasons — such as that there is no traditional or statutory basis placing the Commission
under the control and supervision of the DTI; that to allow such would contravene due process,
especially if the DTI itself were to apply for the safeguard measures motu proprio. To hold otherwise
would destroy the administrative hierarchy, contravene constitutional due process, and disregard the
limitations or restrictions provided in the SMA.

Instead, assuming administrative review were available, it is the NEDA that may conduct such
review following the principles of administrative law, and the NEDA’s decision in turn is reviewable
by the Office of the President. The decision of the Office of the President then effectively substitutes
as the determination of the Tariff Commission, which now forms the basis of the DTI Secretary’s
decision, which now would be ripe for judicial review by the CTA under Section 29 of the SMA. This
is the only way that administrative review of the Tariff Commission’s determination may be sustained
without violating the SMA and its constitutional restrictions and limitations, as well as administrative
law.

In bare theory, the NEDA may review, alter or modify the Tariff Commission’s final determination, the
Commission being an attached agency of the NEDA. Admittedly, there is nothing in the SMA or any
other statute that would prevent the NEDA to exercise such administrative review, and successively,
for the President to exercise in turn review over the NEDA’s decision.

Nonetheless, in acknowledging this possibility, the Court, without denigrating the bare principle that
administrative officers may exercise control and supervision over the acts of the bodies under its
jurisdiction, realizes that this comes at the expense of a speedy resolution to an application for a
safeguard measure, an application dependent on fluctuating factual conditions. The further delay
would foster uncertainty and insecurity within the industry concerned, as well as with all other allied
industries, which in turn may lead to some measure of economic damage. Delay is certain, since
judicial review authorized by law and not administrative review would have the final say. The fact
that the SMA did not expressly prohibit administrative review of the final determination of the Tariff
Commission does not negate the supreme advantages of engendering exclusive judicial review over
questions arising from the imposition of a general safeguard measure.

In any event, even if we conceded the possibility of administrative review of the Tariff Commission’s
final determination by the NEDA, such would not deny merit to the present petition. It does not
change the fact that the Court of Appeals erred in ruling that the DTI Secretary was not bound by the
negative final determination of the Tariff Commission, or that the DTI Secretary acted without
jurisdiction when he imposed general safeguard measures despite the absence of the statutory
positive final determination of the Commission.

IV. Court’s Interpretation of SMA

In Harmony with Other

Constitutional Provisions
In response to our citation of Section 28(2), Article VI, respondents elevate two arguments grounded
in constitutional law. One is based on another constitutional provision, Section 12, Article XIII, which
mandates that "[t]he State shall promote the preferential use of Filipino labor, domestic materials and
locally produced goods and adopt measures that help make them competitive." By no means does
this provision dictate that the Court favor the domestic industry in all competing claims that it may
bring before this Court. If it were so, judicial proceedings in this country would be rendered a
mockery, resolved as they would be, on the basis of the personalities of the litigants and not their
legal positions.

Moreover, the duty imposed on by Section 12, Article XIII falls primarily with Congress, which in that
regard enacted the SMA, a law designed to protect domestic industries from the possible ill-effects
of our accession to the global trade order. Inconveniently perhaps for respondents, the SMA also
happens to provide for a procedure under which such protective measures may be enacted. The
Court cannot just impose what it deems as the spirit of the law without giving due regard to its letter.

In like-minded manner, the Separate Opinion loosely states that the purpose of the SMA is to protect
or safeguard local industries from increased importation of foreign products. This inaccurately
106 

leaves the impression that the SMA ipso facto unravels a protective cloak that shelters all local
industries and producers, no matter the conditions. Indeed, our country has knowingly chosen to
accede to the world trade regime, as expressed in the GATT and WTO Agreements, despite the
understanding that local industries might suffer ill-effects, especially with the easier entry of
competing foreign products. At the same time, these international agreements were designed to
constrict protectionist trade policies by its member-countries. Hence, the median, as expressed by
the SMA, does allow for the application of protectionist measures such as tariffs, but only after an
elaborate process of investigation that ensures factual basis and indispensable need for such
measures. More accurately, the purpose of the SMA is to provide a process for the protection or
safeguarding of domestic industries that have duly established that there is substantial injury or
threat thereof directly caused by the increased imports. In short, domestic industries are not entitled
to safeguard measures as a matter of right or influence.

Respondents also make the astounding argument that the imposition of general safeguard
measures should not be seen as a taxation measure, but instead as an exercise of police power.
The vain hope of respondents in divorcing the safeguard measures from the concept of taxation is to
exclude from consideration Section 28(2), Article VI of the Constitution.

This argument can be debunked at length, but it deserves little attention. The motivation behind
many taxation measures is the implementation of police power goals. Progressive income taxes
alleviate the margin between rich and poor; the so-called "sin taxes" on alcohol and tobacco
manufacturers help dissuade the consumers from excessive intake of these potentially harmful
products. Taxation is distinguishable from police power as to the means employed to implement
these public good goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects of taxation, and the belief that taxes are the
107 

lifeblood of the state. These considerations necessitated the evolution of taxation as a distinct legal
108 

concept from police power. Yet at the same time, it has been recognized that taxation may be made
the implement of the state’s police power. 109

Even assuming that the SMA should be construed exclusively as a police power measure, the Court
recognizes that police power is lodged primarily in the national legislature, though it may also be
exercised by the executive branch by virtue of a valid delegation of legislative power. Considering
110 

these premises, it is clear that police power, however "illimitable" in theory, is still exercised within
the confines of implementing legislation. To declare otherwise is to sanction rule by whim instead of
rule of law. The Congress, in enacting the SMA, has delegated the power to impose general
safeguard measures to the executive branch, but at the same time subjected such imposition to
limitations, such as the requirement of a positive final determination by the Tariff Commission under
Section 5. For the executive branch to ignore these boundaries imposed by Congress is to set up an
ignoble clash between the two co-equal branches of government. Considering that the exercise of
police power emanates from legislative authority, there is little question that the prerogative of the
legislative branch shall prevail in such a clash.

V. Assailed Decision Consistent

With Ruling in Tañada v. Angara

Public respondents allege that the Decision is contrary to our holding in Tañada v. Angara, since111 

the Court noted therein that the GATT itself provides built-in protection from unfair foreign
competition and trade practices, which according to the public respondents, was a reason "why the
Honorable [Court] ruled the way it did." On the other hand, the Decision "eliminates safeguard
measures as a mode of defense."

This is balderdash, as with any and all claims that the Decision allows foreign industries to ride
roughshod over our domestic enterprises. The Decision does not prohibit the imposition of general
safeguard measures to protect domestic industries in need of protection. All it affirms is that the
positive final determination of the Tariff Commission is first required before the general safeguard
measures are imposed and implemented, a neutral proposition that gives no regard to the
nationalities of the parties involved. A positive determination by the Tariff Commission is hardly the
elusive Shangri-la of administrative law. If a particular industry finds it difficult to obtain a positive
final determination from the Tariff Commission, it may be simply because the industry is still
sufficiently competitive even in the face of foreign competition. These safeguard measures are
designed to ensure salvation, not avarice.

