Tax 1

TAXATION I
A. Definition and Concept of Taxation
PINEDAPCG,RN,MAN2015
B. Nature of Taxation
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a
letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest
in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not
taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be
served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed
its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR
a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant
was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the
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TAXATION I
said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of
the reglementary period had been consumed.
Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact,
as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to
the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the
end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or
her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction.
The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was
the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision
of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions
(a) Expenses:
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TAXATION I
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for salaries
or other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical application may
be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted
by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship
is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.
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TAXATION I
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
G.R. No. L-31364 March 30, 1979
MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional Director,
Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and
FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents.
DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special Proceedings No.
7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969 dismissing the Motion for Allowance
of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Philippines against the
Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the decedent in the
total amount of P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second,
dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.
The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3, 1969 in the
abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The claim represents the
indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in the total sum of P3,254.80
as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1 10875-64, to
which motion was attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the
motion solely on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4,
Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent
Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner, Regional Director
of the Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September
18, 1969, a motion for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated
October 7, 1969.
Hence, this appeal on certiorari, petitioner assigning the following errors:
1. The lower court erred in holding that the claim for taxes by the government against the estate of
Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86 of the Rules of Court.
2. The lower court erred in holding that the claim for taxes of the government was already barred
under Section 5, Rule 86 of the Rules of Court.
which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New Rule of Court,
bars claim of the government for unpaid taxes, still within the period of limitation prescribed in Section 331 and 332
of the National Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for Allowance of
Claim, etc. of the petitioners reads as follows:
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TAXATION I
All claims for money against the decedent, arising from contracts, express or implied, whether the
same be due, not due, or contingent, all claims for funeral expenses and expenses for the last
sickness of the decedent, and judgment for money against the decedent, must be filed within the
time limited in they notice; otherwise they are barred forever, except that they may be set forth as
counter claims in any action that the executor or administrator may bring against the claimants.
Where the executor or administrator commence an action, or prosecutes an action already
commenced by the deceased in his lifetime, the debtor may set forth may answer the claims he has
against the decedents, instead of presenting them independently to the court has herein provided,
and mutual claims may be set off against each other in such action; and in final judgment is
rendered in favored of the decedent, the amount to determined shall be considered the true balance
against the estate, as though the claim has been presented directly before the court in the
administration proceedings. Claims not yet due, or contingent may be approved at their present
value.
A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation of the
decedent created by law, such as taxes which is entirely of different character from the claims expressly enumerated
therein, such as: "all claims for money against the decedent arising from contract, express or implied, whether the
same be due, not due or contingent, all claim for funeral expenses and expenses for the last sickness of the
decedent and judgment for money against the decedent." Under the familiar rule of statutory construction
of expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not
mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily,
and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-335).
In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December
30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription
thereof are governed by the provisions of the National Internal revenue Code, particularly Sections 331 and 332
thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals &
Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without being specifically mentioned, the
provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind
of the Court as not affecting the aforecited Section of the National Internal Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes assessed against
the estate of a deceased person ... need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes
upon motion showing that the taxes have been assessed against the estate." The abolition of the Committee on
Claims does not alter the basic ruling laid down giving exception to the claim for taxes from being filed as the other
claims mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after the
distribution of the decedent's estate among his heirs who shall be liable therefor in proportion of their share in the
inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).
The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception
from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and
their prompt and certain availability are imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R. No.
L-22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve the people
for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials
entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same
manner as private persons may be made to suffer individually on account of his own negligence, the presumption
being that they take good care of their personal affairs. This should not hold true to government officials with respect
to matters not of their own personal concern. This is the philosophy behind the government's exception, as a
general rule, from the operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977,
79 SCRA 177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L41001, September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70
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SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA
110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone
Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26,
1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As
already shown, taxes may be collected even after the distribution of the estate of the decedent among his heirs
(Government of the Philippines vs. Pamintuan, supra; Pineda vs. CFI of Tayabas,supra Clara Diluangco Palanca vs.
Commissioner of Internal Revenue, G. R. No. L-16661, January 31, 1962).
Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph of Section
315 of the Tax Code payment of income tax shall be a lien in favor of the Government of the Philippines from the
time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By
virtue of such lien, this court held that the property of the estate already in the hands of an heir or transferee may be
subject to the payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the unpaid
taxes due the decedent may be collected, even without its having been presented under Section 2 of Rule 86 of the
Rules of Court. It may truly be said that until the property of the estate of the decedent has vested in the heirs, the
decedent, represented by his estate, continues as if he were still alive, subject to the payment of such taxes as
would be collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to
be collected were due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.
Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2, Rule 86 of
the Rules of Court, the claim in question may be filed even after the expiration of the time originally fixed therein, as
may be gleaned from the italicized portion of the Rule herein cited which reads:
Section 2. Time within which claims shall be filed. - In the notice provided in the preceding section,
the court shall state the time for the filing of claims against the estate, which shall not be more than
twelve (12) nor less than six (6) months after the date of the first publication of the notice. However,
at any time before an order of distribution is entered, on application of a creditor who has failed to
file his claim within the time previously limited the court may, for cause shown and on such terms as
are equitable, allow such claim to be flied within a time not exceeding one (1) month. (Emphasis
supplied)
In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of Payment of
Taxes) which, though filed after the expiration of the time previously limited but before an order of the distribution is
entered, should have been granted by the respondent court, in the absence of any valid ground, as none was
shown, justifying denial of the motion, specially considering that it was for allowance Of claim for taxes due from the
estate, which in effect represents a claim of the people at large, the only reason given for the denial that the claim
was filed out of the previously limited period, sustaining thereby private respondents' contention, erroneously as has
been demonstrated.
WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the total amount
of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code is a final one and the
respondent estate's sole defense of prescription has been herein overruled, the Motion for Allowance of Claim is
herein granted and respondent estate is ordered to pay and discharge the same, subject only to the limitation of the
interest collectible thereon as provided by the Tax Code. No pronouncement as to costs.
SO ORDERED.
C. Characteristics of Taxation
Tax Code of 1997 Sections 207 to 217
G.R. No. L-24607
January 29, 1968
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TAXATION I
TOMAS TRIA TIRONA, petitioner-appellee,
vs.
THE CITY TREASURER OF MANILA and/or CITY OF MANILA, respondents-appellants.
Tirona and Tirona for petitioner-appellee.
Olimpio R. Navarro for respondents-appellants.
BENGZON, J.P., J.:
Tomas Tria Tirona is the legitimate original holder of a P6,777.92-USAFFE Backpay Certificate No. A-23426 (1684)
issued by the Republic of the Philippines on May 30, 1955 under Republic Act 304, as amended. Tirona paid
therewith his real estate taxes on his land in Sampaloc, Manila for the years 1957 to 1959.
On December 19, 1958, Mayor Arsenio Lacson prohibited the acceptance of backpay certificates in payment of
taxes or obligations due to the City of Manila. The matter was indorsed first to the National Treasurer, then to the
Department of Finance, particularly the Undersecretary, and both opined 1 that the acceptance of the backpay
certificates in payment of taxes is mandatory under Section 2 of Republic Act 304, as amended. Inspite of these
opinions, acceptance was refused Tirona when he tried to pay the City of Manila his real estate taxes for 1960-1963
through his backpay certificate.
On July 30, 1963, Tirona sought to compel the City Treasurer and/or City Mayor of Manila to accept his backpay
certificate in payment of real estate taxes from 1960-1963 (later amended to cover taxes for 1964) thru an action
filed before the Court of First Instance of Manila.
After hearing and presentation of evidence, the Court of First Instance, on January 25, 1965, rendered a decision
ordering the respondents to accept the backpay certificate on the ground that Section 2 of Republic Act 306, as
amended, expressly gives the holder of a backpay certificate the right to give the certificate in payment of his taxes
and other indebtedness, which right must be imposed on the Government, its branches, and instrumentalities.
Respondents appealed directly to Us, alleging that receptance of the certificates is discretionary on the part of the
City and that its compulsory acceptance would constitute an impairment of the obligation of contracts. 2
Section 2 of R.A. 304, as amended by Republic Acts 800 and 897, provides:
Sec. 2. The Treasurer of the Philippines shall, upon application of all persons specified in section one hereof
and within one year from the approval of this amendatory Act, and under such rules and regulations as may
be promulgated by the Secretary of Finance, acknowledge and file requests for the recognition of the right to
the salaries or wages as provided in section one hereof, and notice of such acknowledgment shall be issued
to the applicant which shall state the, total amount of such salaries or wages due the applicant, and certify
that it shall be redeemed by the Government of the Philippines within ten years from the date of their
issuance without interest: Provided, That upon regulations as may be approved by the Secretary of Finance
a certificate of indebtedness may be issued by the Treasurer of the Philippines covering the whole or part of
the total salaries or wages the right to which has been duly acknowledged and recognized, provided that the
face value of such certificate of indebtedness shall not exceed the amount that the applicant may need for
the payment of (1) obligations subsisting at the time of the approval of this amendatory Act for which the
applicant may directly be liable to the Government or to any of its branches or instrumentalities, or the
corporations owned or controlled by the Government, or to any citizen of the Philippines, or to any
association or corporation organized under the laws of the Philippines, who may be willing to accept the
same for such settlement; (2) his taxes; (3) government hospital bills of the applicant; (4) lands purchased or
leased or to be purchased or leased by him from the public domain; and (5) any amount received by the
applicant as gratuity or pension which he has refund to the Government or to any of its branches or
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instrumentalities; Provided, further, That such settlement shall be effected by indorsement on the instrument:
...
Appellants cite the case of De Borja v. Gella 3 where We held that the Cities of Pasay and Manila were not bound to
accept payment of real estate taxes through backpay certificates because first, the obligations were not subsisting at
the time Republic Act 304 took effect on June 18, 1948, considering that the tax obligation in question accrued after
1948; secondly, because Section 2 of Republic Act 304, as amended, allows such payment only if the tax is owed by
the original certificate holder himself, and lastly, that compensation cannot be had under Article 1278 of the Civil
Code because the requisites for compensation were not present.
Although the Gella case was decided when Republic Act 800 amended Republic Act 304 on June 21, 1952, there
was no substantial difference in development upon the effectivity of the latest amendment Republic Act 897 on
June 20, 1953. Republic Act 304 effective June 18, 1948, originally provided for registration of claims of all officers
and employees of the Government of the Commonwealth of the Philippines, its branches and instrumentalities and
the corporations owned or controlled by the Government and those of free local civil governments, provincial or
municipal, duly organized for purposes of resistance against the enemy, to salaries and wages during the enemy or
Japanese occupation. Republic Act 800 amended Republic Act 304 to include elective officials who held over in their
positions, as recipients of the benefits of Republic Act 304, also authorizing the issuance and use of certificates of
indebtedness for purchase of public lands and authorized the limited negotiability of the certificates. The latest
amendment, Republic Act 897, extended the benefits to the members of the Philippine Army and recognized
guerrilla forces and officers of the Philippine Scouts allowed certificates to be used in the purchase of public lands
and government properties and payment of the obligations subsisting at the time of approval of Republic Act 897.
Except for these there is no substantial change in the wording of the provisions.
Lately, this Court speaking through Mr. Justice J.B.L. Reyes in Tirona v. Cudiamat,4 required the acceptance of the
certificates in payment of real estate taxes, reversing the rule enunciated in the Gella case with regard to the nonapplicability of real estate taxes on the ground that the debts were not subsisting at the time of the approval of the
Act. Quoting Section 2 of Republic Act 304, as amended by Republic Act 897, this Court held in said Tironacase that
while the applicability of the backpay certificates to the payment of the holder's obligation to the Government or any
of its branches or instrumentalities, is limited to those subsisting at the time of the approval of the Act the statute
also declares the applicability of such certificates to the payment by the holder of "his taxes" without any specific
limitation. Had the Legislature intended also to limit the payment of taxes, it would have so expressed as it did with
regard to obligations.
It is also claimed that the respondents are not bound to accept the backpay certificates, arguing that according to
Section 2 of the Act, as amended, certificates may be paid for "obligations subsisting at the approval of this act for
which the applicant may be directly liable to the Government or to any of its branches or instrumentalities or the
corporations owned or controlled by the Government or to any citizen of the Philippines or to any association or
corporation organized under the laws of the Philippines who may be willing to accept the same for such settlement."
Contrary to their allegations of discretion in acceptance, it has already been settled that the phrase "who may be
willing to accept the same for settlement" in Section 2 refers only to "any citizen of the Philippines or any association
or corporation organized under the laws of the Philippines", and not to the Government government or any of its
agencies. 5
Furthermore, Section 2 of Republic Act 304, as amended, states that the backpay certificates shall be redeemed by
the Government of the Philippines. "Government of the Philippines" refers to that governmental entity through which
the functions of the government are exercised as an attribute of sovereignty, and in this are included those arms
through which political authority is made effective whether they be provincial, municipal or other form of local
government. 6 Thus, the phrase includes even the City of Manila.
Respondents fear disadvantageous effects of compulsory acceptance of the certificates on its treasury. As stated in
the Tirona case, whatever unfavorable effects the acceptance of the certificates may have on the City's finances, the
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effects must be deemed to have been intended by the Legislature, which, after all, has full control over Cities and
Municipalities in these matters.
That the compulsory acceptance by the City of Manila of the backpay certificates would be an impairment of
obligations of contracts is not tenable because the City of Manila cannot be classified as falling under the phrase
"any citizen, association, or corporation" which are not Government entities or owned or controlled by the
Government. 7
WHEREFORE, the decision appealed from is hereby affirmed. No costs. So ordered.
D. Power of Taxation Compared with Other Powers

1. Police Power
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, 1and
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-vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/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
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(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 Group 8 (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 P0.0025 per kilowatt-hour (/kWh), or a
total of P119,488,847.59, 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 Order 12 in ERC Case No. 2002-165 provisionally approving the
computed amount of P0.0168/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 P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatthour provisionally authorized by the Commission in the said Order. Accordingly, a total amount ofP0.0373 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 P0.0373 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
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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
toP70,000,000.00 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 selfgenerating 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
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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 funds 20 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.
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Article VIII, Section 5(1) and (2) of the 1987 Constitution 27 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 States 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
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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.38In 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 Osmea 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
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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.
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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 EPIRA 50 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;" 57and "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 ERCs 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:
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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 Resolution 64 of August 3, 2004.65Moreover, 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 capitalintensive 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
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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.68Indubitably, 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.
G.R. No. 166006
March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner,

vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes,
executive orders, presidential decrees and other issuances. The Constitution vests that power not only in the
Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) affirming
with modification that of the RTC in Makati City,2 finding petitioner Planters Products, Inc. (PPI) liable to private
respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws. 3 They
are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which
provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all
grades of fertilizers in the Philippines.4 The LOI provides:
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3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution
component of not less than P10 per bag. This capital contribution shall be collected until adequate capital is raised
to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and
Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to
accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against FPA and PPI with the RTC in Makati. It questioned the
constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that
amounted to a denial of due process of law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned
corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise
of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate
consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the
defendant Planters Product, Inc., ordering the latter to pay the former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC
invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the
exercise of the power of taxation. It is a settled principle that the power of taxation by the state is plenary.
Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the
legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent
limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes may
not be levied for purely private purposes, for building up of private fortunes, or for the redress of private wrongs.
