Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal
Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

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

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such
an answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982.
8
The facts
as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on
the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses."
9
The answer
then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited
while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition
for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by
retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only 'because it was better equipped to administer for the public
welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to
be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase
a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all
the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not
unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights,
both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in
appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric
[attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize
that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web
of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive,
act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision
as petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The
injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from
business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not
suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would
condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative
doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules
but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That
would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to
the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been
held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional
mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated
that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the
spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every
person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges,
those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group
equally binding on the rest."
20
That same formulation applies as well to taxation measures. The equal protection clause
is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the
affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law.
There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal
protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the
laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of
policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be treated in law as though they were the
same."
21
Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of
fact, in a leading case of Lutz V. Araneta,
22
this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate,
it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'"
23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag
be uniform and equitable."
24
This requirement is met according to Justice Laurel in Philippine Trust Company v.
Yatco,
25
decided in 1940, when the tax "operates with the same force and effect in every place where the subject may
be found. "
26
He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because
this is hardly attainable."
27
The problem of classification did not present itself in that case. It did not arise until nine
years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... .
28
As clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform."
29
There is quite a similarity then to the standard of equal protection for all that is
required is that the tax "applies equally to all persons, firms and corporations placed in similar situation."
30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between
a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different
categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real
differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized rules removing all deductible items for
all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are
recipients of compensation income are set apart as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or
less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis
of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income
taxation to compensation income, while continuing the system of net income taxation as regards professional and
business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation
to show the arbitrary character of the assailed provision;
31
(2) the force of controlling doctrines on due process, equal
protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable
net income of professionals and businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ.,
concur.
Teehankee, J., concurs in the result.
Plana, J., took no part.


Separate Opinions

AQUINO, J ., concurring:
I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J ., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such
circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the
reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they
claim all sort of deduction justified or not I vote for dismissal.


Separate Opinions
AQUINO, J ., concurring:
I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J ., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such
circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the
reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they
claim all sort of deduction justified or not I vote for dismissal.
Footnotes
1 Petitioner must have realized that a suit for declaratory relief must be filed with Regional Trial Courts.
2 Batas Pambansa Blg. 135, Section 21 (1981).
3 The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue; Romulo Villa, Deputy
Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy Commissioner, Bureau of Internal Revenue;
Manuel Alba, Minister of Budget; Francisco Tantuico, Chairman, Commissioner on Audit; and Cesar E. A. Virata,
Minister of Finance.
4 Petition, Parties, par. 1. The challenge is thus aimed at paragraphs (a) and (b) of Section 1 further Amending Section
21 of the National Internal Revenue Code of 1977. Par. (a) reads: "(a) On taxable compensation income. A tax is
hereby imposed upon the taxable compensation income as determined in Section 28 (a) received during each taxable
year from all sources by every individual, whether a citizen of the Philippines, determined in accordance with the
following schedule:
31 While petitioner cited figures to sustain in his assertion, public respondents refuted with other figures that argue
against his submission. One reason for requiring declaratory relief proceedings to start in regional trial courts is
precisely to enable petitioner to prove his allegation, absent an admission in the answer.



Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.
D E C I S I O N
CARPIO, J .:
The Case
These are consolidated
1
petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of
19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution
2
of 1 March 2011 in CTA Case No.
6746. This Court resolves this case on a pure question of law, which involves the interpretation of Section 27(B) vis--
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
toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount to P63,935,351.57 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."
5
It is a specific
provision which prevails 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 P1,730,367,965 or approximately P1.73 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
wasP218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses)
ofP334,642,615.
8
St. Luke's also claimed that its income does not inure to the 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 payP57,659,981.19 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,
9
as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake
such a factual review. Under the Constitution
10
and the Rules of Court,
11
this Court's review power is generally limited
to "cases in which only an error or question of law is involved."
12
This Court cannot depart from this limitation if a party
fails to invoke a recognized 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 P110,000.00 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 P5,496,963.54
andP778,406.84 or in the sum of P6,275,370.38, x x x.
x x x x
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount
of P6,275,370.38 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 P5,496,963.54, 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")
14
came from charitable activities. The
CTA cancelled the remainder of the P63,113,952.79 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,
16
which examined the primary purposes of St. Luke's under its articles of incorporation and various
documents
17
identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City,
18
which states that "a 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."
19
The 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,
20
which ruled that the old
NIRC (Commonwealth Act No. 466, as amended)
21
"positively exempts from taxation those corporations or
associations which, otherwise, would be subject thereto, because of the existence of x x x net income."
22
The NIRC of
1997 substantially reproduces the provision on 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.
24
The CTA 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
26
which permits factual review "when the
Court of Appeals [in this case, the CTA] manifestly 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."
28
This is not a case of overlooking or failing to consider 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[.]"
30
St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC.
31
As
explained by the CTA En Banc, the amount of P6,275,370.38 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--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.
33
Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
x x x x
(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.
34
St. Luke's asserts that the legislative intent of
introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals.
35
The relevant
provisions of Section 30 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:
x x x x
(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;
x x x x
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
x x x x
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
36
and proprietary non-profit hospitals, among the institutions
covered by 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,
37
this
Court considered as non-profit a sports club organized for recreation and 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.
38
The 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
40
as "a gift, to be applied 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."
41
A non-profit
club for the 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."
43
The requirements for a tax exemption are
strictly construed against the taxpayer
44
because an exemption restricts the collection of taxes necessary for the
existence of the 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
45
and Jesus Sacred
Heart College
46
which says that receiving income from 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."
48
The test of exemption is not
strictly a 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"
49
and that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was
organized."
50
However, under Lung Center, any profit by a charitable institution must 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 P1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 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."
52
Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as
"Revenues from Services to Patients" in contrast to its "Free Services" expenditure ofP218,187,498. 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 P1,730,367,965.00
OPERATING EXPENSES
Professional care of patients P1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
P1,395,725,350.00
INCOME FROM OPERATIONS P334,642,615.00 100%
Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

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.
55
The P1.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 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."
56
The income is plowed back to the corporation not entirely for
charitable purposes, but for 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 Toms que tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?
x x x x
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital
tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social econmica, 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.
58
However, it is 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.1wphi1
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.
60
In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue,
61
the 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.
Leonardo-De Castro
*
, Brion, Perez, and Perlas-Bernabe, JJ., concur.