Respondents well have the right to drape themselves in the colors of the flag. Yet these postures
hardly advance legal claims, or nationalism for that matter. The fineries of the costume pageant are
no better measure of patriotism than simple obedience to the laws of the Fatherland. And even
assuming that respondents are motivated by genuine patriotic impulses, it must be remembered that
under the setup provided by the SMA, it is the facts, and not impulse, that determine whether the
protective safeguard measures should be imposed. As once orated, facts are stubborn things; and
whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the
state of facts and evidence. 112

It is our goal as judges to enforce the law, and not what we might deem as correct economic policy.
Towards this end, we should not construe the SMA to unduly favor or disfavor domestic industries,
simply because the law itself provides for a mechanism by virtue of which the claims of these
industries are thoroughly evaluated before they are favored or disfavored. What we must do is to
simply uphold what the law says. Section 5 says that the DTI Secretary shall impose the general
safeguard measures upon the positive final determination of the Tariff Commission. Nothing in the
whereas clauses or the invisible ink provisions of the SMA can magically delete the words "positive
final determination" and "Tariff Commission" from Section 5.

VI. On Forum-Shopping

We remain convinced that there was no willful and deliberate forum-shopping in this case by
Southern Cross. The causes of action that animate this present petition for review and the petition
for review with the CTA are distinct from each other, even though they relate to similar factual
antecedents. Yet it also appears that contrary to the undertaking signed by the President of
Southern Cross, Hironobu Ryu, to inform this Court of any similar action or proceeding pending
before any court, tribunal or agency within five (5) days from knowledge thereof, Southern Cross
informed this Court only on 12 August 2003 of the petition it had filed with the CTA eleven days
earlier. An appropriate sanction is warranted for such failure, but not the dismissal of the petition.

VII. Effects of Court’s Resolution

Philcemcor argues that the granting of Southern Cross’s Petition should not necessarily lead to the
voiding of the Decision of the DTI Secretary dated 5 August 2003 imposing the general safeguard
measures. For Philcemcor, the availability of appeal to the CTA as an available and adequate
remedy would have made the Court of Appeals’ Decision merely erroneous or irregular, but not void.
Moreover, the said Decision merely required the DTI Secretary to render a decision, which could
have very well been a decision not to impose a safeguard measure; thus, it could not be said that
the annulled decision resulted from the judgment of the Court of Appeals.

The Court of Appeals’ Decision was annulled precisely because the appellate court did not have the
power to rule on the petition in the first place. Jurisdiction is necessarily the power to decide a case,
and a court which does not have the power to adjudicate a case is one that is bereft of jurisdiction.
We find no reason to disturb our earlier finding that the Court of Appeals’ Decision is null and void.

At the same time, the Court in its Decision paid particular heed to the peculiarities attaching to the 5
August 2003 Decision of the DTI Secretary. In the DTI Secretary’s Decision, he expressly stated that
as a result of the Court of Appeals’ Decision, "there is no legal impediment for the Secretary to
decide on the application." Yet the truth remained that there was a legal impediment, namely, that
the decision of the appellate court was not yet final and executory. Moreover, it was declared null
and void, and since the DTI Secretary expressly denominated the Court of Appeals’ Decision as his
basis for deciding to impose the safeguard measures, the latter decision must be voided as well.
Otherwise put, without the Court of Appeals’ Decision, the DTI Secretary’s Decision of 5 August
2003 would not have been rendered as well.

Accordingly, the Court reaffirms as a nullity the DTI Secretary’s Decision dated 5 August 2003. As a
necessary consequence, no further action can be taken on Philcemcor’s Petition for Extension of the
Safeguard Measure. Obviously, if the imposition of the general safeguard measure is void as we
declared it to be, any extension thereof should likewise be fruitless. The proper remedy instead is to
file a new application for the imposition of safeguard measures, subject to the conditions prescribed
by the SMA. Should this step be eventually availed of, it is only hoped that the parties involved would
content themselves in observing the proper procedure, instead of making a mockery of the rule of
law.

WHEREFORE, respondents’ Motions for Reconsideration are DENIED WITH FINALITY.

Respondent DTI Secretary is hereby ENJOINED from taking any further action on the
pending Petition for Extension of the Safeguard Measure.

Hironobu Ryu, President of petitioner Southern Cross Cement Corporation, and Angara Abello
Concepcion Regala & Cruz, counsel petitioner, are hereby given FIVE (5) days from receipt of
this Resolution to EXPLAIN why they should not be meted disciplinary sanction for failing to timely
inform the Court of the filing of Southern Cross’s Petition for Review with the Court of Tax Appeals,
as adverted to earlier in this Resolution.

SO ORDERED.
G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary
of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their
AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.

G.R. No. 115543 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.

CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT
COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF
INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner,

vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF

PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO,
as the Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his
capacity as the Commissioner of Customs, respondents.

RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine Educational Publishers Association,
Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply.
In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino,
Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders
Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution. Although
they admit that H. No. 11197 was filed in the House of Representatives where it passed three
readings and that afterward it was sent to the Senate where after first reading it was referred to the
Senate Ways and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have
done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of
S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes
the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment
to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions
during the Eighth Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President
on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the
House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3,
1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD
TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by
the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by
the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the
Senate on October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers of
Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR

THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO

REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE,
AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO

PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24,
1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL

SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF
GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES
RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO
THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION

OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

 AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES
OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE
OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A
NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5,
1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of
its power to propose amendments to bills required to originate in the House, passed its own version
of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners
Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would make
if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a
substitute measure, "taking into Consideration . . . H.B. 11197."

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

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is

submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the
subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution.
(emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate
possesses less power than the U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

 All Bills for raising Revenue shall originate in the House of Representatives; but the
Senate may propose or concur with amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and
"the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be
like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional
intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be
recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it
was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the
procedure for lawmaking by the Senate and the House of Representatives. The work of proposing
amendments to the Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the following
provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose
or concur with amendments. In case of disapproval by the Senate of any such bills,
the Assembly may repass the same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted and may be submitted to
the President for corresponding action. In the event that the Senate should fail to
finally act on any such bills, the Assembly may, after thirty days from the opening of
the next regular session of the same legislative term, reapprove the same with a vote
of two-thirds of all the members of the Assembly. And upon such reapproval, the bill
shall be deemed enacted and may be submitted to the President for corresponding
action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal.
It deleted everything after the first sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO,
KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the
people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was
not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments
must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills
are required to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by
the House, however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is
clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently

without restriction. It would seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House and leave only a trace of
the original bill. For example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of an inheritance tax .
This was changed by the Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55
L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247

(1961))