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They cannot be levied for the improvement of private property, or for the benefit, and promotion of private
enterprises, except where the aid is incident to the public benefit. It is well-settled principle of constitutional law that
no general tax can be levied except for the purpose of raising money which is to be expended for public use. Funds
cannot be exacted under the guise of taxation to promote a purpose that is not of public interest. Without such
limitation, the power to tax could be exercised or employed as an authority to destroy the economy of the people. A
tax, however, is not held void on the ground of want of public interest unless the want of such interest is clear. (71
Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority pursuant to
the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to the defendant
Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465
the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer by the amount
of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic corporation, became richer by
the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident that LOI
1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and orders that the said amount
should go to the defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax can be
levied only for a public purpose and not to benefit, aid and promote a private enterprise such as Planters Product,
Inc.12
PPI moved for reconsideration but its motion was denied. 13 PPI then filed a notice of appeal with the RTC but it failed
to pay the requisite appeal docket fee. In a separate but related proceeding, this Court 14 allowed the appeal of PPI
and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the
following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the award of attorneys fees is hereby DELETED.15
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality
of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially determine the
constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the constitutionality of a
law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional questions
and to presume that the acts of political departments are valid, absent a clear and unmistakable showing to the
contrary.
However, the courts are not precluded from exercising such power when the following requisites are obtaining in a
controversy before it: First, there must be before the court an actual case calling for the exercise of judicial review.
Second, the question must be ripe for adjudication. Third, the person challenging the validity of the act must have
standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity; and
lastly, the issue of constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora,
338 SCRA 81 [2000]).
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Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the
complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment. Consequently, the requisite that the constitutionality of the law in question be
the very lis mota of the case is present, making it proper for the trial court to rule on the constitutionality of LOI
1465.16
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still
unconstitutional because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was an invalid
exercise of the States power of taxation inasmuch as it violated the inherent and constitutional prescription that
taxes be levied only for public purposes. It reasoned out that the amount collected under the levy was remitted to
the depository bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise of police power. In
addition, it disputes the court a quos findings arguing that the collections under LOI 1465 was for the benefit of
Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock
ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been characterized as the most
essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It may be
exercised as long as the activity or the property sought to be regulated has some relevance to public welfare
(Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the
concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the test to determine the
validity of a police measure as follows: (1) the interests of the public generally, as distinguished from those of a
particular class, requires its exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals (National Development Company v.
Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be
sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public
interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote
the public welfare. The governments commitment to support the successful rehabilitation and continued viability of
PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to
treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or
even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of
police power becomes a travesty which must be struck down for being an arbitrary exercise of government
power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters
Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated
(PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PFI on the strength
of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the
Secretary of Justice in an Opinion dated October 12, 1987, to wit:
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"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer
pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding
the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc.
(Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the
continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which will be added to the price of
all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In this connection,
the Republic hereby acknowledges that the advances by Planters to Planters Foundation which were applied to the
payment of the Planters shares now held in trust by Planters Foundation, have been assigned to, among others, the
Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery
component in the special trust account designated in the notice dated April 2, 1985, addressed by counsel for the
Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of each
month.
The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid
Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the
date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing
clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of
servicing its debts, taking into account both its peso and foreign currency-denominated obligations." (Records, pp.
42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata taken
together with the Justice Secretarys Opinion does not preponderantly demonstrate that the collections made were
held in trust in favor of millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to
establish its claims, this Court is constrained to rely on what is explicitly provided in LOI 1465 that one of the
primary aims in imposing the levy is to support the successful rehabilitation and continued viability of PPI. 18
PPI moved for reconsideration but its motion was denied. 19 It then filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A
DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED
BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND
DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN
TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID
LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
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III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE
GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF
"OPERATIVE FACT" PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE
INSTANT CASE.20 (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional
issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality
which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not
have a "personal and substantial interest in the case or will sustain direct injury as a result of its enforcement." 21 It
asserts that Fertiphil did not suffer any damage from the CRC imposition because "incidence of the levy fell on the
ultimate consumer or the farmers themselves, not on the seller fertilizer company." 22
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been adequately
discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material
interest in the outcome of a case. In private suits, locus standi requires a litigant to be a "real party in interest," which
is defined as "the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the
avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public
right on behalf of the general public because of conflicting public policy issues. 24 On one end, there is the right of
the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At
the other end, there is the public policy precluding excessive judicial interference in official acts, which may
unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public suits. In People v.
Vera,25 it was held that a person who impugns the validity of a statute must have "a personal and substantial interest
in the case such that he has sustained, or will sustain direct injury as a result." The "direct injury test" in public suits
is similar to the "real party in interest" rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil
Procedure.26
Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court relaxed the
requirement in cases of "transcendental importance" or with "far reaching implications." Being a mere procedural
technicality, it has also been held that locus standi may be waived in the public interest. 27
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to
file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, theP10
levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or
all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI
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or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe
sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product
the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in
adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers
may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the
business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this
Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not
only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President
Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text
of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made
dependent and conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution
shall be collected until adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to
squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere
procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is the lis
mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. 28 Alternatively, the resolution
of the constitutional issue is not necessary for a determination of the complaint for collection. 29
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the
constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim
without resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an
executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide,final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power of judicial
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review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts. 32
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs, 33 this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of a rule
or regulation issued by administrative agencies. Such jurisdiction, however, is not limited to the Court of Appeals or
to this Court alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of
rules promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial review or the power
to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. 34
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the
actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in
criminal actions, as in People v. Ferrer35 involving the constitutionality of the now defunct Anti-Subversion law, or in
ordinary actions, as in Krivenko v. Register of Deeds36 involving the constitutionality of laws prohibiting aliens from
acquiring public lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and
(b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis
mota presented.37
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint for
collection filed with the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the Philippines,
isunlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and
disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and were
then exerting all efforts and maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been
presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to illegal
exaction amounting to a denial of due process since the persons of entities which had to bear the burden of paying
the CRC derived no benefit therefrom; that on the contrary it was used by PPI in trying to regain its former
despicable monopoly of the fertilizer industry to the detriment of other distributors and importers. 38 (Underscoring
supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the
complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no
legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law
being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the
very lis mota of the complaint with the RTC.
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The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that the
LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for
benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company. The
levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the
police power, it is still unconstitutional because it did not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and have
different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal
liberty or property in order to promote the general welfare,39 while the power of taxation is the power to levy taxes to
be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while
taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a
law enacted under the police power.40 The power of taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is
true that the power of taxation can be used as an implement of police power,41 the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. 42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration fee is not an exercise by
the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation
and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree,
pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even
though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is
primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly
called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to
the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types of motor
vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code
as taxes like the motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the expenditures
of the Land Transportation Commission as provided for in the last proviso of Sec. 61. 44 (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a
big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five
percent.45 A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI
expressly provided that the levy was imposed "until adequate capital is raised to make PPI viable."
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Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public
purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They
cannot be used for purely private purposes or for the exclusive benefit of private persons. 46 The reason for this is
simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be
used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for
a private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on
the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and
build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called
taxation."47
The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards.
Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those
purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of
basic services, but also includes those purposes designed to promote social justice. Thus, public money may now
be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of the expansion of
government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands.
Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true
intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of
"public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the
RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit
from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution
component of not less than P10 per bag. This capital contribution shall be collected until adequate capital is raised
to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case, the
text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not
even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of
the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a private company
as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming
financially "viable." This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a
maximum amount when PPI is deemed financially "viable." Worse, the liability of Fertiphil and other domestic sellers
of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until adequate capital is
raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to
Far East Bank and Trust Company, the depositary bank of PPI.49 This proves that PPI benefited from the LOI. It is
also proves that the main purpose of the law was to give undue benefit and advantage to PPI.
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Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding 50 dated May
18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem because of its
huge corporate debts. There were pending petitions for rehabilitation against PPI before the Securities and
Exchange Commission. The government guaranteed payment of PPIs debts to its foreign creditors. To fund the
payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and agricultural
chemicals in the Philippines. As regards Planters, the Philippine Government confirms its awareness of the
following: (1) that Planters has outstanding obligations in foreign currency and/or pesos, to the Creditors, (2)
that Planters is currently experiencing financial difficulties, and (3) that there are presently pending with the
Securities and Exchange Commission of the Philippines a petition filed at Planters own behest for the suspension of
payment of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila
Offshore Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it considers and
continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your
expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic hereby manifests
its full and unqualified support of the successful rehabilitation and continuing viability of Planters, and to that end,
hereby binds and obligates itself to the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing
formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the
unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc.
("Planters Foundation"), which unpaid capital is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the "Unpaid Capital"), and subsequently for such capital increases as may be required for the
continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid
Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the
date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables, and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing
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clause (c), the "carrying cost" shall be at such rate as will represent the full and reasonable cost to Planters of
servicing its debts, taking into account both its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51
It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI.
We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country.
The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a
private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public
purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to
comply with the test of "lawful subjects" and "lawful means." Jurisprudence states the test as follows: (1) the interest
of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was
enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on this point,
thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be
sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public
interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote
the public welfare. The governments commitment to support the successful rehabilitation and continued viability of
PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to
treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or
even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of
police power becomes a travesty which must be struck down for being an arbitrary exercise of government
power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)
1awphil
The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on the
doctrine of operative fact, which provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.
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We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been
raised in the court a quo.53 PPI did not raise the applicability of the doctrine of operative fact with the RTC and the
CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional
law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces no
rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as
if it has not been passed.54 Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in
accordance with the general civil code principle against unjust enrichment. The general rule is supported by Article 7
of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by
disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall
govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play.55 It
nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination
of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past
cannot always be erased by a new judicial declaration.56
The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have
relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put
the accused in double jeopardy57 or would put in limbo the acts done by a municipality in reliance upon a law
creating it.58
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No. 1465.
It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its
bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly
enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that "every person who, through
an act of performance by another comes into possession of something at the expense of the latter without just or
legal ground shall return the same to him." We cannot allow PPI to profit from an unconstitutional law. Justice and
equity dictate that PPI must refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.
SO ORDERED.
G.R. No. L-7859
December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Felicisimo R. Rosete for appellee.
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REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our
industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the
"eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed
"to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and
"to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the
United States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a
graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of
lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be
known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the
following purposes or to attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial
position of the Philippine sugar in the United States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof
the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so
that all might continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and working
conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular
session of the National Assembly, make the necessary disbursements from the fund herein created (1) for
the establishment and operation of sugar experiment station or stations and the undertaking of researchers
(a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and
stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar
plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure
and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said agency or agencies.
31 | P a g e
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Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma,
seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public
purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First
Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is
a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will
show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in fields
and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange
needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent
for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and
in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be
readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain
(Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy
Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida
The protection of a large industry constituting one of the great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to
such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern,
it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no
relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally
valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S.
412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint;
indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the
expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke
Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization
Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is
being protected. It may be that other industries are also in need of similar protection; that the legislature is not
required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate
Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be
overthrown because there are other instances to which it might have been applied;" and that "the legislative
32 | P a g e
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authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to
experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of
allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without
any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
G.R. No. 175356
December 3, 2013
MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE SECRETARY OF
THE DEPARTMENT OF FINANCE, Respondents.
DECISION
DEL CASTILLO, J.:
When a party challeges the constitutionality of a law, the burden of proof rests upon him.
Before us is a Petition for Prohibition under Rule 65 of the Rules of Court filed by petitioners Manila Memorial Park,
Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the business of providing funeral and
burial services, against public respondents Secretaries of the Department of Social Welfare and Development
(DSWD) and the Department of Finance (DOF).
2
Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, as amended by RA 9257, and the
implementing rules and regulations issued by the DSWD and DOF insofar as these allow business establishments
to claim the 20% discount given to senior citizens as a tax deduction.
3
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services,
hotels and similar lodging establishment[s], restaurants and recreation centers and purchase of medicine anywhere
in the country: Provided, That private establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert
halls, circuses, carnivals and other similar places of culture, leisure, and amusement;
c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not
exceed the property level as determined by the National Economic and Development Authority (NEDA) for that year;
d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;
e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines to
be issued by the Department of Health, the Government Service Insurance System and the Social Security System;
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f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the
Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be,
as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of
RR No. 02-94 provide:
Sec. 2. DEFINITIONS. For purposes of these regulations: i. Tax Credit refers to the amount representing the
20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation
services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema
houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount
shall be deducted by the said establishments from their gross income for income tax purposes and from their gross
sales for value-added tax or other percentage tax purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING
REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. Private establishments, i.e., transport services, hotels and
similar lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of culture[,] leisure and amusement, giving 20% discounts to qualified
senior citizens are required to keep separate and accurate record[s] of sales made to senior citizens, which shall
include the name, identification number, gross sales/receipts, discounts, dates of transactions and invoice number
for every transaction. The amount of 20% discount shall be deducted from the gross income for income tax
purposes and from gross sales of the business enterprise concerned for purposes of the VAT and other percentage
taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation, the Court declared Sections 2(i) and 4 of
RR No. 02-94 as erroneous because these contravene RA 7432, thus:
5
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn,
the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny
such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent
discount that "shall be deducted by the said establishments from their gross income for income tax purposes and
from their gross sales for value-added tax or other percentage tax purposes." In ordinary business language, the tax
credit represents the amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations. By ordinary acceptation, a discount is an "abatement or
reduction made from the gross amount or value of anything." To be more precise, it is in business parlance "a
deduction or lowering of an amount of money;" or "a reduction from the full amount or value of something, especially
a price." In business there are many kinds of discount, the most common of which is that affecting the income
statement or financial report upon which the income tax is based.
xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,
the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to compute the gross income in the income statement
and cannot be deducted again, even for purposes of computing the income tax. When the law says that the cost of
the discount may be claimed as a tax credit, it means that the amount when claimed shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the tax 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
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Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of
harmony with the statute is a mere nullity;" it cannot prevail. It is a cardinal rule that courts "will and should respect
the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x
x." In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax
laws is crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or competence to
provide." The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be
followed by the courts. Courts, however, will not uphold these authorities interpretations when clearly absurd,
erroneous or improper. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of
RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled x x x the intent of
Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these
regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional
requirements not contemplated by the legislature.
In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or
any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.
7
On February 26, 2004, RA 9257 amended certain provisions of RA 7432, to wit:

8
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision
of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME.
Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale
of goods and/or services specified thereunder are entitled to deduct the said discount from gross income subject to
the following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR
CITIZEN shall be eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL
RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price
can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from
gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes.
(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is
granted.
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(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts,
sales discount granted, [date] of [transaction] and invoice number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods
and/or services may claim the said discount granted as deduction from gross income, namely:
xxxx
(i) Funeral parlors and similar establishments The beneficiary or any person who shall shoulder the funeral and
burial expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment, cremation
cost and other related services for the senior citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted under Rule V,
Section 4 Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections
10 and 11 Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services
rendered.
Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year
that the discount is granted; Provided, further, That the total amount of the claimed tax deduction net of value added
tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau of
Internal Revenue (BIR) and approved by the Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA
7432, as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be
declared unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior
citizens as a tax deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax
credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND
REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR
CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL.
9
Petitioners Arguments
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Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only
assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules
and regulations issued by the DSWD and the DOF.
10
Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which provides
that: "[p]rivate property shall not be taken for public use without just compensation."
11
In support of their position, petitioners cite Central Luzon Drug Corporation, where it was ruled that the 20%
discount privilege constitutes taking of private property for public use which requires the payment of just
compensation, and Carlos Superdrug Corporation v. Department of Social Welfare and Development, where it
was acknowledged that the tax deduction scheme does not meet the definition of just compensation.