Footnotes
*
Designated Acting Member per Special Order No. 1308 dated 21 September 2012.
1
The consolidation of the petitions is pursuant to the Resolution of this Court dated 4 April 2011. Rollo (G.R. No.
195960), p. 9.
2
This Resolution denied the motions filed by both parties to reconsider the CTA En Banc Decision dated 19 November
2010.
3
CTA First Division Decision dated 23 February 2009, citing the earlier decision in St. Luke's Medical Center, Inc. v.
Commissioner of Internal Revenue, CTA Case No. 6993, 21 November 2008. Rollo (G.R. No. 195909), p. 68.
4
This prompted St. Luke's to file an Amended Petition for Review on 12 December 2003 before the First Divison of the
CTA.
5
CTA First Division Decision, citing the Answer filed by the BIR before the CTA. Rollo (G.R. No. 195909), p. 62.
6
Id. at 63.
7
Id. at 65-67.
8
Id. at 67. The operating expenses of St. Luke's consisted of professional care of patients, administrative, household
and property expenses.
9
This income in the amount of P17,482,304 was declared by St. Luke's as "Other Income-Net" in its 1998 Income Tax
Return/Audited Statements of Revenues and Expenses.
10
Constitution, Art. VIII, Sec. 5(2)(e). Except for criminal cases where the penalty imposed is reclusion perpetua or
higher, the enumeration under Article VIII, Section 5(1) and (2) of the Constitution generally involves a question of law.
11
Rules of Court, Rule 45, Sec. 1.
12
Constitution, Art. VIII, Sec. 5(2)(e). See note 10.
13
Rollo (G.R. No. 195909), pp. 82-83. Emphases in the original.
14
See note 9. This is one of the errors assigned by St. Luke's in its petition before this Court.
15
Rollo (G.R. No. 195909), p. 65. The revised total deficiency income tax assessed by the BIR isP63,113,952.79, which
includes the deficiency under "Other Income-Net."
16
CTA Case No. 6993, 21 November 2008.
17
These are documentary evidence which, among others, show that government agencies such as the Department of
Social Welfare and Development and the Philippine Charity Sweepstakes Office recognize St. Luke's as a charitable
institution.
18
123 Phil. 38 (1966).
19
Id. at 41 citing 51 Am. Jur. 607.
20
95 Phil. 16 (1954).
21
Commonwealth Act No. 466, as amended by Republic Act No. 82, Sec. 27 provides: Exemption from tax on
corporation. - The following organizations shall not be taxed under this Title in respect to income received by them as
such -
x x x x
(e) Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, cultural, or
educational purposes, or for the rehabilitation of veterans no part of the net income of which inures to the benefit of any
private stockholder or individual: Provided, however, That the income of whatever kind and character from any of its
properties, real or personal, or from any activity conducted for profit regardless of the disposition made of such income,
shall be liable to the tax imposed under this Code.
22
Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20 at 21.
23
Id.
24
The CTA adopted its earlier interpretation in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue.
Supra note 16.
25
Rollo (G.R. No. 195909), p. 76. Italics in the original.
26
410 Phil. 241 (2001).
27
Id. at 257; rollo (G.R. No. 195960), pp. 15-16.
28
Rollo (G.R. No. 195960), p. 24.
29
Id. at 50.
30
NIRC, Sec. 248(A)(3).
31
NIRC, Sec. 249(C)(3) provides: "A deficiency tax, or any surcharge or interest thereon on the due date appearing in
the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at
the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax."
32
CTA En Banc Resolution dated 1 March 2011. Rollo (G.R. No. 195909), p. 56.
Section 249 of the NIRC provides:
(A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed
for its payment until the amount is fully paid.
(B) Deficiency Interest - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest
prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its
payment until the full payment thereof.
x x x x
33
Id. at 21-27. Section 27(E) of the NIRC of 1977 provides:
Sec. 27. Exemptions from tax on corporations. - The following organizations shall not be taxed under this Title in respect
to income received by them as such -
x x x x
(E) Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private
stockholder or individual.
x x x x
34
See Comment of St. Luke's dated 19 September 2011 in G.R. No. 195909. Id. at 105-116.
35
Id. at 106-108.
36
Cf. NIRC, Sec. 30(H).
37
115 Phil. 310 (1962).
38
Id. at 311.
39
Id. at 314.
40
G.R. No. 144104, 29 June 2004, 433 SCRA 119.
41
Id. at 128-129. Emphasis supplied.
42
For further discussion of the Subsidy Theory of Tax Exemption, see H. Hansmann, The Rationale for Exempting
Nonprofit Organizations from Corporate Income Taxation, 91 YALE L. J. 54 (1981) at 66-75. See also M. Hall & J.
Colombo, The Charitable Status of Nonprofit Hospitals: Toward a Donative Theory of Tax Exemption, 66 WASH. L.
Rev. 307 (1991).
43
CONSTITUTION, Art. VI, Sec. 28(4).
44
Commissioner of Internal Revenue v. The Philippine American Accident Insurance Company, Inc., 493 Phil. 785
(2005); Lung Center of the Philippines v. Quezon City, supra note 40 at 133-134; Mactan Cebu International Airport
Authority v. Marcos, 330 Phil. 392 (1996); Manila Electric Company v. Vera, 160-A Phil. 498 (1975).
45
Supra note 18.
46
Supra note 20.
47
Lung Center of the Philippines v. Quezon City, supra note 40 at 131-132. Citation omitted.
48
Constitution, Art. VI, Sec. 28(3).
49
Corporation Code (B.P. Blg. 68), Sec. 87.
50
Id.
51
Supra note 40. Emphasis supplied.
52
Since the exemption is proportional to the revenue of the institution, Hall & Colombo say that "a general tax
exemption suffers from the same 'upside down' effect as many tax deductions: those entities with the highest net
revenues or the greatest value of otherwise-taxable property receive the greatest amount of subsidy, yet these are the
entities that least need support. From the standpoint of equity among different tax-exempt entities, the result of the
general tax exemption is that entities that are the 'poorest' in either an income or property tax sense, and thus most in
need of government assistance to serve impoverished and uninsured patients, receive the least government assistance.
Because uncompensated care is an expense item, those hospitals with the most net revenues are more likely to have
actually rendered the least free care, all other things being equal." Hall & Colombo, supra note 42 at 355-356. Citations
omitted.
53
Comment of St. Luke's dated 19 September 2011. Rollo (G.R. No. 195909), p. 113.
54
Supra note 40 at 137. Emphasis supplied; citations omitted.
55
Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20 at 20-21.
56
Lung Center of the Philippines v. Quezon City, supra note 40.
57
Supra note 20 at 29.
58
Supra note 20 at 23. Jesus Sacred Heart College distinguished an educational institution from a charitable institution:
"More important still, the law applied in the case relied upon by [the BIR] exempted from taxation only such educational
institutions as were established for charitable or philanthropic purposes. Consequently, the amount of fees charged or
the intent to collect more than the cost of operation or instruction was material to the determination of such purpose.
Upon the other hand, under Section 27(e) of [the old] National Internal Revenue Code, as amended, an institution
operated exclusively for educational purposes need not have, in addition thereto, a charitable or philanthropic character,
to be exempt from taxation, provided only that no part of its net income 'inures to the benefit of any private stockholder
or individual.'" (Italics in the original; emphasis supplied)
59
Italics supplied.
60
See CTA First Division Decision dated 23 February 2009. Rollo (G.R. No. 195909), p. 69.
61
533 Phil. 101 (2006).
62
Id. at 108-109.



Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General
Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J .:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certified
to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the power of
taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19,
1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of
Republic Act No. 2264.
1
otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing
authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are
practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per
his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance
by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from
soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink
corked."
2
For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the
month.
3

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

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding
the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional;
ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated
the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the people.
6
It is a power that is purely legislative and
which the central legislative body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect
of matters of local concern.
7
This is sanctioned by immemorial practice.
8
By necessary implication, the legislative
power to create political corporations for purposes of local self-government carries with it the power to confer on such
local governmental agencies the power to tax.
9
Under the New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations
as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and vest in local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the
legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes.
10
This is not to say though that the constitutional
injunction against deprivation of property without due process of law may be passed over under the guise of the taxing
power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the
jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice
and opportunity for hearing are provided.
11
Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and
arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process
clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to
such taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be raised
should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which
it shall be apportioned are generally not necessary to due process of law.
12

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

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

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as
distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs.
22
Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or
manufactured, or an equivalent of 1- centavos per case,
23
cannot be considered unjust and unfair. 24 an increase in
the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the reates of imposable taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given
expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance
with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be
realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers of
soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of
1968, of defendant Municipality,
29
appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities
are empowered to impose, not only municipal license taxes upon persons engaged in any business or occupation but
also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the
second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy
Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of
1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino and Concepcion, Jr., JJ.,
concur.


Separate Opinions

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

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

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

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


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

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

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

So I would view the issues in this suit and accordingly concur in the result.
Footnotes
1 "Sec. 2. Taxation. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in any
occupation or business, or exercising private in chartered cities, municipalities and municipal districts by requiring them
to secure licenses at rates fixed by the municipal board or city council of the city, the municipal council of the
municipality, or the municipal district council of the municipal district to collect fees and charges for service rendered by
the city, municipality or municipal district; to regulate and impose reasonable for services rendered in connection with
any business, profession 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 any newspaper engaged in the printing and publication of any newspaper, magazine,
review or bulletin appearing at regular interval and having fixed prices 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 on wharves owned by the national government, tonnage and all other kinds of
customs fees, charges and dues;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax:
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance companies; and
(i) Taxes, fees or levies, of any kind, which in effect impose a burden on exports of Philippine finished, manufactured or
processed products and products of Philippine cottage industries.