The above-mentioned bills are supposed to be initiated by the House of

Representatives because it is more numerous in membership and therefore also
more representative of the people. Moreover, its members are presumed to be more
familiar with the needs of the country in regard to the enactment of the legislation
involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose
or concur with amendments to the bills initiated by the House of Representatives.
Thus, in one case, a bill introduced in the U.S. House of Representatives was
changed by the Senate to make a proposed inheritance tax a corporation tax. It is
also accepted practice for the Senate to introduce what is known as an amendment
by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is
referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill
as a substitute, in which case it will be known as a committee bill; or (4) to make no
report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House
by prescribing that the number of the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be incorporated in place of the original
body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S.
No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any
which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that
S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification
that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197," implying that there is something substantially different between
the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude
that R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates that
the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was
a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two bills could be referred to the Conference
Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When
the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank
deposits), were referred to a conference committee, the question was raised whether the two bills
could be the subject of such conference, considering that the bill from one house had not been
passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill
is passed by the House but not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the House, can the two bills be
the subject of a conference, and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in

cases like this where a conference should be had. If the House bill had been
approved by the Senate, there would have been no need of a conference; but
precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of
that committee.
 (2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct
and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that
because the President separately certified to the need for the immediate enactment of these
measures, his certification was ineffectual and void. The certification had to be made of the version
of the same revenue bill which at the moment was being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the bill he has already certified. It is enough
that he certifies the bill which, at the time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified.
For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision
that the phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also the requirement that
before a bill can become a law it must have passed "three readings on separate days." There is not
only textual support for such construction but historical basis as well.

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

(2) No bill shall be passed by either House unless it shall have been printed and
copies thereof in its final form furnished its Members at least three calendar days
prior to its passage, except when the President shall have certified to the necessity of
its immediate enactment. Upon the last reading of a bill, no amendment thereof shall
be allowed and the question upon its passage shall be taken immediately thereafter,
and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been distributed to the Members
three days before its passage, except when the Prime Minister certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. Upon
the last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas and nays entered in the
Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the
present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the President
certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on separate
days are required and a bill has to be printed in final form before it can be passed, the need for a law
may be rendered academic by the occurrence of the very emergency or public calamity which it is
meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an
enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation
calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed
that there was an urgent need for consideration of S. No. 1630, because they responded to the call
of the President by voting on the bill on second and third readings on the same day. While the
judicial department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it
was discussed for six days. Only its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second
reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on
third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND
STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially
achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the

Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of
the constitutional policy of full public disclosure and the people's right to know (Art. II, §28 and Art.
III, §7) the Conference Committee met for two days in executive session with only the conferees
present.

As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new
rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress
has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least
staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case who
on the last two days of the conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of
their meetings. Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing versions of
the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in the original bills without the need of a
statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a
point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of
the conference committee regarding House Bill No. 2557 by reason of the provision
of Section 11, Article XII, of the Rules of this House which provides specifically that
the conference report must be accompanied by a detailed statement of the effects of
the amendment on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to
consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection
with the point of order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill
have been amended. In this case before us an entire bill is presented; therefore, it
can be easily seen from the reading of the bill what the provisions are. Besides, this
procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for
the provisions of the Rules, and the reason for the requirement in the provision cited
by the gentleman from Pangasinan is when there are only certain words or phrases
inserted in or deleted from the provisions of the bill included in the conference report,
and we cannot understand what those words and phrases mean and their relation to
the bill. In that case, it is necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when the reason
for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was sustained
by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long
as these are germane to the subject of the conference. As this Court held in Philippine Judges
Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving differences between the Senate
and the House. It may propose an entirely new provision. What is important is that its report is
subsequently approved by the respective houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been added by the conference committee,
there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that

an amendment was made upon the last reading of the bill that eventually became
R.A. No. 7354 and that copies thereof in its final form were not distributed among the
members of each House. Both the enrolled bill and the legislative journals certify that
the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a coordinate
department of the government, to which we owe, at the very least, a becoming
courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a

1979 study:

Conference committees may be of two types: free or instructed. These committees

may be given instructions by their parent bodies or they may be left without
instructions. Normally the conference committees are without instructions, and this is
why they are often critically referred to as "the little legislatures." Once bills have
been sent to them, the conferees have almost unlimited authority to change the
clauses of the bills and in fact sometimes introduce new measures that were not in
the original legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his idealism put it
this way: "I killed a bill on export incentives for my interest group [copra] in the
conference committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the report is
not accepted, then the committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND

LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only
to say that conference committees here are no different from their counterparts in the United States
whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under
Art. VI, §16(3) each house has the power "to determine the rules of its proceedings," including those
of its committees. Any meaningful change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26
(1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one
subject which shall be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or
description, imposed, levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National
Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added

tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
§103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added

tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING

ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES,"
Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in
the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions
of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually, it is the bill
which becomes a law that is required to express in its title the subject of legislation. The titles of H.
No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It
contained a provision repealing all franking privileges. It was contended that the withdrawal of
franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court
held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley, Constitutional Limitations,
8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its

title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly be
included in the act. Thus, it is proper to create in the same act the
machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also have
special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the
press is not exempt from the taxing power of the State and that what the constitutional guarantee of
free press prohibits are laws which single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the press on the basis of the content of
the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to
which other businesses have long ago been subject. It is thus different from the tax involved in the
cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L.
Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts
only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied
only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long
who controlled the state legislature which enacted the license tax. The censorial motivation for the
law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have
been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing
or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes.
It was, however, later made to pay a special use tax on the cost of paper and ink which made these
items "the only items subject to the use tax that were component of goods to be sold at retail." The
U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely
and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously
granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially
withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

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

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)
The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection

afforded by the First Amendment is not so restricted. A license tax certainly does not
acquire constitutional validity because it classifies the privileges protected by the
First Amendment along with the wares and merchandise of hucksters and peddlers
and treats them all alike. Such equality in treatment does not save the ordinance.
Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with
the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by
the American Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or
properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to violate its freedom
under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to those
who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the
volume of sale. Granting that to be the case, the resulting burden on the exercise of religious
freedom is so incidental as to make it difficult to differentiate it from any other economic imposition
that might make the right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by
§7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies
transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of
the sale of real property by installment or on deferred payment basis would result in substantial
increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it
is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous
sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of
the Constitution. Even though such taxation may affect particular contracts, as it may increase the
debt of one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of contract can extend
to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be
exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can afford to rent houses in the meantime that
they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is
inherent in the power to tax that the State be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for taxation,
or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord,
City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1)
which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or
ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of
Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A.
No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on
grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory,
unjust and regressive in violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform.
...

The sales tax adopted in EO 273 is applied similarly on all goods and services sold
to the public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from
its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of
the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay.

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

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not

impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from
the VAT:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
 (b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

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

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. These include real properties
held primarily for sale to customers or for lease in the ordinary course of trade or business, the right
or privilege to use patent, copyright, and other similar property or right, the right or privilege to use
industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television,
satellite transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services
of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its effect on property rights.
For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is
not made concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.