12
13
14
15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation that the tax deduction scheme
adopted by the government is justified by police power.
16
17
They assert that "[a]lthough both police power and the power of eminent domain have the general welfare for their
object, there are still traditional distinctions between the two" and that "eminent domain cannot be made less
supreme than police power."
18
19
Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous contemporaneous
construction that prior payment of taxes is required for tax credit.
20
Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 and Article XIII, Section 11 of
the Constitution because it shifts the States constitutional mandate or duty of improving the welfare of the elderly to
the private sector.
21
22
23
Under the tax deduction scheme, the private sector shoulders 65% of the discount because only 35% of it is
actually returned by the government.
24
25
Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA 9257 affects the
businesses of petitioners.
26
Thus, there exists an actual case or controversy of transcendental importance which deserves judicious disposition
on the merits by the highest court of the land.
27
Respondents Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this
disregards the hierarchy of courts.
28
They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction
treatment is not a "fair and full equivalent of the loss sustained" by them.
29
As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that
petitioners failed to overturn its presumption of constitutionality.
30
More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the States police
power.
31
Our Ruling
The Petition lacks merit.
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There exists an actual case or controversy.
We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial review may be
availed of only if the following requisites concur: "(1) the existence of an actual and appropriate case; (2) the
existence of personal and substantial interest on the part of the party raising the [question of constitutionality]; (3)
recourse to judicial review is made at the earliest opportunity; and (4) the [question of constitutionality] is the lis
mota of the case."
32
In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and
the implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the
Petition on the ground that there is no actual case or controversy. We do not agree with respondents. An actual case
or controversy exists when there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of
judicial resolution."
33
The Petition must therefore show that "the governmental act being challenged has a direct adverse effect on the
individual challenging it."
34
In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them. Thus, it cannot
be denied that there exists an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of
police power of the State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior
citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation is
warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without
payment of just compensation. At the outset, we note that this question has been settled in Carlos Superdrug
Corporation.
35
In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and
capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to
provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners
arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme
as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on
the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an
amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of
tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but
merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a
just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner
by the expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be
taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private
38 | P a g e
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establishments the burden of partly subsidizing a government program. The Court believes so. The Senior Citizens
Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and
privileges to them for their improvement and well-being as the State considers them an integral part of our society.
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act
provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the Constitution, it is the
duty of the family to take care of its elderly members while the State may design programs of social security for
them. In addition to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall
provide social justice in all phases of national development." Further, Article XIII, Section 11, provides: "The State
shall adopt an integrated and comprehensive approach to health development which shall endeavor to make
essential goods, health and other social services available to all the people at affordable cost. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women and children." Consonant with these
constitutional principles the following are the declared policies of this Act:
(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to
actively seek their partnership.
To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals,
and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of
medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient
and flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been
described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner
of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow
to the primacy of police power because property rights, though sheltered by due process, must yield to general
welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere
plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover,
in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is
incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business,
because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have
not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage.
In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF
Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as
only P0.32 will be refunded by the government by way of a tax deduction. To illustrate this point, petitioner Carlos
Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example. According to the latter, it acquires
Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which
translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53 per
tablet will be refunded and not the full amount of the discount which is P7.92. In short, only 32% of the 20% discount
will be reimbursed to the drugstores. Petitioners computation is flawed. For purposes of reimbursement, the law
states that the cost of the discount shall be deducted from gross income, the amount of income derived from all
sources before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss
on a per transaction basis, which should not be the case. An income statement, showing an accounting of
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petitioners' sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of
the discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will
be operating at a loss should they give the discount. In addition, the computation was erroneously based on the
assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on
income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines
given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the
mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply
because they cannot afford to raise their prices for fear of losing their customers to competition. The Court is not
oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business which may result in an impairment of
property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for
the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of
contracts and public utilities, continuously serve as x x x reminder[s] that the right to property can be relinquished
upon the command of the State for the promotion of public good. Undeniably, the success of the senior citizens
program rests largely on the support imparted by petitioners and the other private establishments concerned. This
being the case, the means employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4 (a) of R.A.
No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act. (Bold in the original; underline supplied)
36
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of
the State.
No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug
Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation that the 20% discount is an
exercise of the power of eminent domain, thus, requiring the payment of just compensation. They urge us to reexamine our ruling in Carlos Superdrug Corporation which allegedly reversed the ruling in Central Luzon Drug
Corporation.
37
38
39
They also point out that Carlos Superdrug Corporation recognized that the tax deduction scheme under the
assailed law does not provide for sufficient just compensation. We agree with petitioners observation that there are
statements in Central Luzon Drug Corporation describing the 20% discount as an exercise of the power of eminent
domain, viz.:
40
41
[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as
their just compensation for private property taken by the State for public use. The concept of public use is no longer
confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers
and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or
benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount 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
40 | P a g e
TAXATION I
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues. Besides, the taxation power can also be used as an implement for the exercise of the
power of eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and
"clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to
realize social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment
under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under
our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not
intended to take away rights from a person and give them to another who is not entitled thereto." For this reason, a
just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our
legislators find support to realize social justice, and no administrative body can alter that fact. To put it differently, a
private establishment that merely breaks even without the discounts yet will surely start to incur losses
because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its sales
come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also
be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross
income or its gross sales. 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. (Italics in the
original; emphasis supplied)
42
The above was partly incorporated in our ruling in Carlos Superdrug Corporation when we stated preliminarily that
43
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and
capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to
provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners
arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme
as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on
the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible
expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an
amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of
tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but
merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a
just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner
by the expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be
taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government program. The Court believes so.
44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation that the 20% discount and tax deduction
scheme is a valid exercise of the police power of the State. The present case, thus, affords an opportunity for us to
clarify the above-quoted statements in Central Luzon Drug Corporation and Carlos Superdrug Corporation.
45
46
47
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation is obiter
dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation, we ruled that the BIR
acted ultra vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No.
2-94, despite the clear wording of the previous law that the same should be treated as a tax credit. We were,
therefore, not confronted in that case with the issue as to whether the 20% discount is an exercise of police power
48
49
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or eminent domain. Second, although we adverted to Central Luzon Drug Corporation in our ruling in Carlos
Superdrug Corporation, this referred only to preliminary matters. A fair reading of Carlos Superdrug
Corporation would show that we categorically ruled therein that the 20% discount is a valid exercise of police
power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme
under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private
establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just
compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug
Corporation and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners
arguments are a mere reiteration of those raised and resolved in Carlos Superdrug Corporation. Thus, we sustain
Carlos Superdrug Corporation.
50
51
52
53
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, 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.
56
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, regulated or restricted to promote public
welfare. In such cases, there is no compensable taking, hence, payment of just compensation is not required.
Examples of these regulations are property condemned for being noxious or intended for noxious purposes (e.g., a
building on the verge of collapse to be demolished for public safety, or obscene materials to be destroyed in the
interest of public morals) as well as zoning ordinances prohibiting the use of property for purposes injurious to the
health, morals or safety of the community (e.g., dividing a citys territory into residential and industrial areas).
65
66
67
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
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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 the government and a private company.
71
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 compensation in eminent domain evinces that these are
not static concepts. Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or
experiment with different measures to promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain. The judicious approach, therefore, is to look
at the nature and effects of the challenged governmental act and decide, on the basis thereof, whether the act is the
exercise of police power or eminent domain. Thus, we now look at the nature and effects of the 20% discount to
determine if it constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve
the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and
other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to mention
also that the discount serves to honor senior citizens who presumably spent the productive years of their lives on
contributing to the development and progress of the nation. This distinct cultural Filipino practice of honoring the
elderly is an integral part of this law. As to its nature and effects, the 20% discount is a regulation affecting the ability
of private establishments to price their products and services relative to a special class of individuals, senior
citizens, for which the Constitution affords preferential concern.
73
74
75
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 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 establishments profits or
78
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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 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.
80
81
The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-tocase 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 plants, challenged the
validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus twomonth 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.
83
84
We adopted a similar line of reasoning in Carlos Superdrug Corporation when we ruled that petitioners therein
failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a
financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was presented in
order to show that they would be operating at a loss due to the subject regulation or that the continued
implementation of the law would be 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
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 laws validity if any set of facts may be conceived to
sustain it.
85
86
87
On its face, we find that there are at least two conceivable bases to sustain the subject regulations 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
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tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary,
oppressive or confiscatory.
Conclusion
In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will
force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross
sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder
the subsidy for senior citizens. This, in petitioners view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more
importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial
review. In a way, this law pursues its social equity objective in a non-traditional manner unlike past and existing
direct subsidy programs of the government for the poor and marginalized sectors of our society. Verily, Congress
must be given sufficient leeway in formulating welfare legislations given the enormous challenges that the
government faces relative to, among others, resource adequacy and administrative capability in implementing social
reform measures which aim to protect and uphold the interests of those most vulnerable in our society. In the
process, the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his
share in supporting measures intended for the common good. This is only fair. In fine, without the requisite showing
of a clear and unequivocal breach of the Constitution, the validity of the assailed law must be sustained.
Refutation of the Dissent
The main points of Justice Carpios 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 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 establishments total revenue, arising from the mandatory discount, is a taking of private property for public
use or benefit, hence, an exercise of the power of eminent domain requiring the payment of just compensation. I We
maintain that the discussion on eminent domain in Central Luzon Drug Corporation is obiter dicta. As previously
discussed, in Central Luzon Drug Corporation, the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the
senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite the clear
provision in that law which stated
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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 by comparing the wording of the previous law vis-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
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show that the Court went on to state that the tax credit "can be deemed" as just compensation only to explain why
the previous law provides for a tax credit instead of a tax deduction. The Court surmised that the tax credit was a
form of just compensation given to the establishments covered by the 20% discount. However, the reason why the
previous law provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to whether
the revenue regulation contravenes the law. Hence, the discussion on eminent domain is obiter dicta.
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 "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 PagIBIG 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 Dissents 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.
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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 P10.00 to the general public, then
it shall be sold at P8.00 ( i.e., P10.00 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 P20.00 but is
required to sell it at P16.00 (i.e. , P20.00 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 P5.00 to produce and is sold at P10.00, then the
profit is P5.00 or a profit margin of 50%.
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Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens yet the business
would still earn P3.00 or a 30% profit margin. On the other hand, if the product costs P9.00 to produce and is
required to be sold at P8.00 to senior citizens, then the business would experience a loss of P1.00.
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103
104
But note that since not all customers of a business establishment are senior citizens, the business establishment
may continue to earn P1.00 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 P10.00 a piece to X and Y resulting
in income/gross sales of P20.00 (P10.00 + P10.00). With the passage of the law, A must now sell his product to X
at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales would be P18.00 (P8.00 +P10.00) or lower by P2.00.
To prevent this from happening, A decides to increase the price of his products toP11.11 per piece. Thus, he sells
his product to X at P8.89 (i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his income/gross sales would still
be P20.00 (P8.89 + P11.11). The capacity, then, of business 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.
105
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
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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 there are those who make more and, thus, would not be greatly affected
by this regulation).
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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 to operate at a loss.
111
112
Even the obiter in Central Luzon Drug Corporation, which the Dissent essentially adopts and relies on, is premised
on the permanent reduction of total revenues and the loss that business establishments will be forced to suffer in
arguing that the 20% discount constitutes a "taking" under the power of eminent domain. Thus, when the Dissent
now argues that the issue of profit or loss is immaterial, it contradicts itself because it later argues, in order to justify
that there is a "taking" under the power of eminent domain in this case, that the 20% discount forces business
establishments to suffer a significant loss or to operate at a loss. Second, this argument suffers from the same flaw
as the Dissent's original arguments. It is an erroneous characterization of the 20% discount. According to the
Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to business
establishments. However, as previously discussed, the 20% discount is not private property actually owned and/or
used by the business establishment. It should be distinguished from properties like lands or buildings actually used
in the operation of a business establishment which, if appropriated for public use, would amount to a "taking" under
the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts the pricing and,
hence, the profitability of business establishments. At the time the discount is imposed, no particular property of the
business establishment can be said to be "taken." That is, the State does not acquire or take anything from the
business establishment in the way that it takes a piece of private land to build a public road. While the 20% discount
may form part of the potential profits or income/gross sales of the business establishment, as similarly
characterized by Justice Bersamin in his Concurring Opinion, potential profits or income/gross sales are not private
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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
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The above paragraph, in full, states
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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--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
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 P5.00 to produce a product and it sells the same at P10.00 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 P7.00 to produce the same product. The profit per product of the company would be reduced to P3.00 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,
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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 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 that requires
the State to pay just compensation," then these statutory provisions would, likewise, have to be declared
unconstitutional. It does not matter that these benefits are deemed part of the employees legislated wages because
the net effect is the same, that is, it leads to higher labor costs and a permanent reduction in the profits or
income/gross sales of the business establishments.
120
121
122
The point then is this most, if not all, regulatory measures imposed by the State on business establishments
impact, at some level, the latters prices and/or profits or income/gross sales.
123
If the Court were to sustain the Dissents 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 Corporation consistent with long standing principles in police
power and eminent domain analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be
clearly shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof which petitioners failed to do. A law,
which has been in operation for many years and promotes the welfare of a group accorded special concern by the
Constitution, cannot and should not be summarily invalidated on a mere allegation that it reduces the profits or
income/gross sales of business establishments.
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WHEREFORE, the Petition is hereby DISMISSED for lack of merit.
SO ORDERED.
2. Power of Eminent Domain

G.R. No. 166429 December 19, 2005
REPUBLIC OF THE PHILIPPINES, Represented by Executive Secretary Eduardo R. Ermita, the
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS (DOTC), and the MANILA INTERNATIONAL
AIRPORT AUTHORITY (MIAA), Petitioners,
vs.
HON. HENRICK F. GINGOYON, In his capacity as Presiding Judge of the Regional Trial Court, Branch 117,
Pasay City and PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., Respondents.
DECISION
TINGA, J.:
The Ninoy Aquino International Airport Passenger Terminal III (NAIA 3) was conceived, designed and constructed to
serve as the countrys show window to the world. Regrettably, it has spawned controversies. Regrettably too,
despite the apparent completion of the terminal complex way back it has not yet been operated. This has caused
immeasurable economic damage to the country, not to mention its deplorable discredit in the international
community.
In the first case that reached this Court, Agan v. PIATCO,1 the contracts which the Government had with the
contractor were voided for being contrary to law and public policy. The second case now before the Court involves
the matter of just compensation due the contractor for the terminal complex it built. We decide the case on the basis
of fairness, the same norm that pervades both the Courts 2004 Resolution in the first case and the latest
expropriation law.
The present controversy has its roots with the promulgation of the Courts decision in Agan v. PIATCO,2promulgated
in 2003 (2003 Decision). This decision nullified the "Concession Agreement for the Build-Operate-and-Transfer
Arrangement of the Ninoy Aquino International Airport Passenger Terminal III" entered into between the Philippine
Government (Government) and the Philippine International Air Terminals Co., Inc. (PIATCO), as well as the
amendments and supplements thereto. The agreement had authorized PIATCO to build a new international airport
terminal (NAIA 3), as well as a franchise to operate and maintain the said terminal during the concession period of
25 years. The contracts were nullified, among others, that Paircargo Consortium, predecessor of PIATCO, did not
possess the requisite financial capacity when it was awarded the NAIA 3 contract and that the agreement was
contrary to public policy.3
At the time of the promulgation of the 2003 Decision, the NAIA 3 facilities had already been built by PIATCO and
were nearing completion.4 However, the ponencia was silent as to the legal status of the NAIA 3 facilities following
the nullification of the contracts, as well as whatever rights of PIATCO for reimbursement for its expenses in the
construction of the facilities. Still, in his Separate Opinion, Justice Panganiban, joined by Justice Callejo, declared as
follows:
Should government pay at all for reasonable expenses incurred in the construction of the Terminal? Indeed
it should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in particular, its funders,
contractors and investors both local and foreign. After all, there is no question that the State needs and will
make use of Terminal III, it being part and parcel of the critical infrastructure and transportation-related programs of
government.5
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PIATCO and several respondents-intervenors filed their respective motions for the reconsideration of the 2003
Decision. These motions were denied by the Court in its Resolution dated 21 January 2004 (2004
Resolution).6However, the Court this time squarely addressed the issue of the rights of PIATCO to refund,
compensation or reimbursement for its expenses in the construction of the NAIA 3 facilities. The holding of the Court
on this crucial point follows:
This Court, however, is not unmindful of the reality that the structures comprising the NAIA IPT III facility
are almost complete and that funds have been spent by PIATCO in their construction. For the government
to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures. The
compensation must be just and in accordance with law and equity for the government can not unjustly
enrich itself at the expense of PIATCO and its investors.7
After the promulgation of the rulings in Agan, the NAIA 3 facilities have remained in the possession of PIATCO,
despite the avowed intent of the Government to put the airport terminal into immediate operation. The Government
and PIATCO conducted several rounds of negotiation regarding the NAIA 3 facilities. 8 It also appears that arbitral
proceedings were commenced before the International Chamber of Commerce International Court of Arbitration and
the International Centre for the Settlement of Investment Disputes,9 although the Government has raised
jurisdictional questions before those two bodies.10
Then, on 21 December 2004, the Government11 filed a Complaint for expropriation with the Pasay City Regional Trial
Court (RTC), together with an Application for Special Raffle seeking the immediate holding of a special raffle. The
Government sought upon the filing of the complaint the issuance of a writ of possession authorizing it to take
immediate possession and control over the NAIA 3 facilities.
The Government also declared that it had deposited the amount of P3,002,125,000.0012 (3 Billion)13 in Cash with the
Land Bank of the Philippines, representing the NAIA 3 terminals assessed value for taxation purposes. 14
The case15 was raffled to Branch 117 of the Pasay City RTC, presided by respondent judge Hon. Henrick F.
Gingoyon (Hon. Gingoyon). On the same day that the Complaint was filed, the RTC issued an Order16 directing the
issuance of a writ of possession to the Government, authorizing it to "take or enter upon the possession" of the
NAIA 3 facilities. Citing the case of City of Manila v. Serrano,17 the RTC noted that it had the ministerial duty to issue
the writ of possession upon the filing of a complaint for expropriation sufficient in form and substance, and upon
deposit made by the government of the amount equivalent to the assessed value of the property subject to
expropriation. The RTC found these requisites present, particularly noting that "[t]he case record shows that [the
Government has] deposited the assessed value of the [NAIA 3 facilities] in the Land Bank of the Philippines, an
authorized depositary, as shown by the certification attached to their complaint." Also on the same day, the RTC
issued a Writ of Possession. According to PIATCO, the Government was able to take possession over the NAIA 3
facilities immediately after the Writ of Possession was issued.18
However, on 4 January 2005, the RTC issued another Order designed to supplement its 21 December
2004Order and the Writ of Possession. In the 4 January 2005 Order, now assailed in the present petition, the RTC
noted that its earlier issuance of its writ of possession was pursuant to Section 2, Rule 67 of the 1997 Rules of Civil
Procedure. However, it was observed that Republic Act No. 8974 (Rep. Act No. 8974), otherwise known as "An Act
to Facilitate the Acquisition of Right-of-Way, Site or Location for National Government Infrastructure Projects and For
Other Purposes" and its Implementing Rules and Regulations (Implementing Rules) had amended Rule 67 in many
respects.
There are at least two crucial differences between the respective procedures under Rep. Act No. 8974 and Rule 67.
Under the statute, the Government is required to make immediate payment to the property owner upon the filing of
the complaint to be entitled to a writ of possession, whereas in Rule 67, the Government is required only to make an
initial deposit with an authorized government depositary. Moreover, Rule 67 prescribes that the initial deposit be
equivalent to the assessed value of the property for purposes of taxation, unlike Rep. Act No. 8974 which provides,
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as the relevant standard for initial compensation, the market value of the property as stated in the tax declaration or
the current relevant zonal valuation of the Bureau of Internal Revenue (BIR), whichever is higher, and the value of
the improvements and/or structures using the replacement cost method.
Accordingly, on the basis of Sections 4 and 7 of Rep. Act No. 8974 and Section 10 of the Implementing Rules, the
RTC made key qualifications to its earlier issuances. First, it directed the Land Bank of the Philippines, Baclaran
Branch (LBP-Baclaran), to immediately release the amount of US$62,343,175.77 to PIATCO, an amount which the
RTC characterized as that which the Government "specifically made available for the purpose of this expropriation;"
and such amount to be deducted from the amount of just compensation due PIATCO as eventually determined by
the RTC. Second, the Government was directed to submit to the RTC a Certificate of Availability of Funds signed by
authorized officials to cover the payment of just compensation. Third, the Government was directed "to maintain,
preserve and safeguard" the NAIA 3 facilities or "perform such as acts or activities in preparation for their direct
operation" of the airport terminal, pending expropriation proceedings and full payment of just compensation.
However, the Government was prohibited "from performing acts of ownership like awarding concessions or leasing
any part of [NAIA 3] to other parties."19
The very next day after the issuance of the assailed 4 January 2005 Order, the Government filed an Urgent Motion
for Reconsideration, which was set for hearing on 10 January 2005. On 7 January 2005, the RTC issued
another Order, the second now assailed before this Court, which appointed three (3) Commissioners to ascertain
the amount of just compensation for the NAIA 3 Complex. That same day, the Government filed a Motion for
Inhibition of Hon. Gingoyon.
The RTC heard the Urgent Motion for Reconsideration and Motion for Inhibition on 10 January 2005. On the same
day, it denied these motions in an Omnibus Order dated 10 January 2005. This is the third Order now assailed
before this Court. Nonetheless, while the Omnibus Order affirmed the earlier dispositions in the 4 January
2005 Order, it excepted from affirmance "the superfluous part of the Order prohibiting the plaintiffs from awarding
concessions or leasing any part of [NAIA 3] to other parties." 20
Thus, the present Petition for Certiorari and Prohibition under Rule 65 was filed on 13 January 2005. The petition
prayed for the nullification of the RTC orders dated 4 January 2005, 7 January 2005, and 10 January 2005, and for
the inhibition of Hon. Gingoyon from taking further action on the expropriation case. A concurrent prayer for the
issuance of a temporary restraining order and preliminary injunction was granted by this Court in a Resolutiondated
14 January 2005.21
The Government, in imputing grave abuse of discretion to the acts of Hon. Gingoyon, raises five general arguments,
to wit:
(i) that Rule 67, not Rep. Act No. 8974, governs the present expropriation proceedings;
(ii) that Hon. Gingoyon erred when he ordered the immediate release of the amount of US$62.3 Million to PIATCO
considering that the assessed value as alleged in the complaint was only P3 Billion;
(iii) that the RTC could not have prohibited the Government from enjoining the performance of acts of ownership;
(iv) that the appointment of the three commissioners was erroneous; and
(v) that Hon. Gingoyon should be compelled to inhibit himself from the expropriation case. 22
Before we delve into the merits of the issues raised by the Government, it is essential to consider the crucial holding
of the Court in its 2004 Resolution in Agan, which we repeat below:
This Court, however, is not unmindful of the reality that the structures comprising the NAIA IPT III facility are almost
complete and that funds have been spent by PIATCO in their construction. For the government to take over the
said facility, it has to compensate respondent PIATCO as builder of the said structures. The compensation
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must be just and in accordance with law and equity for the government can not unjustly enrich itself at the
expense of PIATCO and its investors.23
This pronouncement contains the fundamental premises which permeate this decision of the Court. Indeed, Agan,
final and executory as it is, stands as governing law in this case, and any disposition of the present petition must
conform to the conditions laid down by the Court in its 2004 Resolution.
The 2004 Resolution Which Is
Law of This Case Generally
Permits Expropriation
The pronouncement in the 2004 Resolution is especially significant to this case in two aspects, namely: (i)
that PIATCO must receive payment of just compensation determined in accordance with law and equity;
and (ii) that the government is barred from taking over NAIA 3 until such just compensation is paid. The
parties cannot be allowed to evade the directives laid down by this Court through any mode of judicial action, such
as the complaint for eminent domain.
It cannot be denied though that the Court in the 2004 Resolution prescribed mandatory guidelines which the
Government must observe before it could acquire the NAIA 3 facilities. Thus, the actions of respondent judge under
review, as well as the arguments of the parties must, to merit affirmation, pass the threshold test of whether such
propositions are in accord with the 2004 Resolution.
The Government does not contest the efficacy of this pronouncement in the 2004 Resolution,24 thus its application
to the case at bar is not a matter of controversy. Of course, questions such as what is the standard of "just
compensation" and which particular laws and equitable principles are applicable, remain in dispute and shall be
resolved forthwith.
The Government has chosen to resort to expropriation, a remedy available under the law, which has the added
benefit of an integrated process for the determination of just compensation and the payment thereof to PIATCO. We
appreciate that the case at bar is a highly unusual case, whereby the Government seeks to expropriate a building
complex constructed on land which the State already owns. 25 There is an inherent illogic in the resort to eminent
domain on property already owned by the State. At first blush, since the State already owns the property on which
NAIA 3 stands, the proper remedy should be akin to an action for ejectment.
However, the reason for the resort by the Government to expropriation proceedings is understandable in this case.
The 2004 Resolution, in requiring the payment of just compensation prior to the takeover by the Government of
NAIA 3, effectively precluded it from acquiring possession or ownership of the NAIA 3 through the unilateral exercise
of its rights as the owner of the ground on which the facilities stood. Thus, as things stood after the 2004 Resolution,
the right of the Government to take over the NAIA 3 terminal was preconditioned by lawful order on the payment of
just compensation to PIATCO as builder of the structures.
The determination of just compensation could very well be agreed upon by the parties without judicial intervention,
and it appears that steps towards that direction had been engaged in. Still, ultimately, the Government resorted to its
inherent power of eminent domain through expropriation proceedings. Is eminent domain appropriate in the first
place, with due regard not only to the law on expropriation but also to the Courts 2004 Resolution in Agan?
The right of eminent domain extends to personal and real property, and the NAIA 3 structures, adhered as they are
to the soil, are considered as real property.26 The public purpose for the expropriation is also beyond dispute. It
should also be noted that Section 1 of Rule 67 (on Expropriation) recognizes the possibility that the property sought
to be expropriated may be titled in the name of the
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Republic of the Philippines, although occupied by private individuals, and in such case an averment to that effect
should be made in the complaint. The instant expropriation complaint did aver that the NAIA 3 complex "stands on a
parcel of land owned by the Bases Conversion Development Authority, another agency of [the Republic of the
Philippines]."27
Admittedly, eminent domain is not the sole judicial recourse by which the Government may have acquired the NAIA
3 facilities while satisfying the requisites in the 2004 Resolution. Eminent domain though may be the most effective,
as well as the speediest means by which such goals may be accomplished. Not only does it enable immediate
possession after satisfaction of the requisites under the law, it also has a built-in procedure through which just
compensation may be ascertained. Thus, there should be no question as to the propriety of eminent domain
proceedings in this case.
Still, in applying the laws and rules on expropriation in the case at bar, we are impelled to apply or construe these
rules in accordance with the Courts prescriptions in the 2004 Resolution to achieve the end effect that the
Government may validly take over the NAIA 3 facilities. Insofar as this case is concerned, the 2004 Resolution is
effective not only as a legal precedent, but as the source of rights and prescriptions that must be guaranteed, if not
enforced, in the resolution of this petition. Otherwise, the integrity and efficacy of the rulings of this Court will be
severely diminished.
It is from these premises that we resolve the first question, whether Rule 67 of the Rules of Court or Rep. Act No.
8974 governs the expropriation proceedings in this case.
Application of Rule 67 Violates
the 2004 Agan Resolution
The Government insists that Rule 67 of the Rules of Court governs the expropriation proceedings in this case to the
exclusion of all other laws. On the other hand, PIATCO claims that it is Rep. Act No. 8974 which does apply. Earlier,
we had adverted to the basic differences between the statute and the procedural rule. Further elaboration is in order.
Rule 67 outlines the procedure under which eminent domain may be exercised by the Government. Yet by no
means does it serve at present as the solitary guideline through which the State may expropriate private property.
For example, Section 19 of the Local Government Code governs as to the exercise by local government units of the
power of eminent domain through an enabling ordinance. And then there is Rep. Act No. 8974, which covers
expropriation proceedings intended for national government infrastructure projects.
Rep. Act No. 8974, which provides for a procedure eminently more favorable to the property owner than Rule 67,
inescapably applies in instances when the national government expropriates property "for national government
infrastructure projects."28 Thus, if expropriation is engaged in by the national government for purposes other than
national infrastructure projects, the assessed value standard and the deposit mode prescribed in Rule 67 continues
to apply.
Under both Rule 67 and Rep. Act No. 8974, the Government commences expropriation proceedings through the
filing of a complaint. Unlike in the case of local governments which necessitate an authorizing ordinance before
expropriation may be accomplished, there is no need under Rule 67 or Rep. Act No. 8974 for legislative
authorization before the Government may proceed with a particular exercise of eminent domain. The most crucial
difference between Rule 67 and Rep. Act No. 8974 concerns the particular essential step the Government has to
undertake to be entitled to a writ of possession.
The first paragraph of Section 2 of Rule 67 provides:
SEC. 2. Entry of plaintiff upon depositing value with authorized government depository. Upon the filing of the
complaint or at any time thereafter and after due notice to the defendant, the plaintiff shall have the right to take or
enter upon the possession of the real property involved if he deposits with the authorized government
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depositary an amount equivalent to the assessed value of the property for purposes of taxation to be held
by such bank subject to the orders of the court. Such deposit shall be in money, unless in lieu thereof the
court authorizes the deposit of a certificate of deposit of a government bank of the Republic of the
Philippines payable on demand to the authorized government depositary.
In contrast, Section 4 of Rep. Act No. 8974 relevantly states:
SEC. 4. Guidelines for Expropriation Proceedings. Whenever it is necessary to acquire real property for the rightof-way, site or location for any national government infrastructure project through expropriation, the appropriate
proceedings before the proper court under the following guidelines:
a) Upon the filing of the complaint, and after due notice to the defendant, the implementing agency shall
immediately pay the owner of the property the amount equivalent to the sum of (1) one hundred percent (100%) of
the value of the property based on the current relevant zonal valuation of the Bureau of Internal Revenue (BIR); and
(2) the value of the improvements and/or structures as determined under Section 7 hereof;
...
c) In case the completion of a government infrastructure project is of utmost urgency and importance, and there is
no existing valuation of the area concerned, the implementing agency shall immediately pay the owner of the
property its proffered value taking into consideration the standards prescribed in Section 5 hereof.
Upon completion with the guidelines abovementioned, the court shall immediately issue to the implementing agency
an order to take possession of the property and start the implementation of the project.
Before the court can issue a Writ of Possession, the implementing agency shall present to the court a certificate of
availability of funds from the proper official concerned.