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

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

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual
case and not an abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really
settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the government." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" and all that
Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial
power to determine questions of grave abuse of discretion by any branch or instrumentality of the
government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a
court to hear and decide cases pending between parties who have the right to sue and be sued in
the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly appropriated until it is apportioned
among several courts either by the Constitution, as in the case of Art. VIII, §5, or by statute, as in the
case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P.
Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this
Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the
government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of
the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a
definite policy of granting tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986,
P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December
31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the
framers of the Constitution "repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of
tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the
underprivileged.

The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
 domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged
to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5.
What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments theretofore
granted to private business enterprises in general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions of cooperatives in
1986, the exemption was again repealed by E.O. No. 93, §1, but then again cooperatives were not
the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all,
including government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and viability.
Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put
an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter
of policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt
from taxation. Such theory is contrary to the Constitution under which only the following are exempt
from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3), and
non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the
equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life. We cannot
say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No.
7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the other branches of the government does
not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency
must be addressed to Congress as the body which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the
people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194
U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in
arguing that we should enforce the public accountability of legislators, that those who took part in
passing the law in question by voting for it in Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining
order previously issued is hereby lifted.

SO ORDERED.

G.R. No. L-26521      December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.

Pelaez, Jalandoni and Jamir for plaintiff-appellees.

Assistant City Fiscal Vicente P. Gengos for defendant-appellant.

CASTRO, J.:

Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo
declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License
Tax On Persons Engaged In The Business Of Operating Tenement Houses," and ordering the City
to refund to the plaintiffs-appellees the sums of collected from them under the said ordinance.

On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license
tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house,
partly or wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer,
P24.00 per apartment; (3) tenement house, partly or wholly engaged in business in any other
streets, P12.00 per apartment. The validity and constitutionality of this ordinance were challenged by
the spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four tenement houses
containing 34 apartments. This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio
Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires, "it not appearing that the
power to tax owners of tenement houses is one among those clearly and expressly granted to the
City of Iloilo by its Charter."

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of
Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or
power to enact an ordinance similar to that previously declared by this Court as ultra vires, enacted
Ordinance 11, series of 1960, hereunder quoted in full:

AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN

THE BUSINESS OF OPERATING TENEMENT HOUSES

Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of
Republic Act No. 2264, otherwise known as the Autonomy Law of Local Government, that:
 Section 1. — A municipal license tax is hereby imposed on tenement houses in accordance
with the schedule of payment herein provided.

Section 2. — Tenement house as contemplated in this ordinance shall mean any building or
dwelling for renting space divided into separate apartments or accessorias.

Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:

I. Tenement houses:
(a) Apartment house made of strong P20.00 per
materials door p.a.
(b) Apartment house made of mixed P10.00 per
materials door p.a.
P10.00 per
II Rooming house of strong materials door p.a.
P5.00 per
Rooming house of mixed materials door p.a.
III. Tenement house partly or wholly
engaged in or dedicated to business in the
following streets: J.M. Basa, Iznart,
Aldeguer, Guanco and Ledesma from P30.00 per
Plazoleto Gay to Valeria. St. door p.a.
IV. Tenement house partly or wholly
engaged in or dedicated to business in any P12.00 per
other street door p.a.
V. Tenement houses at the streets
surrounding the super market as soon as P24.00 per
said place is declared commercial door p.a.

Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.

Section 5. — Any person found violating this ordinance shall be punished with a fine note
exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six (6)
months or both at the discretion of the Court.

Section 6 — This ordinance shall take effect upon approval.

ENACTED, January 15, 1960.

In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five
tenement houses, aggregately containing 43 apartments, while the other appellees and the same
Remedios S. Villanueva are owners of ten apartments. Each of the appellees' apartments has a door
leading to a street and is rented by either a Filipino or Chinese merchant. The first floor is utilized as
a store, while the second floor is used as a dwelling of the owner of the store. Eusebio Villanueva
owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City, Baguio City and Quezon
City, which cities, according to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva
and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees
Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the
sum of P1,317.00. Eusebio Villanueva has likewise been paying real estate taxes on his property.

On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance
11, series of 1960, be declared "invalid for being beyond the powers of the Municipal Council of the
City of Iloilo to enact, and unconstitutional for being violative of the rule as to uniformity of taxation
and for depriving said plaintiffs of the equal protection clause of the Constitution," and that the City
be ordered to refund the amounts collected from them under the said ordinance.

On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the
grounds that (a) "Republic Act 2264 does not empower cities to impose apartment taxes," (b) the
same is "oppressive and unreasonable," for the reason that it penalizes owners of tenement houses
who fail to pay the tax, (c) it constitutes not only double taxation, but treble at that and (d) it violates
the rule of uniformity of taxation.

The issues posed in this appeal are:

1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double
taxation?

2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?

3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal
clause?

4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?

1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:

SEC. 2. 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 licences 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; Provided,
however, That no city, municipality or municipal district may levy or impose any of the
following:

(a) Residence tax;

(b) Documentary stamp tax;

 (c) Taxes on the business of persons engaged in the printing and publication of any
newspaper, magazine, review or bulletin appearing at regular intervals and having fixed
prices for for subscription and sale, and which is not published primarily for the purpose of
publishing advertisements;

(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric
light, heat and power;

(e) Taxes on forest products and forest concessions;

(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;

(g) Taxes on income of any kind whatsoever;

(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof;

(i) Customs duties registration, wharfage dues on wharves owned by the national
government, tonnage, and all other kinds of customs fees, charges and duties;

(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and

(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign
insurance companies.

A tax ordinance shall go into effect on the fifteenth day after its passage, unless the
ordinance shall provide otherwise: Provided, however, That the Secretary of Finance shall
have authority to suspend the effectivity of any ordinance within one hundred and twenty
days after its passage, if, in his opinion, the tax or fee therein levied or imposed is unjust,
excessive, oppressive, or confiscatory, and when the said Secretary exercises this authority
the effectivity of such ordinance shall be suspended.

In such event, the municipal board or city council in the case of cities and the municipal
council or municipal district council in the case of municipalities or municipal districts may
appeal the decision of the Secretary of Finance to the court during the pendency of which
case the tax levied shall be considered as paid under protest.

It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments
broad taxing authority which extends to almost "everything, excepting those which are mentioned
therein," provided that the tax so levied is "for public purposes, just and uniform," and does not
transgress any constitutional provision or is not repugnant to a controlling statute.2 Thus, when a tax,
levied under the authority of a city or municipal ordinance, is not within the exceptions and limitations
aforementioned, the same comes within the ambit of the general rule, pursuant to the rules
of expressio unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti.

Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in
section 2 of the Local Autonomy Act? For this purpose, it is necessary to determine the true nature
of the tax. The appellees strongly maintain that it is a "property tax" or "real estate tax,"3 and not a
"tax on persons engaged in any occupation or business or exercising privileges," or a license tax, or
a privilege tax, or an excise tax.4 Indeed, the title of the ordinance designates it as a
"municipal license tax on persons engaged in the business of operating tenement houses," while
section 1 thereof states that a "municipal license tax is hereby imposed on tenement houses." It is
the phraseology of section 1 on which the appellees base their contention that the tax involved is a
real estate tax which, according to them, makes the ordinance ultra vires as it imposes a levy "in
excess of the one per centum real estate tax allowable under Sec. 38 of the Iloilo City Charter, Com.
Act 158."5.

It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax.
Obviously, the appellees confuse the tax with the real estate tax within the meaning of the
Assessment Law,6 which, although not applicable to the City of Iloilo, has counterpart provisions in
the Iloilo City Charter.7 A real estate tax is a direct tax on the ownership of lands and buildings or
other improvements thereon, not specially exempted,8 and is payable regardless of whether the
property is used or not, although the value may vary in accordance with such factor.9 The tax is
usually single or indivisible, although the land and building or improvements erected thereon are
assessed separately, except when the land and building or improvements belong to separate
owners.10 It is a fixed proportion11 of the assessed value of the property taxed, and requires,
therefore, the intervention of assessors.12 It is collected or payable at appointed times,13 and it
constitutes a superior lien on and is enforceable against the property14 subject to such taxation, and
not by imprisonment of the owner.

The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a
tax on the land on which the tenement houses are erected, although both land and tenement houses
may belong to the same owner. The tax is not a fixed proportion of the assessed value of the
tenement houses, and does not require the intervention of assessors or appraisers. It is not payable
at a designated time or date, and is not enforceable against the tenement houses either by sale or
distraint. Clearly, therefore, the tax in question is not a real estate tax.

"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court
looks less to its words and more to the context, subject-matter, consequence and effect.
Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof,
while that which is in the letter, although not within the spirit, is not within the ordinance."15 It is within
neither the letter nor the spirit of the ordinance that an additional real estate tax is being imposed,
otherwise the subject-matter would have been not merely tenement houses. On the contrary, it is
plain from the context of the ordinance that the intention is to impose a license tax on the operation
of tenement houses, which is a form of business or calling. The ordinance, in both its title and body,
particularly sections 1 and 3 thereof, designates the tax imposed as a "municipal license tax" which,
by itself, means an "imposition or exaction on the right to use or dispose of property, to pursue a
business, occupation, or calling, or to exercise a privilege."16.

"The character of a tax is not to be fixed by any isolated words that may beemployed in the
statute creating it, but such words must be taken in the connection in which they are used
and the true character is to be deduced from the nature and essence of the subject."17 The
subject-matter of the ordinance is tenement houses whose nature and essence are
expressly set forth in section 2 which defines a tenement house as "any building or
dwelling for renting space divided into separate apartments or accessorias." The Supreme
Court, in City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March 23, 1959,
adopted the definition of a tenement house18 as "any house or building, or portion thereof,
which is rented, leased, or hired out to be occupied, or is occupied, as the home or residence
of three families or more living independently of each other and doing their cooking in the
premises or by more than two families upon any floor, so living and cooking, but having a
common right in the halls, stairways, yards, water-closets, or privies, or some of them."
Tenement houses, being necessarily offered for rent or lease by their very nature and
essence, therefore constitute a distinct form of business or calling, similar to the hotel or
 motel business, or the operation of lodging houses or boarding houses. This is precisely one
of the reasons why this Court, in the said case of City of Iloilo vs. Remedios Sian Villanueva,
et al., supra, declared Ordinance 86 ultra vires, because, although the municipal board of
Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee for,
and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding
houses, livery garages, public warehouses, pawnshops, theaters, cinematographs,"
tenement houses, which constitute a different business enterprise,19 are not mentioned in the
aforestated section of the City Charter of Iloilo. Thus, in the aforesaid case, this Court
explicitly said:.

"And it not appearing that the power to tax owners of tenement houses is one among those
clearly and expressly granted to the City of Iloilo by its Charter, the exercise of such power
cannot be assumed and hence the ordinance in question is ultra vires insofar as it taxes a
tenement house such as those belonging to defendants." .

The lower court has interchangeably denominated the tax in question as a tenement tax or an
apartment tax. Called by either name, it is not among the exceptions listed in section 2 of the Local
Autonomy Act. On the other hand, the imposition by the ordinance of a license tax on persons
engaged in the business of operating tenement houses finds authority in section 2 of the Local
Autonomy Act which provides that chartered cities have the authority to impose municipal license
taxes or fees upon persons engaged in any occupation or business, or exercising privileges within
their respective territories, and "otherwise to levy for public purposes, just and uniform taxes,
licenses, or fees." .

2. The trial court condemned the ordinance as constituting "not only double taxation but treble at
that," because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A)
(3) (s) of the National Internal Revenue Code, besides the tenement tax under the said ordinance."
Obviously, what the trial court refers to as "income taxes" are the fixed taxes on business and
occupation provided for in section 182, Title V, of the National Internal Revenue Code, by virtue of
which persons engaged in "leasing or renting property, whether on their account as principals or as
owners of rental property or properties," are considered "real estate dealers" and are taxed
according to the amount of their annual income.20.

While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National
Internal Revenue Code as real estate dealers, and still taxable under the ordinance in question, the
argument against double taxation may not be invoked. The same tax may be imposed by the
national government as well as by the local government. There is nothing inherently obnoxious in the
exaction of license fees or taxes with respect to the same occupation, calling or activity by both the
State and a political subdivision thereof.21.

The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate
taxes and the tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-
settled rule that a license tax may be levied upon a business or occupation although the land or
property used in connection therewith is subject to property tax. The State may collect an ad valorem
tax on property used in a calling, and at the same time impose a license tax on that calling, the
imposition of the latter kind of tax being in no sensea double tax.22.

"In order to constitute double taxation in the objectionable or prohibited sense the same
property must be taxed twice when it should be taxed but once; both taxes must be imposed
on the same property or subject-matter, for the same purpose, by the same State,
Government, or taxing authority, within the same jurisdiction or taxing district, during the
same taxing period, and they must be the same kind or character of tax."23 It has been shown
 that a real estate tax and the tenement tax imposed by the ordinance, although imposed by
the sametaxing authority, are not of the same kind or character.

At all events, there is no constitutional prohibition against double taxation in the Philippines.24 It is
something not favored, but is permissible, provided some other constitutional requirement is not
thereby violated, such as the requirement that taxes must be uniform."25.