...
As can be gleaned from the above-quoted texts, Rule 67 merely requires the Government to deposit with an
authorized government depositary the assessed value of the property for expropriation for it to be entitled to a writ of
possession. On the other hand, Rep. Act No. 8974 requires that the Government make a direct payment to the
property owner before the writ may issue. Moreover, such payment is based on the zonal valuation of the BIR in the
case of land, the value of the improvements or structures under the replacement cost method, 29 or if no such
valuation is available and in cases of utmost urgency, the proffered value of the property to be seized.
It is quite apparent why the Government would prefer to apply Rule 67 in lieu of Rep. Act No. 8974. Under Rule 67,
it would not be obliged to immediately pay any amount to PIATCO before it can obtain the writ of possession since
all it need do is deposit the amount equivalent to the assessed value with an authorized government depositary.
Hence, it devotes considerable effort to point out that Rep. Act No. 8974 does not apply in this case, notwithstanding
the undeniable reality that NAIA 3 is a national government project. Yet, these efforts fail, especially considering the
controlling effect of the 2004 Resolution in Agan on the adjudication of this case.
It is the finding of this Court that the staging of expropriation proceedings in this case with the exclusive use of Rule
67 would allow for the Government to take over the NAIA 3 facilities in a fashion that directly rebukes our 2004
Resolution in Agan. This Court cannot sanction deviation from its own final and executory orders.
Section 2 of Rule 67 provides that the State "shall have the right to take or enter upon the possession of the real
property involved if [the plaintiff] deposits with the authorized government depositary an amount equivalent to the
assessed value of the property for purposes of taxation to be held by such bank subject to the orders of the
court."30 It is thus apparent that under the provision, all the Government need do to obtain a writ of possession is to
deposit the amount equivalent to the assessed value with an authorized government depositary.
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Would the deposit under Section 2 of Rule 67 satisfy the requirement laid down in the 2004 Resolution that "[f]or the
government to take over the said facility, it has to compensate respondent PIATCO as builder of the said
structures"? Evidently not.
If Section 2 of Rule 67 were to apply, PIATCO would be enjoined from receiving a single centavo as just
compensation before the Government takes over the NAIA 3 facility by virtue of a writ of possession. Such an
injunction squarely contradicts the letter and intent of the 2004 Resolution. Hence, the position of the Government
sanctions its own disregard or violation the prescription laid down by this Court that there must first be just
compensation paid to PIATCO before the Government may take over the NAIA 3 facilities.
Thus, at the very least, Rule 67 cannot apply in this case without violating the 2004 Resolution. Even assuming that
Rep. Act No. 8974 does not govern in this case, it does not necessarily follow that Rule 67 should then apply. After
all, adherence to the letter of Section 2, Rule 67 would in turn violate the Courts requirement in the 2004 Resolution
that there must first be payment of just compensation to PIATCO before the Government may take over the
property.
It is the plain intent of Rep. Act No. 8974 to supersede the system of deposit under Rule 67 with the scheme of
"immediate payment" in cases involving national government infrastructure projects. The following portion of the
Senate deliberations, cited by PIATCO in its Memorandum, is worth quoting to cogitate on the purpose behind the
plain meaning of the law:
THE CHAIRMAN (SEN. CAYETANO). "x x x Because the Senate believes that, you know, we have to pay the
landowners immediately not by treasury bills but by cash.
Since we are depriving them, you know, upon payment, no, of possession, we might as well pay them as
much, no, hindi lang 50 percent.
xxx
THE CHAIRMAN (REP. VERGARA). Accepted.
xxx
THE CHAIRMAN (SEN. CAYETANO). Oo. Because this is really in favor of the landowners, e.
THE CHAIRMAN (REP. VERGARA). Thats why we need to really secure the availability of funds.
xxx
THE CHAIRMAN (SEN. CAYETANO). No, no. Its the same. It says here: iyong first paragraph, diba? Iyong
zonal talagang magbabayad muna. In other words, you know, there must be a payment kaagad. (TSN,
Bicameral Conference on the Disagreeing Provisions of House Bill 1422 and Senate Bill 2117, August 29, 2000, pp.
14-20)
xxx
THE CHAIRMAN (SEN. CAYETANO). Okay, okay, no. Unang-una, it is not deposit, no. Its payment."
REP. BATERINA. Its payment, ho, payment." (Id., p. 63)31
It likewise bears noting that the appropriate standard of just compensation is a substantive matter. It is well within
the province of the legislature to fix the standard, which it did through the enactment of Rep. Act No. 8974.
Specifically, this prescribes the new standards in determining the amount of just compensation in expropriation
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cases relating to national government infrastructure projects, as well as the manner of payment thereof. At the same
time, Section 14 of the Implementing Rules recognizes the continued applicability of Rule 67 on procedural aspects
when it provides "all matters regarding defenses and objections to the complaint, issues on uncertain ownership and
conflicting claims, effects of appeal on the rights of the parties, and such other incidents affecting the complaint shall
be resolved under the provisions on expropriation of Rule 67 of the Rules of Court." 32
Given that the 2004 Resolution militates against the continued use of the norm under Section 2, Rule 67, is it then
possible to apply Rep. Act No. 8974? We find that it is, and moreover, its application in this case complements
rather than contravenes the prescriptions laid down in the 2004 Resolution.
Rep. Act No. 8974 Fits
to the Situation at Bar
and Complements the
2004 Agan Resolution
Rep. Act No. 8974 is entitled "An Act To Facilitate The Acquisition Of Right-Of-Way, Site Or Location For National
Government Infrastructure Projects And For Other Purposes." Obviously, the law is intended to cover expropriation
proceedings intended for national government infrastructure projects. Section 2 of Rep. Act No. 8974 explains what
are considered as "national government projects."
Sec. 2. National Government Projects. The term "national government projects" shall refer to all national
government infrastructure, engineering works and service contracts, including projects undertaken by governmentowned and controlled corporations, all projects covered by Republic Act No. 6957, as amended by Republic Act No.
7718, otherwise known as the Build-Operate-and-Transfer Law, and other related and necessary activities, such as
site acquisition, supply and/or installation of equipment and materials, implementation, construction, completion,
operation, maintenance, improvement, repair and rehabilitation, regardless of the source of funding.
As acknowledged in the 2003 Decision, the development of NAIA 3 was made pursuant to a build-operate-andtransfer arrangement pursuant to Republic Act No. 6957, as amended, 33 which pertains to infrastructure or
development projects normally financed by the public sector but which are now wholly or partly implemented by the
private sector.34 Under the build-operate-and-transfer scheme, it is the project proponent which undertakes the
construction, including the financing, of a given infrastructure facility.35 In Tatad v. Garcia,36 the Court acknowledged
that the operator of the EDSA Light Rail Transit project under a BOT scheme was the owner of the facilities such as
"the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power plant." 37
There can be no doubt that PIATCO has ownership rights over the facilities which it had financed and constructed.
The 2004 Resolution squarely recognized that right when it mandated the payment of just compensation to PIATCO
prior to the takeover by the Government of NAIA 3. The fact that the Government resorted to eminent domain
proceedings in the first place is a concession on its part of PIATCOs ownership. Indeed, if no such right is
recognized, then there should be no impediment for the Government to seize control of NAIA 3 through ordinary
ejectment proceedings.
Since the rights of PIATCO over the NAIA 3 facilities are established, the nature of these facilities should now be
determined. Under Section 415(1) of the Civil Code, these facilities are ineluctably immovable or real property, as
they constitute buildings, roads and constructions of all kinds adhered to the soil. 38 Certainly, the NAIA 3 facilities are
of such nature that they cannot just be packed up and transported by PIATCO like a traveling circus caravan.
Thus, the property subject of expropriation, the NAIA 3 facilities, are real property owned by PIATCO. This point is
critical, considering the Governments insistence that the NAIA 3 facilities cannot be deemed as the "right-of-way",
"site" or "location" of a national government infrastructure project, within the coverage of Rep. Act No. 8974.
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There is no doubt that the NAIA 3 is not, under any sensible contemplation, a "right-of-way." Yet we cannot agree
with the Governments insistence that neither could NAIA 3 be a "site" or "location". The petition quotes the
definitions provided in Blacks Law Dictionary of "location" as the specific place or position of a person or thing and
site as pertaining to a place or location or a piece of property set aside for specific use." 39 Yet even Blacks Law
Dictionary provides that "[t]he term [site] does not of itself necessarily mean a place or tract of land fixed by definite
boundaries."40 One would assume that the Government, to back up its contention, would be able to point to a clearcut rule that a "site" or "location" exclusively refers to soil, grass, pebbles and weeds. There is none.
Indeed, we cannot accept the Governments proposition that the only properties that may be expropriated under
Rep. Act No. 8974 are parcels of land. Rep. Act No. 8974 contemplates within its coverage such real property
constituting land, buildings, roads and constructions of all kinds adhered to the soil. Section 1 of Rep. Act No. 8974,
which sets the declaration of the laws policy, refers to "real property acquired for national government infrastructure
projects are promptly paid just compensation."41 Section 4 is quite explicit in stating that the scope of the law relates
to the acquisition of "real property," which under civil law includes buildings, roads and constructions adhered to the
soil.
It is moreover apparent that the law and its implementing rules commonly provide for a rule for the valuation of
improvements and/or structures thereupon separate from that of the land on which such are constructed. Section 2
of Rep. Act No. 8974 itself recognizes that the improvements or structures on the land may very well be the subject
of expropriation proceedings. Section 4(a), in relation to Section 7 of the law provides for the guidelines for the
valuation of the improvements or structures to be expropriated. Indeed, nothing in the law would prohibit the
application of Section 7, which provides for the valuation method of the improvements and or structures in the
instances wherein it is necessary for the Government to expropriate only the improvements or structures, as in this
case.
The law classifies the NAIA 3 facilities as real properties just like the soil to which they are adhered. Any subclassifications of real property and divergent treatment based thereupon for purposes of expropriation must be
based on substantial distinctions, otherwise the equal protection clause of the Constitution is violated. There may be
perhaps a molecular distinction between soil and the inorganic improvements adhered thereto, yet there are no
purposive distinctions that would justify a variant treatment for purposes of expropriation. Both the land itself and the
improvements thereupon are susceptible to private ownership independent of each other, capable of pecuniary
estimation, and if taken from the owner, considered as a deprivation of property. The owner of improvements seized
through expropriation suffers the same degree of loss as the owner of land seized through similar means. Equal
protection demands that all persons or things similarly situated should be treated alike, both as to rights conferred
and responsibilities imposed. For purposes of expropriation, parcels of land are similarly situated as the buildings or
improvements constructed thereon, and a disparate treatment between those two classes of real property infringes
the equal protection clause.
Even as the provisions of Rep. Act No. 8974 call for that laws application in this case, the threshold test must still be
met whether its implementation would conform to the dictates of the Court in the 2004 Resolution. Unlike in the case
of Rule 67, the application of Rep. Act No. 8974 will not contravene the 2004 Resolution, which requires the
payment of just compensation before any takeover of the NAIA 3 facilities by the Government. The 2004 Resolution
does not particularize the extent such payment must be effected before the takeover, but it unquestionably requires
at least some degree of payment to the private property owner before a writ of possession may issue. The utilization
of Rep. Act No. 8974 guarantees compliance with this bare minimum requirement, as it assures the private property
owner the payment of, at the very least, the proffered value of the property to be seized. Such payment of the
proffered value to the owner, followed by the issuance of the writ of possession in favor of the Government, is
precisely the schematic under Rep. Act No. 8974, one which facially complies with the prescription laid down in the
2004 Resolution.
Clearly then, we see no error on the part of the RTC when it ruled that Rep. Act No. 8974 governs the instant
expropriation proceedings.
The Proper Amount to be Paid
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under Rep. Act No. 8974
Then, there is the matter of the proper amount which should be paid to PIATCO by the Government before the writ
of possession may issue, consonant to Rep. Act No. 8974.
At this juncture, we must address the observation made by the Office of the Solicitor General in behalf of the
Government that there could be no "BIR zonal valuations" on the NAIA 3 facility, as provided in Rep. Act No. 8974,
since zonal valuations are only for parcels of land, not for airport terminals. The Court agrees with this point, yet
does not see it as an impediment for the application of Rep. Act No. 8974.
It must be clarified that PIATCO cannot be reimbursed or justly compensated for the value of the parcel of land on
which NAIA 3 stands. PIATCO is not the owner of the land on which the NAIA 3 facility is constructed, and it should
not be entitled to just compensation that is inclusive of the value of the land itself. It would be highly disingenuous to
compensate PIATCO for the value of land it does not own. Its entitlement to just compensation should be limited to
the value of the improvements and/or structures themselves. Thus, the determination of just compensation cannot
include the BIR zonal valuation under Section 4 of Rep. Act No. 8974.
Under Rep. Act No. 8974, the Government is required to "immediately pay" the owner of the property the amount
equivalent to the sum of (1) one hundred percent (100%) of the value of the property based on the current relevant
zonal valuation of the [BIR]; and (2) the value of the improvements and/or structures as determined under Section 7.
As stated above, the BIR zonal valuation cannot apply in this case, thus the amount subject to immediate payment
should be limited to "the value of the improvements and/or structures as determined under Section 7," with Section
7 referring to the "implementing rules and regulations for the equitable valuation of the improvements and/or
structures on the land." Under the present implementing rules in place, the valuation of the improvements/structures
are to be based using "the replacement cost method." 42 However, the replacement cost is only one of the factors to
be considered in determining the just compensation.
In addition to Rep. Act No. 8974, the 2004 Resolution in Agan also mandated that the payment of just compensation
should be in accordance with equity as well. Thus, in ascertaining the ultimate amount of just compensation, the
duty of the trial court is to ensure that such amount conforms not only to the law, such as Rep. Act No. 8974, but to
principles of equity as well.
Admittedly, there is no way, at least for the present, to immediately ascertain the value of the improvements and
structures since such valuation is a matter for factual determination.43 Yet Rep. Act No. 8974 permits an expedited
means by which the Government can immediately take possession of the property without having to await precise
determination of the valuation. Section 4(c) of Rep. Act No. 8974 states that "in case the completion of a
government infrastructure project is of utmost urgency and importance, and there is no existing valuation of the
area concerned, the implementing agency shall immediately pay the owner of the property its proferred value,
taking into consideration the standards prescribed in Section 5 [of the law]." 44 The "proffered value" may strike as a
highly subjective standard based solely on the intuition of the government, but Rep. Act No. 8974 does provide
relevant standards by which "proffered value" should be based, 45 as well as the certainty
of judicial determination of the propriety of the proffered value. 46
In filing the complaint for expropriation, the Government alleged to have deposited the amount of P3 Billion
earmarked for expropriation, representing the assessed value of the property. The making of the deposit, including
the determination of the amount of the deposit, was undertaken under the erroneous notion that Rule 67, and not
Rep. Act No. 8974, is the applicable law. Still, as regards the amount, the Court sees no impediment to recognize
this sum of P3 Billion as the proffered value under Section 4(b) of Rep. Act No. 8974. After all, in the initial
determination of the proffered value, the Government is not strictly required to adhere to any predetermined
standards, although its proffered value may later be subjected to judicial review using the standards enumerated
under Section 5 of Rep. Act No. 8974.
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How should we appreciate the questioned order of Hon. Gingoyon, which pegged the amount to be immediately
paid to PIATCO at around $62.3 Million? The Order dated 4 January 2005, which mandated such amount, proves
problematic in that regard. While the initial sum of P3 Billion may have been based on the assessed value, a
standard which should not however apply in this case, the RTC cites without qualification Section 4(a) of Rep. Act
No. 8974 as the basis for the amount of $62.3 Million, thus leaving the impression that the BIR zonal valuation may
form part of the basis for just compensation, which should not be the case. Moreover, respondent judge made no
attempt to apply the enumerated guidelines for determination of just compensation under Section 5 of Rep. Act No.
8974, as required for judicial review of the proffered value.
The Court notes that in the 10 January 2005 Omnibus Order, the RTC noted that the concessions agreement
entered into between the Government and PIATCO stated that the actual cost of building NAIA 3 was "not less than"
US$350 Million.47 The RTC then proceeded to observe that while Rep. Act No. 8974 required the immediate
payment to PIATCO the amount equivalent to 100% of the value of NAIA 3, the amount deposited by the
Government constituted only 18% of this value. At this point, no binding import should be given to this observation
that the actual cost of building NAIA 3 was "not less than" US$350 Million, as the final conclusions on the amount of
just compensation can come only after due ascertainment in accordance with the standards set under Rep. Act No.
8974, not the declarations of the parties. At the same time, the expressed linkage between the BIR zonal valuation
and the amount of just compensation in this case, is revelatory of erroneous thought on the part of the RTC.
We have already pointed out the irrelevance of the BIR zonal valuation as an appropriate basis for valuation in this
case, PIATCO not being the owner of the land on which the NAIA 3 facilities stand. The subject order is flawed
insofar as it fails to qualify that such standard is inappropriate.
It does appear that the amount of US$62.3 Million was based on the certification issued by the LBP-Baclaran that
the Republic of the Philippines maintained a total balance in that branch amounting to such amount. Yet the actual
representation of the $62.3 Million is not clear. The Land Bank Certification expressing such amount does state that
it was issued upon request of the Manila International Airport Authority "purportedly as guaranty deposit for the
expropriation complaint."48 The Government claims in its Memorandum that the entire amount was made available
as a guaranty fund for the final and executory judgment of the trial court, and not merely for the issuance of the writ
of possession.49 One could readily conclude that the entire amount of US$62.3 Million was intended by the
Government to answer for whatever guaranties may be required for the purpose of the expropriation complaint.
Still, such intention the Government may have had as to the entire US$62.3 Million is only inferentially established.
In ascertaining the proffered value adduced by the Government, the amount of P3 Billion as the amount deposited
characterized in the complaint as "to be held by [Land Bank] subject to the [RTCs] orders," 50should be deemed as
controlling. There is no clear evidence that the Government intended to offer US$62.3 Million as the initial payment
of just compensation, the wording of the Land Bank Certification notwithstanding, and credence should be given to
the consistent position of the Government on that aspect.
In any event, for the RTC to be able to justify the payment of US$62.3 Million to PIATCO and not P3 Billion Pesos,
he would have to establish that the higher amount represents the valuation of the structures/improvements, and not
the BIR zonal valuation on the land wherein NAIA 3 is built. The Order dated 5 January 2005 fails to establish such
integral fact, and in the absence of contravening proof, the proffered value of P3 Billion, as presented by the
Government, should prevail.
Strikingly, the Government submits that assuming that Rep. Act No. 8974 is applicable, the deposited amount ofP3
Billion should be considered as the proffered value, since the amount was based on comparative values made by
the City Assessor.51 Accordingly, it should be deemed as having faithfully complied with the requirements of the
statute.52 While the Court agrees that P3 Billion should be considered as the correct proffered value, still we cannot
deem the Government as having faithfully complied with Rep. Act No. 8974. For the law plainly requires direct
payment to the property owner, and not a mere deposit with the authorized government depositary. Without such
direct payment, no writ of possession may be obtained.
Writ of Possession May Not
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Be Implemented Until Actual
Receipt by PIATCO of Proferred

Value
The Court thus finds another error on the part of the RTC. The RTC authorized the issuance of the writ of
possession to the Government notwithstanding the fact that no payment of any amount had yet been made to
PIATCO, despite the clear command of Rep. Act No. 8974 that there must first be payment before the writ of
possession can issue. While the RTC did direct the LBP-Baclaran to immediately release the amount of US$62
Million to PIATCO, it should have likewise suspended the writ of possession, nay, withdrawn it altogether, until the
Government shall have actually paid PIATCO. This is the inevitable consequence of the clear command of Rep. Act
No. 8974 that requires immediate payment of the initially determined amount of just compensation should be
effected. Otherwise, the overpowering intention of Rep. Act No. 8974 of ensuring payment first before transfer of
repossession would be eviscerated.
Rep. Act No. 8974 represents a significant change from previous expropriation laws such as Rule 67, or even
Section 19 of the Local Government Code. Rule 67 and the Local Government Code merely provided that the
Government deposit the initial amounts53 antecedent to acquiring possession of the property with, respectively, an
authorized
Government depositary54 or the proper court.55 In both cases, the private owner does not receive compensation prior
to the deprivation of property. On the other hand, Rep. Act No. 8974 mandates immediate payment of the initial just
compensation prior to the issuance of the writ of possession in favor of the Government.
Rep. Act No. 8974 is plainly clear in imposing the requirement of immediate prepayment, and no amount of statutory
deconstruction can evade such requisite. It enshrines a new approach towards eminent domain that reconciles the
inherent unease attending expropriation proceedings with a position of fundamental equity. While expropriation
proceedings have always demanded just compensation in exchange for private property, the previous deposit
requirement impeded immediate compensation to the private owner, especially in cases wherein the determination
of the final amount of compensation would prove highly disputed. Under the new modality prescribed by Rep. Act
No. 8974, the private owner sees immediate monetary recompense with the same degree of speed as the taking of
his/her property.
While eminent domain lies as one of the inherent powers of the State, there is no requirement that it undertake a
prolonged procedure, or that the payment of the private owner be protracted as far as practicable. In fact, the
expedited procedure of payment, as highlighted under Rep. Act No. 8974, is inherently more fair, especially to the
layperson who would be hard-pressed to fully comprehend the social value of expropriation in the first place.
Immediate payment placates to some degree whatever ill-will that arises from expropriation, as well as satisfies the
demand of basic fairness.
The Court has the duty to implement Rep. Act No. 8974 and to direct compliance with the requirement of immediate
payment in this case. Accordingly, the Writ of Possession dated 21 December 2004 should be held in abeyance,
pending proof of actual payment by the Government to PIATCO of the proffered value of the NAIA 3 facilities, which
totals P3,002,125,000.00.
Rights of the Government
upon Issuance of the Writ
of Possession
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Once the Government pays PIATCO the amount of the proffered value of P3 Billion, it will be entitled to the Writ of
Possession. However, the Government questions the qualification imposed by the RTC in its 4 January
2005Order consisting of the prohibition on the Government from performing acts of ownership such as awarding
concessions or leasing any part of NAIA 3 to other parties. To be certain, the RTC, in its 10 January 2005Omnibus
Order, expressly stated that it was not affirming "the superfluous part of the Order [of 4 January 2005] prohibiting the
plaintiffs from awarding concessions or leasing any part of NAIA [3] to other parties." 56 Still, such statement was
predicated on the notion that since the Government was not yet the owner of NAIA 3 until final payment of just
compensation, it was obviously incapacitated to perform such acts of ownership.
In deciding this question, the 2004 Resolution in Agan cannot be ignored, particularly the declaration that "[f]or the
government to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures."
The obvious import of this holding is that unless PIATCO is paid just compensation, the Government is barred from
"taking over," a phrase which in the strictest sense could encompass even a bar of physical possession of NAIA 3,
much less operation of the facilities.
There are critical reasons for the Court to view the 2004 Resolution less stringently, and thus allow the operation by
the Government of NAIA 3 upon the effectivity of the Writ of Possession. For one, the national prestige is diminished
every day that passes with the NAIA 3 remaining mothballed. For another, the continued non-use of the facilities
contributes to its physical deterioration, if it has not already. And still for another, the economic benefits to the
Government and the country at large are beyond dispute once the NAIA 3 is put in operation.
Rep. Act No. 8974 provides the appropriate answer for the standard that governs the extent of the acts the
Government may be authorized to perform upon the issuance of the writ of possession. Section 4 states that "the
court shall immediately issue to the implementing agency an order to take possession of the property and start the
implementation of the project." We hold that accordingly, once the Writ of Possession is effective, the Government
itself is authorized to perform the acts that are essential to the operation of the NAIA 3 as an international airport
terminal upon the effectivity of the Writ of Possession. These would include the repair, reconditioning and
improvement of the complex, maintenance of the existing facilities and equipment, installation of new facilities and
equipment, provision of services and facilities pertaining to the facilitation of air traffic and transport, and other
services that are integral to a modern-day international airport.
The Governments position is more expansive than that adopted by the Court. It argues that with the writ of
possession, it is enabled to perform acts de jure on the expropriated property. It cites Republic v. Tagle,57 as well as
the statement therein that "the expropriation of real property does not include mere physical entry or occupation of
land," and from them concludes that "its mere physical entry and occupation of the property fall short of the taking of
title, which includes all the rights that may be exercised by an owner over the subject property."
This conclusion is indeed lifted directly from statements in Tagle,58 but not from the ratio decidendi of that
case.Tagle concerned whether a writ of possession in favor of the Government was still necessary in light of the fact
that it was already in actual possession of the property. In ruling that the Government was entitled to the writ of
possession, the Court in Tagle explains that such writ vested not only physical possession, but also the legal right to
possess the property. Continues the Court, such legal right to possess was particularly important in the case, as
there was a pending suit against the Republic for unlawful detainer, and the writ of possession would serve to
safeguard the Government from eviction.59
At the same time, Tagle conforms to the obvious, that there is no transfer of ownership as of yet by virtue of the writ
of possession. Tagle may concede that the Government is entitled to exercise more than just the right of possession
by virtue of the writ of possession, yet it cannot be construed to grant the Government the entire panoply of rights
that are available to the owner. Certainly, neither Tagle nor any other case or law, lends support to the Governments
proposition that it acquires beneficial or equitable ownership of the expropriated property merely through the writ of
possession.
Indeed, this Court has been vigilant in defense of the rights of the property owner who has been validly deprived of
possession, yet retains legal title over the expropriated property pending payment of just compensation. We
reiterated the various doctrines of such import in our recent holding in Republic v. Lim:60
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The recognized rule is that title to the property expropriated shall pass from the owner to the expropriator onlyupon
full payment of the just compensation. Jurisprudence on this settled principle is consistent both here and in other
democratic jurisdictions. In Association of Small Landowners in the Philippines, Inc. et al., vs. Secretary of Agrarian
Reform[61], thus:
"Title to property which is the subject of condemnation proceedings does not vest the condemnor until the
judgment fixing just compensation is entered and paid, but the condemnors title relates back to the date on
which the petition under the Eminent Domain Act, or the commissioners report under the Local Improvement Act, is
filed.
x x x Although the right to appropriate and use land taken for a canal is complete at the time of entry, title to
the property taken remains in the owner until payment is actually made. (Emphasis supplied.)
In Kennedy v. Indianapolis, the US Supreme Court cited several cases holding that title to property does not pass to
the condemnor until just compensation had actually been made. In fact, the decisions appear to be uniform to this
effect. As early as 1838, in Rubottom v. McLure, it was held that actual payment to the owner of the condemned
property was a condition precedent to the investment of the title to the property in the State albeit not to
the appropriation of it to public use. In Rexford v. Knight, the Court of Appeals of New York said that the
construction upon the statutes was that the fee did not vest in the State until the payment of the compensation
although the authority to enter upon and appropriate the land was complete prior to the payment. Kennedy further
said that both on principle and authority the rule is . . . that the right to enter on and use the property is
complete, as soon as the property is actually appropriated under the authority of law for a public use, but
that the title does not pass from the owner without his consent, until just compensation has been made to
him."
Our own Supreme Court has held in Visayan Refining Co. v. Camus and Paredes, that:
If the laws which we have exhibited or cited in the preceding discussion are attentively examined it will be
apparent that the method of expropriation adopted in this jurisdiction is such as to afford absolute
reassurance that no piece of land can be finally and irrevocably taken from an unwilling owner until
compensation is paid...."(Emphasis supplied.)
Clearly, without full payment of just compensation, there can be no transfer of title from the landowner to the
expropriator. Otherwise stated, the Republics acquisition of ownership is conditioned upon the full payment of just
compensation within a reasonable time.
Significantly, in Municipality of Bian v. Garcia[62] this Court ruled that the expropriation of lands consists of two
stages, to wit:
"x x x The first is concerned with the determination of the authority of the plaintiff to exercise the power of eminent
domain and the propriety of its exercise in the context of the facts involved in the suit. It ends with an order, if not of
dismissal of the action, "of condemnation declaring that the plaintiff has a lawful right to take the property sought to
be condemned, for the public use or purpose described in the complaint, upon the payment of just compensation to
be determined as of the date of the filing of the complaint" x x x.
The second phase of the eminent domain action is concerned with the determination by the court of "the just
compensation for the property sought to be taken." This is done by the court with the assistance of not more than
three (3) commissioners. x x x.
It is only upon the completion of these two stages that expropriation is said to have been completed. In Republic v.
Salem Investment Corporation[63] , we ruled that, "the process is not completed until payment of just compensation."
Thus, here, the failure of the Republic to pay respondent and his predecessors-in-interest for a period of 57 years
rendered the expropriation process incomplete.
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Lim serves fair warning to the Government and its agencies who consistently refuse to pay just compensation due
to the private property owner whose property had been
expropriated. At the same time, Lim emphasizes the fragility of the rights of the Government as possessor pending
the final payment of just compensation, without diminishing the potency of such rights. Indeed, the public policy,
enshrined foremost in the Constitution, mandates that the Government must pay for the private property it
expropriates. Consequently, the proper judicial attitude is to guarantee compliance with this primordial right to just
compensation.
Final Determination of Just
Compensation Within 60 Days
The issuance of the writ of possession does not write finis to the expropriation proceedings. As earlier pointed out,
expropriation is not completed until payment to the property owner of just compensation. The proffered value stands
as merely a provisional determination of the amount of just compensation, the payment of which is sufficient to
transfer possession of the property to the Government. However, to effectuate the transfer of ownership, it is
necessary for the Government to pay the property owner the final just compensation.
In Lim, the Court went as far as to countenance, given the exceptional circumstances of that case, the reversion of
the validly expropriated property to private ownership due to the failure of the Government to pay just compensation
in that case.64 It was noted in that case that the Government deliberately refused to pay just compensation. The
Court went on to rule that "in cases where the government failed to pay just compensation within five (5) years from
the finality of the judgment in the expropriation proceedings, the owners concerned shall have the right to recover
possession of their property."65
Rep. Act No. 8974 mandates a speedy method by which the final determination of just compensation may be had.
Section 4 provides:
In the event that the owner of the property contests the implementing agencys proffered value, the court shall
determine the just compensation to be paid the owner within sixty (60) days from the date of filing of the
expropriation case. When the decision of the court becomes final and executory, the implementing agency shall pay
the owner the difference between the amount already paid and the just compensation as determined by the court.
We hold that this provision should apply in this case. The sixty (60)-day period prescribed in Rep. Act No. 8974
gives teeth to the laws avowed policy "to ensure that owners of real property acquired for national government
infrastructure projects are promptly paid just compensation."66 In this case, there already has been irreversible
delay in the prompt payment of PIATCO of just compensation, and it is no longer possible for the RTC to determine
the just compensation due PIATCO within sixty (60) days from the filing of the complaint last 21 December 2004, as
contemplated by the law. Still, it is feasible to effectuate the spirit of the law by requiring the trial court to make such
determination within sixty (60) days from finality of this decision, in accordance with the guidelines laid down in
Rep. Act No. 8974 and its Implementing Rules.