3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not
only oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months
or both, if the owner or owners of the tenement buildings divided into apartments do not pay the
tenement or apartment tax fixed in said ordinance," but also unconstitutional as it subjects the
owners of tenement houses to criminal prosecution for non-payment of an obligation which is purely
sum of money." The lower court apparently had in mind, when it made the above ruling, the
provision of the Constitution that "no person shall be imprisoned for a debt or non-payment of a poll
tax."26 It is elementary, however, that "a tax is not a debt in the sense of an obligation incurred by
contract, express or implied, and therefore is not within the meaning of constitutional or statutory
provisions abolishing or prohibiting imprisonment for debt, and a statute or ordinance which
punishes the non-payment thereof by fine or imprisonment is not, in conflict with that
prohibition."27 Nor is the tax in question a poll tax, for the latter is a tax of a fixed amount upon all
persons, or upon all persons of a certain class, resident within a specified territory, without regard to
their property or the occupations in which they may be engaged.28 Therefore, the tax in question is
not oppressive in the manner the lower court puts it. On the other hand, the charter of Iloilo
City29 empowers its municipal board to "fix penalties for violations of ordinances, which shall not
exceed a fine of two hundred pesos or six months' imprisonment, or both such fine and
imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court
overruled the pronouncement of the lower court declaring illegal and void an ordinance imposing an
occupation tax on persons exercising various professions in the City of Manilabecause it imposed a
penalty of fine and imprisonment for its violation.30.

4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.

"... because while the owners of the other buildings only pay real estate tax and income
taxes the ordinance imposes aside from these two taxes an apartment or tenement tax. It
should be noted that in the assessment of real estate tax all parts of the building or buildings
are included so that the corresponding real estate tax could be properly imposed. If aside
from the real estate tax the owner or owners of the tenement buildings should pay apartment
taxes as required in the ordinance then it will violate the rule of uniformity of taxation.".

Complementing the above ruling of the lower court, the appellees argue that there is "lack of
uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are singled out
to pay taxes on their tenement houses, while citizens of other cities, where their councils do not
enact a similar tax ordinance, are permitted to escape such imposition." .

It is our view that both assertions are undeserving of extended attention. This Court has already
ruled that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are
uniform and equal when imposed upon all property of the same class or character within the taxing
authority."31 The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do
not pay the taxes imposed by the ordinance in question is no argument at all against uniformity and
equality of the tax imposition. Neither is the rule of equality and uniformity violated by the fact that
tenement taxesare not imposed in other cities, for the same rule does not require that taxes for the
same purpose should be imposed in different territorial subdivisions at the same time.32 So long as
the burden of the tax falls equally and impartially on all owners or operators of tenement houses
similarly classified or situated, equality and uniformity of taxation is accomplished.33 The plaintiffs-
appellees, as owners of tenement houses in the City of Iloilo, have not shown that the tax burden is
not equally or uniformly distributed among them, to overthrow the presumption that tax statutes are
intended to operate uniformly and equally.34.

5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a
mere reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in L-
12695, supra, as ultra vires, the decision in that case should be accorded the effect of res judicata in
the present case or should constitute estoppel by judgment. To dispose of this contention, it suffices
to say that there is no identity of subject-matter in that case andthis case because the subject-matter
in L-12695 was an ordinance which dealt not only with tenement houses but also warehouses, and
the said ordinance was enacted pursuant to the provisions of the City charter, while the ordinance in
the case at bar was enacted pursuant to the provisions of the Local Autonomy Act. There is likewise
no identity of cause of action in the two cases because the main issue in L-12695 was whether the
City of Iloilo had the power under its charter to impose the tax levied by Ordinance 11, series of
1960, under the Local Autonomy Act which took effect on June 19, 1959, and therefore was not
available for consideration in the decision in L-12695 which was promulgated on March 23, 1959.
Moreover, under the provisions of section 2 of the Local Autonomy Act, local governments may now
tax any taxable subject-matter or object not included in the enumeration of matters removed from the
taxing power of local governments.Prior to the enactment of the Local Autonomy Act the taxes that
could be legally levied by local governments were only those specifically authorized by law, and their
power to tax was construed in strictissimi juris. 35.

ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the
complaint is hereby dismissed. No pronouncement as to costs..

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando and Capistrano,
JJ., conc

G.R. No. 195909               September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:
 The Case

These are consolidated  petitions for review on certiorari under Rule 45 of the Rules of Court
1 

assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution  of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
2 

question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the
Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements
that are available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

x x x x  3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x."  It is a specific provision which prevails
5 

over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 
6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998.  7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615.  St. Luke's also claimed that its income does not inure to the
8 

benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does
not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment
of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR
prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income,  as well as the payment of surcharge and delinquency interest. There is no
9 

ground for this Court to undertake such a factual review. Under the Constitution  and the Rules of
10 

Court,  this Court's review power is generally limited to "cases in which only an error or question of
11 

law is involved."  This Court cannot depart from this limitation if a party fails to invoke a recognized
12 

exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED.  13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net")  came
14 

from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's.  15

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

of St. Luke's under its articles of incorporation and various documents  identifying St. Luke's as a
17 

charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City,  which states that "a
18 

charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x."  The 19 

generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue,  which20 

ruled that the old NIRC (Commonwealth Act No. 466, as amended)  "positively exempts from
21 

taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income."  The NIRC of 1997 substantially reproduces the provision on
22 

charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's.  The CTA
24 

explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax
on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997,
as amended."  25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall
raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals  which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
26 
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 
27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x."  This is not a case of overlooking or failing to consider
28 

relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 
29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the
time prescribed for its payment in the notice of assessment[.]"  St. Luke's is also liable to pay 20%
30 

delinquency interest under Section 249(C)(3) of the NIRC.  As explained by the CTA En Banc, the
31 

amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest.  32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997.  Section 27(B) of the present NIRC provides:
33 

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

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions.  St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
34 

remove the exemption for "proprietary non-profit" hospitals.  The relevant provisions of Section 30
35 

state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

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

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)
of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The effect of the introduction
of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions  and proprietary non-profit hospitals, among the institutions covered by
36 

Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu,  this Court considered as non-profit a sports club organized for recreation and
37 

entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course.  The 38 

club was non-profit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise.  39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City  as "a gift, to be applied
40 

consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government."  A non-profit club for the
41 
benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury.  42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress."  The requirements for a tax exemption are strictly construed against the
43 

taxpayer  because an exemption restricts the collection of taxes necessary for the existence of the
44 

government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as
Hospital de San Juan  and Jesus Sacred Heart College  which says that receiving income from
45  46 

paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution.  47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation."  The test of exemption is not strictly a
48 

requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers"  and that any profit "obtain[ed] as an incident to its operations shall, whenever
49 

necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized."  However, under Lung Center, any profit by a charitable institution must
50 

not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x
x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit."  Indeed, St. Luke's admits that it derived
52 

profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998.  53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
₱1,395,725,350.00
INCOME FROM OPERATIONS ₱334,642,615.00 100%
Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

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

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the cost" of services.  The ₱1.73
55 
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is "devoted or used altogether to the charitable object which it is intended to
achieve."  The income is plowed back to the corporation not entirely for charitable purposes, but for
56 

profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.' 
57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution.  However, it is
58 

applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers. 1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax.  In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue,  the
60  61 

Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.