Of course, once the amount of just compensation has been finally determined, the Government is obliged to pay
PIATCO the said amount. As shown in Lim and other like-minded cases, the Governments refusal to make such
payment is indubitably actionable in court.
Appointment of Commissioners
The next argument for consideration is the claim of the Government that the RTC erred in appointing the three
commissioners in its 7 January 2005 Order without prior consultation with either the Government or PIATCO, or
without affording the Government the opportunity to object to the appointment of these commissioners. We can
dispose of this argument without complication.
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It must be noted that Rep. Act No. 8974 is silent on the appointment of commissioners tasked with the
ascertainment of just compensation.67 This protocol though is sanctioned under Rule 67. We rule that the
appointment of commissioners under Rule 67 may be resorted to, even in expropriation proceedings under Rep. Act
No. 8974, since the application of the provisions of Rule 67 in that regard do not conflict with the statute. As earlier
stated, Section 14 of the Implementing Rules does allow such other incidents affecting the complaint to be resolved
under the provisions on expropriation of Rule 67 of the Rules of Court. Even without Rule 67, reference during trial
to a commissioner of the examination of an issue of fact is sanctioned under Rule 32 of the Rules of Court.
But while the appointment of commissioners under the aegis of Rule 67 may be sanctioned in expropriation
proceedings under Rep. Act No. 8974, the standards to be observed for the determination of just compensation are
provided not in Rule 67 but in the statute. In particular, the governing standards for the determination of just
compensation for the NAIA 3 facilities are found in Section 10 of the Implementing Rules for Rep. Act No. 8974,
which provides for the replacement cost method in the valuation of improvements and structures. 68
Nothing in Rule 67 or Rep. Act No. 8974 requires that the RTC consult with the parties in the expropriation case on
who should be appointed as commissioners. Neither does the Court feel that such a requirement should be imposed
in this case. We did rule in Municipality of Talisay v. Ramirez69 that "there is nothing to prevent [the trial court] from
seeking the recommendations of the parties on [the] matter [of appointment of commissioners], the better to ensure
their fair representation."70 At the same time, such solicitation of recommendations is not obligatory on the part of the
court, hence we cannot impute error on the part of the RTC in its exercise of solitary discretion in the appointment of
the commissioners.
What Rule 67 does allow though is for the parties to protest the appointment of any of these commissioners, as
provided under Section 5 of the Rule. These objections though must be made filed within ten (10) days from service
of the order of appointment of the commissioners.71 In this case, the proper recourse of the Government to challenge
the choice of the commissioners is to file an objection with the trial court, conformably with Section 5, Rule 67, and
not as it has done, assail the same through a special civil action for certiorari. Considering that the expropriation
proceedings in this case were effectively halted seven (7) days after the Order appointing the commissioners,72 it is
permissible to allow the parties to file their objections with the RTC within five (5) days from finality of this decision.
Insufficient Ground for Inhibition
of Respondent Judge
The final argument for disposition is the claim of the Government is that Hon. Gingoyon has prejudged the
expropriation case against the Governments cause and, thus, should be required to inhibit himself. This grave
charge is predicated on facts which the Government characterizes as "undeniable." In particular, the Government
notes that the 4 January 2005 Order was issued motu proprio, without any preceding motion, notice or hearing.
Further, such order, which directed the payment of US$62 Million to PIATCO, was attended with error in the
computation of just compensation. The Government also notes that the said Order was issued even before
summons had been served on PIATCO.
The disqualification of a judge is a deprivation of his/her judicial power 73 and should not be allowed on the basis of
mere speculations and surmises. It certainly cannot be predicated on the adverse nature of the judges rulings
towards the movant for inhibition, especially if these rulings are in accord with law. Neither could inhibition be
justified merely on the erroneous nature of the rulings of the judge. We emphasized in Webb v. People:74
To prove bias and prejudice on the part of respondent judge, petitioners harp on the alleged adverse and
erroneous rulings of respondent judge on their various motions. By themselves, however, they do not
sufficiently prove bias and prejudice to disqualify respondent judge. To be disqualifying, the bias and
prejudice must be shown to have stemmed from an extrajudicial source and result in an opinion on the
merits on some basis other than what the judge learned from his participation in the case. Opinions formed in
the course of judicial proceedings, although erroneous, as long as they are based on the evidence presented and
conduct observed by the judge, do not prove personal bias or prejudice on the part of the judge.As a general rule,
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repeated rulings against a litigant, no matter how erroneous and vigorously and consistently expressed, are
not a basis for disqualification of a judge on grounds of bias and prejudice. Extrinsic evidence is required
to establish bias, bad faith, malice or corrupt purpose, in addition to the palpable error which may be
inferred from the decision or order itself. Although the decision may seem so erroneous as to raise doubts
concerning a judge's integrity, absent extrinsic evidence, the decision itself would be insufficient to
establish a case against the judge. The only exception to the rule is when the error is so gross and patent
as to produce an ineluctable inference of bad faith or malice.75
The Governments contentions against Hon. Gingoyon are severely undercut by the fact that the 21 December
2004 Order, which the 4 January 2005 Order sought to rectify, was indeed severely flawed as it erroneously applied
the provisions of Rule 67 of the Rules of Court, instead of Rep. Act No. 8974, in ascertaining compliance with the
requisites for the issuance of the writ of possession. The 4 January
2005 Order, which according to the Government establishes Hon. Gingoyons bias, was promulgated precisely to
correct the previous error by applying the correct provisions of law. It would not speak well of the Court if it sanctions
a judge for wanting or even attempting to correct a previous erroneous order which precisely is the right move to
take.
Neither are we convinced that the motu proprio issuance of the 4 January 2005 Order, without the benefit of notice
or hearing, sufficiently evinces bias on the part of Hon. Gingoyon. The motu proprio amendment by a court of an
erroneous order previously issued may be sanctioned depending on the circumstances, in line with the longrecognized principle that every court has inherent power to do all things reasonably necessary for the administration
of justice within the scope of its jurisdiction.76 Section 5(g), Rule 135 of the Rules of Court further recognizes the
inherent power of courts "to amend and control its process and orders so as to make them conformable to law and
justice,"77 a power which Hon. Gingoyon noted in his 10 January 2005 Omnibus Order.78This inherent power
includes the right of the court to reverse itself, especially when in its honest opinion it has committed an error or
mistake in judgment, and that to adhere to its decision will cause injustice to a party litigant. 79
Certainly, the 4 January 2005 Order was designed to make the RTCs previous order conformable to law and justice,
particularly to apply the correct law of the case. Of course, as earlier established, this effort proved incomplete, as
the 4 January 2005 Order did not correctly apply Rep. Act No. 8974 in several respects. Still, at least, the 4 January
2005 Order correctly reformed the most basic premise of the case that Rep. Act No. 8974 governs the expropriation
proceedings.
Nonetheless, the Government belittles Hon. Gingoyons invocation of Section 5(g), Rule 135 as "patently without
merit". Certainly merit can be seen by the fact that the 4 January 2005 Order reoriented the expropriation
proceedings towards the correct governing law. Still, the Government claims that the unilateral act of the RTC did
not conform to law or justice, as it was not afforded the right to be heard.
The Court would be more charitably disposed towards this argument if not for the fact that the earlier order with the
4 January 2005 Order sought to correct was itself issued without the benefit of any hearing. In fact, nothing either in
Rule 67 or Rep. Act No. 8975 requires the conduct of a hearing prior to the issuance of the writ of possession, which
by design is available immediately upon the filing of the complaint provided that the requisites attaching thereto are
present. Indeed, this expedited process for the obtention of a writ of possession in expropriation cases comes at the
expense of the rights of the property owner to be heard or to be deprived of possession. Considering these
predicates, it would be highly awry to demand that an order modifying the earlier issuance of a writ of possession in
an expropriation case be barred until the staging of a hearing, when the issuance of the writ of possession itself is
not subject to hearing. Perhaps the conduct of a hearing under these circumstances would be prudent. However,
hearing is not mandatory, and the failure to conduct one does not establish the manifest bias required for the
inhibition of the judge.
The Government likewise faults Hon. Gingoyon for using the amount of US$350 Million as the basis for the 100%
deposit under Rep. Act No. 8974. The Court has noted that this statement was predicated on the erroneous belief
that the BIR zonal valuation applies as a standard for determination of just compensation in this case. Yet this is
manifest not of bias, but merely of error on the part of the judge. Indeed, the Government was not the only victim of
68 | P a g e
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the errors of the RTC in the assailed orders. PIATCO itself was injured by the issuance by the RTC of the writ of
possession, even though the former had yet to be paid any amount of just compensation. At the same time, the
Government was also prejudiced by the erroneous ruling of the RTC that the amount of US$62.3 Million, and notP3
Billion, should be released to PIATCO.
The Court has not been remiss in pointing out the multiple errors committed by the RTC in its assailed orders, to the
prejudice of both parties. This attitude of error towards all does not ipso facto negate the charge of bias. Still, great
care should be had in requiring the inhibition of judges simply because the magistrate did err. Incompetence may be
a ground for administrative sanction, but not for inhibition, which requires lack of objectivity or impartiality to sit on a
case.
The Court should necessarily guard against adopting a standard that a judge should be inhibited from hearing the
case if one litigant loses trust in the judge. Such loss of trust on the part of the Government may be palpable, yet
inhibition cannot be grounded merely on the feelings of the party-litigants. Indeed, every losing litigant in any case
can resort to claiming that the judge was biased, and he/she will gain a sympathetic ear from friends, family, and
people who do not understand the judicial process. The test in believing such a proposition should not be the
vehemence of the litigants claim of bias, but the Courts judicious estimation, as people who know better than to
believe any old cry of "wolf!", whether such bias has been irrefutably exhibited.
The Court acknowledges that it had been previously held that "at the very first sign of lack of faith and trust in his
actions, whether well-grounded or not, the judge has no other alternative but to inhibit himself from the case." 80But
this doctrine is qualified by the entrenched rule that "a judge may not be legally prohibited from sitting in a litigation,
but when circumstances appear that will induce doubt to his honest actuations and probity in favor of either party, or
incite such state of mind, he should conduct a careful selfexamination. He should exercise his discretion in a way that the people's faith in the Courts of Justice is not
impaired."81 And a self-assessment by the judge that he/she is not impaired to hear the case will be respected by the
Court absent any evidence to the contrary. As held in Chin v. Court of Appeals:
An allegation of prejudgment, without more, constitutes mere conjecture and is not one of the "just and valid
reasons" contemplated in the second paragraph of Rule 137 of the Rules of Court for which a judge may inhibit
himself from hearing the case. We have repeatedly held that mere suspicion that a judge is partial to a party is not
enough. Bare allegations of partiality and prejudgment will not suffice in the absence of clear and convincing
evidence to overcome the presumption that the judge will undertake his noble role to dispense justice according to
law and evidence and without fear or favor. There should be adequate evidence to prove the allegations, and there
must be showing that the judge had an interest, personal or otherwise, in the prosecution of the case. To be a
disqualifying circumstance, the bias and prejudice must be shown to have stemmed from an extrajudicial source
and result in an opinion on the merits on some basis other than what the judge learned from his participation in the
case.82
The mere vehemence of the Governments claim of bias does not translate to clear and convincing evidence of
impairing bias. There is no sufficient ground to direct the inhibition of Hon. Gingoyon from hearing the expropriation
case.
In conclusion, the Court summarizes its rulings as follows:
(1) The 2004 Resolution in Agan sets the base requirement that has to be observed before the Government may
take over the NAIA 3, that there must be payment to PIATCO of just compensation in accordance with law and
equity. Any ruling in the present expropriation case must be conformable to the dictates of the Court as pronounced
in the Agan cases.
(2) Rep. Act No. 8974 applies in this case, particularly insofar as it requires the immediate payment by the
Government of at least the proffered value of the NAIA 3 facilities to PIATCO and provides certain valuation
standards or methods for the determination of just compensation.
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(3) Applying Rep. Act No. 8974, the implementation of Writ of Possession in favor of the Government over NAIA 3 is
held in abeyance until PIATCO is directly paid the amount of P3 Billion, representing the proffered value of NAIA 3
under Section 4(c) of the law.
(4) Applying Rep. Act No. 8974, the Government is authorized to start the implementation of the NAIA 3 Airport
terminal project by performing the acts that are essential to the operation of the NAIA 3 as an international airport
terminal upon the effectivity of the Writ of Possession, subject to the conditions above-stated. As prescribed by the
Court, such authority encompasses "the repair, reconditioning and improvement of the complex, maintenance of the
existing facilities and equipment, installation of new facilities and equipment, provision of services and facilities
pertaining to the facilitation of air traffic and transport, and other services that are integral to a modern-day
international airport."83
(5) The RTC is mandated to complete its determination of the just compensation within sixty (60) days from finality
of this Decision. In doing so, the RTC is obliged to comply with "law and equity" as ordained in Again and the
standard set under Implementing Rules of Rep. Act No. 8974 which is the "replacement cost method" as the
standard of valuation of structures and improvements.
(6) There was no grave abuse of discretion attending the RTC Order appointing the commissioners for the purpose
of determining just compensation. The provisions on commissioners under Rule 67 shall apply insofar as they are
not inconsistent with Rep. Act No. 8974, its Implementing Rules, or the rulings of the Court in Agan.
(7) The Government shall pay the just compensation fixed in the decision of the trial court to PIATCO immediately
upon the finality of the said decision.
(8) There is no basis for the Court to direct the inhibition of Hon. Gingoyon.
All told, the Court finds no grave abuse of discretion on the part of the RTC to warrant the nullification of the
questioned orders. Nonetheless, portions of these orders should be modified to conform with law and the
pronouncements made by the Court herein.
WHEREFORE, the Petition is GRANTED in PART with respect to the orders dated 4 January 2005 and 10 January
2005 of the lower court. Said orders are AFFIRMED with the following MODIFICATIONS:
1) The implementation of the Writ of Possession dated 21 December 2005 is HELD IN ABEYANCE, pending
payment by petitioners to PIATCO of the amount of Three Billion Two Million One Hundred Twenty Five Thousand
Pesos (P3,002,125,000.00), representing the proffered value of the NAIA 3 facilities;
2) Petitioners, upon the effectivity of the Writ of Possession, are authorized start the implementation of the Ninoy
Aquino International Airport Pasenger Terminal III project by performing the acts that are essential to the operation
of the said International Airport Passenger Terminal project;
3) RTC Branch 117 is hereby directed, within sixty (60) days from finality of this Decision, to determine the just
compensation to be paid to PIATCO by the Government.
The Order dated 7 January 2005 is AFFIRMED in all respects subject to the qualification that the parties are given
ten (10) days from finality of this Decision to file, if they so choose, objections to the appointment of the
commissioners decreed therein.
The Temporary Restraining Order dated 14 January 2005 is hereby LIFTED.
No pronouncement as to costs.
SO ORDERED.
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E. Purpose of Taxation
1. Revenue-raising
2. Non-Revenue/Special or Regulatory
G.R. No. 180006
September 28, 2011
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.
DECISION
BRION, J.:
Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of Court by petitioner
Commissioner of Internal Revenue (CIR), assailing the decision dated July 12, 2007 1 and the resolution dated
October 4, 2007,2 both issued by the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 228.