SO ORDERED.

November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

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

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari: 1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the

December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals
(CTA) in En Banc Case No. 622; 2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671;  and 3

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671. 4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA)
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU. 6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on
August 3, 2005 a petition for review with the CTA Division. 8
DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV,
Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU]
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.

SO ORDERED. 9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision.  On April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration
10

while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes.  The Commissioner did not promptly object to the formal offer of supplemental evidence
13

despite notice. 14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED.

[DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge
for the fiscal years 2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic
deficiency taxes ... until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency
taxes, surcharge and deficiency interest which have accrued ... from September 30, 2004 until fully
paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that
the CTA Division erred in admitting DLSU's additional evidence. 16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review
with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the
LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment;  and (3) the CTA Division erred
17

in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes. 18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of
the CTA Division. 19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes; hence,
exempt from tax.  The CTA En Banc was satisfied with DLSU's supporting evidence confirming that
20

part of its rental income had indeed been used to pay the loan it obtained to build the university's
Physical Education – Sports Complex. 21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan
and mortgage documents.  The CTA En Banc found that DLSU's DST payments had been remitted
23

to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)  and Section 2 of
24

Revenue Regulations (RR) No. 15-2001. 25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible
even if DLSU formally offered them only when it moved for reconsideration of the CTA Division's
original decision. Notably, the law creating the CTA provides that proceedings before it shall not be
governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision.  Thus, she came to this court for relief through a petition for review on certiorari (G.R.
27

No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47 inclusive of surcharge. 28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;  hence, the issue was deemed properly
29

submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited.  The
30

prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if
the audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA. 31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid. 32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses. 33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay the
loan obtained to fund the construction of the Sports Complex, the rental income from other sources
were not shown to have been actually, directly and exclusively used for educational purposes. 34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of.  DLSU's operations of canteens and bookstores within its campus even though exclusively
35

serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of [its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA  to support its conclusion that revenues however
38
generated are covered by the constitutional exemption, provided that, the revenues will be used for
educational purposes or will be held in reserve for such purposes. 39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property.  Thus, DLSU's
40

income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment  and that it is
42

not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to certain
classes of taxpayers under RR No. 9-2000. 43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered
the supplemental evidence only after it received the unfavorable CTA Division's original decision.  In 44

any case, DLSU's submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior
years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior
Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income
tax, VAT and DST for taxable years 2001, 2002 and 2003.  DLSU objects to the CTA En
47

Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No.
43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
issued to DLSU follows this format, then any assessment arising from it must be entirely voided. 48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.  The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did to
49

the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution. 50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the
same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on
DLSU's petition docketed as G.R. No. 198841. 51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution;  (2) Section 30 of the 1997 Tax Code is almost an exact replica of
54

Section 26 of the 1977 Tax Code -with the addition of non-stock, non-profit educational institutions
to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined. 55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that
is contrary to the Constitution void and without any force and effect.  Section 30 (H) of the 1997 Tax
56

Code insofar as it subjects to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes." 57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for
an exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must
prove that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.  Unlike YMCA, which is not an educational institution, DLSU is undisputedly a
58

non-stock, non-profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes. 59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that
the tax exemption was granted "to incentivize private educational institutions to share with the State
the responsibility of educating the youth." 60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled
DLSU' s loan and mortgage transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001.  In any case, DLSU argues that it cannot be
61

held liable for DST owing to the exemption granted under the Constitution. 62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound
by the results of the submission of such supplemental evidence. 63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it
failed to raise this issue in both the administrative and judicial proceedings.  That it was asked on
64

cross-examination during the trial does not make it an issue that the CTA could resolve.  The
65

Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.  In addition, DLSU prays that the
67

Court award attorney's fees in its favor because it was constrained to unnecessarily retain the
services of counsel in this separate petition.
68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which
we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed
by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved
to have been used actually, directly and exclusively for educational purposes are exempt
from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is
valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts.
We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively
for educational purposes; and
 b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,

directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions on
dividends and provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions.
69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a
non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational

institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx
(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the revenues and income they derived from their assets,
or from any of their activities conducted for profit, are taxable even if these revenues and income are
used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,  the Court in the YMCA case had
71

in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution.
The Court in that case made doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling
under Article VI, Section 28 (3) of the Constitution,  the YMCA is not tax-exempt per se; " what is
73

exempted is not the institution itself... those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the income of
exempt organizations from any of their properties, real or personal, are subject to the same tax
imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its
property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
holding that the term educational institution, when used in laws granting tax exemptions, refers to
the school system (synonymous with formal education); it includes a college or an educational
establishment; it refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system. 76
The Court then significantly laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes. 77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-
stock, non-profit educational institutions, provided, that the non-stock, non-profit educational
institutions prove that its assets and revenues are used actually, directly and exclusively for
educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not

subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income  for 78

educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from
tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes ... ," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets ... used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is
not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records
of the 1986 Constitutional Commission  to provide broader tax privilege to non-stock, non-profit
79

educational institutions as recognition of their role in assisting the State provide a public good. The
tax exemption was seen as beneficial to students who may otherwise be charged unreasonable
tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.
80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is unqualified
by any reference to the source of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.  It may refer to the sale of goods, rendition of services, or the return of an investment.
82

Revenue is a component of the tax base in income tax,  VAT,  and local business tax (LBT).
83 84 85
Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.  It 86

may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory
of goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).  Also, the landed cost of imported goods is a component of the tax base in
87

VAT on importation  and tariff duties.

88 89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.  We ruled in that case that the test of exemption from taxation is the use of
90

the property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes
such asset from the property tax exemption granted under the Constitution.  There is no exemption
91

because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational

purposes the revenues earned from the lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational
purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used

actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These
are two things that must be viewed and treated separately. But so long as the assets or revenues
are used actually, directly and exclusively for educational purposes, they are exempt from duties
and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are
nonprofit shall pay a tax of ten percent (10%) on their taxable income .. . Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions ... [the regular corporate income tax of 30%] shall be
imposed on the entire taxable income ... " 92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity
does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-
stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty  to uphold the primacy of the
93

Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal
revenue liabilities  and for the purpose of collecting the correct amount of tax,  in accordance with
95 96

Section 5 of the Tax Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the audit process  and 97

informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The
practice of issuing [LO As] covering audit of unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without
this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting
records from random unverified years, which may include documents from as far back as ten years
in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period
is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial.  DLSU then raised the issue in its memorandum and motion for partial reconsideration with the
100

CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could,
as it did, pass upon the validity of the LOA.  Besides, the Commissioner had the opportunity to
101

argue for the validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice. 102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division.  The CTA Division admitted the supplemental evidence, which proved that a
103

portion of DLSU's rental income was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. 104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in
the form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal.  Because of a party's failure to timely object, the evidence offered becomes part of the
105

evidence in the case. As a consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented. 106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice.  The Commissioner objected to the admission of the supplemental evidence only
107

when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her
objection, it was too late; the formal offer, admission and evaluation of the supplemental
evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality
or sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence. 108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's
admission of the formal offer of supplemental evidence, without prompt objection from the
Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers'
motion for reconsideration. 1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,  the tax refund claimant attached to its
109

motion for reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of
the Final Adjustment Return.  We thus admitted and gave weight to the Final Adjustment
110

Return although it was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of evidence  and that the paramount
111

consideration remains the ascertainment of truth. We ruled that procedural rules should not bar
courts from considering undisputed facts to arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue  and Commissioner of Internal Revenue v. PERF Realty
113

Corporation,  where the taxpayers also submitted the supplemental supporting document only upon
114

filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application
of the technical rules of evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in the case of a taxpayer who claims
a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,  DLSU is claiming tax exemption based on the
115

Constitution. If liberality is afforded to taxpayers who paid more than they should have under a
statute, then with more reason that we should allow a taxpayer to prove its exemption from tax
based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.  We thus accord the findings of fact by the CTA with the highest respect. These findings
116

of facts can only be disturbed on appeal if they are not supported by substantial evidence or there is
a showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. 117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
actually, directly and exclusively for educational purposes a portion of its assessed income and that
it had remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed
income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.
The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and
fund balance and statement of fund changes. 118

These documents showed that DLSU borrowed ₱93.86 Million,  which was used to build the
119

university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),  intended for the university's capital projects, was not
120

proved to have been used actually, directly and exclusively for educational purposes. The
CTA observed that "[DLSU] ... failed to fully account for and substantiate all the disbursements from
the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires
was indeed used for educational purposes." 121

To stress, the CTA's factual findings were based on and supported by the report of the Independent
CPA who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of original
documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation requirements under pertinent
tax laws, regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on
such formal report; and (g) performing such other functions as the CTA may direct. 122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held
that only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved
by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT. 123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years
2001 and 2002 due to the defective LOA. 124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its
ruling on the evidence on record, which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU' s unsubstantiated rental income (i.e., income not proved to have been actually,
directly and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year
2003.  DLSU earned this income from leasing a portion of its premises to: 1) MTG-Sports Complex,
125

2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore. 126
To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) ₱4,007,724.00  used to pay the loan obtained by
127

DLSU to build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account. 128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00
transferred to the CF-CPA Account was used actually, directly and exclusively for educational
purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income
tax and VAT. 129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements
from the CF-CPA Account for taxable year 2003 is only 26.68%.  The CTA held as follows:
130

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus
failing to prove that the rental income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to ₱6,259,078.30
only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is
₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements
for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to
and used in the CF-CPA Account in the amount of ₱6,602,655.00 is ₱1,761,588.35.  (emphasis
131

supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the abovementioned
concessionaries. The difference (₱6,602,655.00) was the portion claimed to have been deposited to
the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements

(₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the
rental income (₱4,841,066.65). 132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)  was derived by multiplying

133

the rental income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68%
or the ratio of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio  was the result of dividing the substantiated disbursements from the CF-CPA
134

Account as found by the Independent CPA (₱6,259,078.30) by the total disbursements

(₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, non-profit educational institutions. The CTA's reasoning is
flawed because it required DLSU to substantiate an amount that is greater than the rental income
deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of ₱10.61 million)  were used for educational purposes. This
135

amount was divided into two parts: (a) the ₱4.0l million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the ₱6.60 million,  which was transferred to the CF-
136

CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million.  These figures, read in light of the constitutional exemption, raises the question: does DLSU
137

claim that the whole total CF-CPA disbursement of ₱23.46 million is tax-exempt so that it is
required to prove that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million
had been for educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61
million for tax-exemption and should thus be required to prove that this amount had been used as
claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed
by the Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was
transferred to the CF-CPA which in turn made disbursements of ₱23.46 million for various general
purposes, among them the ₱6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A
concluded that the expenses for educational purposes that had been coursed through the CF-CPA
should be prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole ₱23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used for educational
purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the
deposited funds were DLSU revenue funds that had been confirmed and proven to have been
actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have
had other sources of funding is irrelevant because the assessment in the present case pertains only
to the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA
funds used for educational purposes should not be prorated as part of its total CF-CPA
disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been for educational purposes. No
prorating is necessary; to state the obvious, exemption is based on actual and direct use and this
DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the difference between
what it claimed and what it has proven. In more concrete terms, DLSU only had to prove that its
rental income for taxable year 2003 (₱10,610,379.00) was used for educational purposes. Hence,
while the total disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which was the ₱6,602,655.00 transferred
to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been used
for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003
as follows:

  CTA
Decision 138
Revised
Rental income 10,610,379.0
10,610,379.00
0
Less: Rent income used in 4,007,724.00 4,007,724.00
construction of the Sports
Complex
     
Rental income deposited to the
6,602,655.00 6,602,655.00
CF-CPA Account
     
Less: Substantiated portion of 1,761,588.35 6,259,078.30
CF-CPA disbursements
     
Tax base for deficiency
4,841,066.65 343.576.70
income tax and VAT

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did
with the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes
and VAT under certain BIR and Department of Finance issuances  that required the educational
139

institution to own and operate the canteens, or other commercial enterprises within its campus, as
condition for tax exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."
141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and
materiality of the evidence supporting their respective claims for tax exemption would necessarily
differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable
years they were assessed varied. The amount of tax assessment also varied. The amount of
income proven to have been used for educational purposes
also varied because the amount substantiated varied.  Thus, the amount of tax assessment
142

cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years
2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax
of ₱8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo
was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly
and exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim
were not produced in court. Indeed, the Independent CPA testified that some disbursements had not
been proven to have been used actually, directly and exclusively for educational purposes. 144

The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no bad
faith on its part.  To our mind, this admission is a good indicator of how the Ateneo and the DLSU
145

cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital
in some other authentic documents on record,  can no longer be entertained at this late stage of the
146

proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU' s
assertion of lack of bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate.  A tax is uniform when it operates with the same force and
147

effect in every place where the subject of it is found.  The concept requires that all subjects of
148

taxation similarly situated should be treated alike and placed in equal footing.
149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because
their income proved to have been used actually, directly and exclusively for educational purposes
were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if
they indeed used their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its income and
revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result
happened because it failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact
that the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that
the CTA or this Court would similarly decide every case for (or against) both universities. Success in
tax litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence.
DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid
and remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner
argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code
and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the
person making, signing, issuing, accepting, or transferring the same.  The Tax Code provides that
150

whenever one party to the document enjoys exemption from DST, the other party not exempt from
DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean the full settlement of the DST
due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These
agreements are subject to DST.  For the purpose of showing that the DST on the loan agreement
151

has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that
DST has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay
and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions.
RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line
Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48. 152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal
Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of
the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
No. 671, with the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.

SO ORDERED.