BACKGROUND FACTS
Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products. Prior to January 1,
1997, the excises taxes on these products were in the form of ad valorem taxes, pursuant to Section 142 of the
1977 National Internal Revenue Code (1977 Tax Code).
Beginning January 1, 1997, Republic Act No. (RA) 82403 took effect and a shift from ad valorem to specific taxes
was made. Section 142(c) of the 1977 Tax Code, as amended by RA 8240, reads in part:
Sec. 142. Cigars and cigarettes. x x x.
(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight pesos
(P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but
does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00)
per pack;
(4) If the net retail price (excluding the excise tax and the [value]-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso (P1.00) per pack.
xxxx
The specific tax from any brand of cigarettes within the next three (3) years of effectivity of this Act shall not be lower
than the tax [which] is due from each brand on October 1, 1996: Provided, however, That in cases where the
specific tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of
71 | P a g e
TAXATION I
more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in
1998.
xxxx
The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000. [emphases ours]
To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue Regulation No. (RR) 1-97
whose Section 3(c) and (d) echoed the above-quoted portion of Section 142 of the 1977 Tax Code, as amended. 4
The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of 1997 (1997 Tax
Code), and Section 142, as amended by RA 8240, was renumbered as Section 145.
This time, to implement the 12% increase in specific taxes mandated under Section 145 of the 1997 Tax Code and
again pursuant to its rule-making powers, the CIR issued RR 17-99, which reads:
Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following sections are hereby
increased by twelve percent (12%) and the new rates to be levied, assessed, and collected are as follows:
Section
145
Description of Articles
Present Specific
Tax Rates (Prior to
January 1, 2000)
New Specific Tax

Rates (Effective
January 1, 2000)
CIGARS and
CIGARETTES
B) Cigarettes Packed by
Machine
P12.00/pack
P13.44/pack
P8.00/pack
P8.96/pack
P5.00/pack
P5.60/pack
(1) Net Retail Price

(excluding VAT & Excise)
exceeds P10.00 per pack

is P6.51 up to P10.00 per
pack

is P5.00 to P6.50 per pack
72 | P a g e
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P1.00/pack
P1.12/pack
is below P5.00 per pack
Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by
machine, distilled spirits, wines and fermented liquors shall not be lower than the excise tax that is actually being
paid prior to January 1, 2000. [emphasis ours]
THE FACTS OF THE CASE
Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in advance excise taxes
for the year 2003 in the amount of P11.15 billion, and for the period covering January 1 to May 31, 2004 in the
amount of P4.90 billion.5
In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for erroneously and/or
illegally collected taxes in the amount of P491 million.6 Without waiting for the CIRs action on its claim, Fortune
Tobacco filed with the CTA a judicial claim for tax refund.7
In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and granted its claim for
refund.8 The CTA First Divisions ruling was upheld on appeal by the CTA en banc in its decision dated July 12,
2007.9 The CIRs motion for reconsideration of the CTA en bancs decision was denied in a resolution dated October
4, 2007.10
THE ISSUE
Fortune Tobaccos claim for refund of overpaid excise taxes is based primarily on what it considers as an
"unauthorized administrative legislation" on the part of the CIR. Specifically, it assails the proviso in Section 1 of RR
17-99 that requires the payment of the "excise tax actually being paid prior to January 1, 2000" if this amount is
higher than the new specific tax rate, i.e., the rates of specific taxes imposed in 1997 for each category of cigarette,
plus 12%. It claimed that by including the proviso, the CIR went beyond the language of the law and usurped
Congress power. As mentioned, the CTA sided with Fortune Tobacco and allowed the latter to claim the refund.
The CIR disagrees with the CTAs ruling and assails it before this Court through the present petition for review on
certiorari. The CIR posits that the inclusion of the proviso in Section 1 of RR 17-99 was made to carry into effect the
laws intent and is well within the scope of his delegated legislative authority.11 He claims that the CTAs strict
interpretation of the law ignored Congress intent "to increase the collection of excise taxes by increasing specific tax
rates on sin products."12 He cites portions of the Senates deliberation on House Bill No. 7198 (the precursor of RA
8240) that conveyed the legislative intent to increase the excise taxes being paid. 13
The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that "[t]he excise tax from any
brand of cigarettes within the [three-year transition period from January 1, 1997 to December 31, 1999] shall not be
lower than the tax, which is due from each brand on October 1, 1996." He posits that there is no plausible reason
why the new specific tax rates due beginning January 1, 2000 should not be subject to the same rule as those due
during the transition period. To the CIR, the adoption of the "higher tax rule" during the transition period
unmistakably shows the intent of Congress not to lessen the excise tax collection. Thus, the CTA should have
construed the ambiguity or omission in Section 145(c) in a manner that would uphold the laws policy and intent.
Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and interpreted as it is written; it
imposes a 12% increase on the rates of excise taxes provided under sub-paragraphs (1), (2), (3), and (4) only; it
does not say that the tax due during the transition period shall continue to be collected if the amount is higher than
73 | P a g e
TAXATION I
the new specific tax rates. It contends that the "higher tax rule" applies only to the three-year transition period to
offset the burden caused by the shift from ad valorem to specific taxes.
THE COURTS RULING
Except for the tax period and the amounts involved, 14 the case at bar presents the same issue that the Court already
resolved in 2008 in CIR v. Fortune Tobacco Corporation. 15 In the 2008 Fortune Tobacco case, the Court upheld the
tax refund claims of Fortune Tobacco after finding invalid the proviso in Section 1 of RR 17-99. We ruled:
Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax
Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October
1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on
cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably,
Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective
on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be
lower than that collected prior to this date.
By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher
amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax
under paragraph C, sub-paragraph (1)-(4), as increased by 12% a situation not supported by the plain wording of
Section 145 of the Tax Code.16
Following the principle of stare decisis,17 our ruling in the present case should no longer come as a surprise. The
proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it was supposed to implement, and
therefore entitles Fortune Tobacco to claim a refund of the overpaid excise taxes collected pursuant to this provision.
The amount involved in the present case and the CIRs firm insistence of its arguments nonetheless compel us to
take a second look at the issue, but our findings ultimately lead us to the same conclusion. Indeed, we find more
reasons to disagree with the CIRs construction of the law than those stated in our 2008 Fortune Tobacco ruling,
which was largely based on the application of the rules of statutory construction.
Raising government revenue is not the sole objective of RA 8240
That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise government revenues is a
given fact, but this is not the sole and only objective of the law.18 Congressional deliberations show that the shift from
ad valorem to specific taxes introduced by the law was also intended to curb the corruption that became endemic to
the imposition of ad valorem taxes.19 Since ad valorem taxes were based on the value of the goods, the prices of the
goods were often manipulated to yield lesser taxes. The imposition of specific taxes, which are based on the volume
of goods produced, would prevent price manipulation and also cure the unequal tax treatment created by the
skewed valuation of similar goods.
Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99
The Constitution requires that taxation should be uniform and equitable. 20 Uniformity in taxation requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. 21 This
requirement, however, is unwittingly violated when the proviso in Section 1 of RR 17-99 is applied in certain cases.
To illustrate this point, we consider three brands of cigarettes, all classified as lower-priced cigarettes under Section
145(c)(4) of the 1997 Tax Code, since their net retail price is below P5.00 per pack:
Brand22
Net
Retail
Price
(A)
Ad Valorem
Tax Due
(B)
Specific Tax
under
(C)
Specific
Tax Due
(D)
New Specific
Tax imposing
(E)
New
Specific Tax
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Due by Jan
Jan 1997 to 12% increase
2000 perRR
Dec 1999
by Jan 2000
17-99
per
pack
prior to Jan
1997
Section
145(C)(4)
Camel KS
4.71
5.50
1.00/pack
5.50
1.12/pack
5.50
Champion
M 100
4.56
3.30
1.00/pack
3.30
1.12/pack
3.30
Union
American
Blend
4.64
1.09
1.00/pack
1.09
1.12/pack
1.12
Although the brands all belong to the same category, the proviso in Section 1, RR 17-99 authorized the imposition of
different (and grossly disproportionate) tax rates (see column [D]). It effectively extended the qualification stated in
the third paragraph of Section 145(c) of the 1997 Tax Code that was supposed to apply only during the transition
period:
The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall
not be lower than the tax, which is due from each brand on October 1, 1996[.]
In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was supposed to be cured
by the shift from ad valorem to specific taxes.
The omission in the law in fact reveals the legislative intent not to adopt the "higher tax rule"
The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third paragraph of Section 145(c)
of the 1997 Tax Code. Since the laws intent was to increase revenue, it found no reason not to apply the same
"higher tax rule" to excise taxes due after the transition period despite the absence of a similar text in the wording of
Section 145(c). What the CIR misses in his argument is that he applied the rule not only for cigarettes, but also for
cigars, distilled spirits, wines and fermented liquors:
Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by
machine, distilled spirits, wines and fermented liquors shall not be lower than the excise tax that is actually being
paid prior to January 1, 2000.
When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products are read, however,
there is nothing similar to the third paragraph of Section 145(c) that can be found in the provisions imposing excise
taxes on distilled spirits (Section 14123 ) and wines (Section 14224 ). In fact, the rule will also not apply to cigars as
these products fall under Section 145(a).25
Evidently, the 1997 Tax Codes provisions on excise taxes have omitted the adoption of certain tax measures. To our
mind, these omissions are telling indications of the intent of Congress not to adopt the omitted tax measures; they
are not simply unintended lapses in the laws wording that, as the CIR claims, are nevertheless covered by the spirit
of the law. Had the intention of Congress been solely to increase revenue collection, a provision similar to the third
paragraph of Section 145(c) would have been incorporated in Sections 141 and 142 of the 1997 Tax Code. This,
however, is not the case.
We note that Congress was not unaware that the "higher tax rule" is a proviso that should ideally apply to the
increase after the transition period (as the CIR embodied in the proviso in Section 1 of RR 17-99). During the
deliberations for the law amending Section 145 of the 1997 Tax Code (RA 9334), Rep. Jesli Lapuz adverted to the
"higher tax rule" after December 31, 1999 when he stated:
This bill serves as a catch-up measure as government attempts to collect additional revenues due it since 2001.
Modifications are necessary indeed to capture the loss proceeds and prevent further erosion in revenue base. x x x.
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As it is, it plugs a major loophole in the ambiguity of the law as evidenced by recent disputes resulting in the
government being ordered by the courts to refund taxpayers. This bill clarifies that the excise tax due on the
products shall not be lower than the tax due as of the date immediately prior to the effectivity of the act or the excise
tax due as of December 31, 1999.26
1wphi1
This remark notwithstanding, the final version of the bill that became RA 9334 contained no provision similar to the
proviso in Section 1 of RR 17-99 that imposed the tax due as of December 31, 1999 if this tax is higher than the new
specific tax rates. Thus, it appears that despite its awareness of the need to protect the increase of excise taxes to
increase government revenue, Congress ultimately decided against adopting the "higher tax rule.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision dated July 12, 2007 and the resolution
dated October 4, 2007 of the Court of Tax Appeals in CTA E.B. No. 228 are AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
RA 10351
HB No. 5727
F. Principles of Sound Tax System
1. Fiscal Adequacy
2. Administrative Feasibility
G.R. No. 193007
July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief 1 assailing the
validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of Republic Act 7716
(the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or
the NIRC) at the House of Representatives. Timbol, on the other hand, claims that she served as Assistant
Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose
VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and other
76 | P a g e
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sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the
meaning of "sale of services" that are subject to VAT; that a toll fee is a "users tax," not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT.
The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10
days from notice.2 Later, the Court issued another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the governments comment. 4 The government avers that
the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the
law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in the
statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR
rulings and circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since
they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign taxing power which is
generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates
cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a
reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate. Further, the
imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators cannot be regarded as
franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect
the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be illegal
since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first
become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll
fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and
tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the Code;
and
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2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators right to a reasonable return of investment under their TOAs;
and c) is not administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for
declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The government has
sought reconsideration of the Courts resolution,7 however, arguing that petitioners allegations clearly made out a
case for declaratory relief, an action over which the Court has no original jurisdiction. The government adds,
moreover, that the petition does not meet the requirements of Rule 65 for actions for prohibition since the BIR did
not exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides,
petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has farreaching implications and raises questions that need to be resolved for the public good. 8 The Court has also held
that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the
more than half a million motorists who use the tollways everyday, but more so on the governments effort to raise
revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more
mischief both to the tax-paying public and the government. A belated declaration of nullity of the BIR action would
make any attempt to refund to the motorists what they paid an administrative nightmare with no solution.
Consequently, it is not only the right, but the duty of the Court to take cognizance of and resolve the issues that the
petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive
such technical requirements when the legal questions to be resolved are of great importance to the public. The
same may be said of the requirement of locus standi which is a mere procedural requisite. 10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected,
according to Section 108, on the gross receipts derived from the sale or exchange of services as well as from the
use or lease of properties. The third paragraph of Section 108 defines "sale or exchange of services" as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal
or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
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relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of
franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. (Underscoring
supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines for a fee,
including those specified in the list. The enumeration of affected services is not exclusive. 11 By qualifying "services"
with the words "all kinds," Congress has given the term "services" an all-encompassing meaning. The listing of
specific services are intended to illustrate how pervasive and broad is the VATs reach rather than establish concrete
limits to its application. Thus, every activity that can be imagined as a form of "service" rendered for a fee should be
deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree
establishes the legal basis for the services that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators expense. Tollways serve as alternatives
to regular public highways that meander through populated areas and branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In consideration for constructing tollways at their expense, the
operators are allowed to collect government-approved fees from motorists using the tollways until such operators
could fully recover their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities
over which the operator enjoys private proprietary rights 12 that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service providers under Section 108 who allow others to use their
properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land relative to their transport of goods or
cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds of services" rendered for a fee
"regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties." This means that "services" to be subject to VAT need not fall under the traditional concept of services, the
personal or professional kinds that require the use of human knowledge and skills.
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And not only do tollway operators come under the broad term "all kinds of services," they also come under the
specific class described in Section 108 as "all other franchise grantees" who are subject to VAT, "except those under
Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities)
that Section 11913 spares from the payment of VAT. The word "franchise" broadly covers government grants of a
special right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under Section 108
since they do not hold legislative franchises. But nothing in Section 108 indicates that the "franchise grantees" it
speaks of are those who hold legislative franchises. Petitioners give no reason, and the Court cannot surmise any,
for making a distinction between franchises granted by Congress and franchises granted by some other government
agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted by local
authorities, as agents of the state, constitute as much a legislative franchise as though the grant had been made by
Congress itself.15 The term "franchise" has been broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which
the power to grant franchises has been delegated by Congress. 16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The construction,
operation, and maintenance of toll facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former tollway concessionaire for the
North and South Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers under P.D. 1112.17 The franchise in this case is evidenced by a "Toll
Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from
the term "sale of services" under Section 108 of the Code. But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by way of example electric utilities, telephone, telegraph,
and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the
collection of tolls or charges for its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner of
Internal Revenue,20 "statements made by individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the lawmakers voted on. Consequently,
the meaning and intention of the law must first be sought "in the words of the statute itself, read and considered in
their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is tantamount to taxing a
tax.21 Actually, petitioners base this argument on the following discussion in Manila International Airport Authority
(MIAA) v. Court of Appeals:22
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.
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x x x 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 for 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 users 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 users tax is more equitable a principle of taxation mandated in the 1987
Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "users tax" must also pertain to
tollway fees. But the main issue in the MIAA case was whether or not Paraaque City could sell airport lands and
buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local governments
have no power to tax the national government, the Court held that the City could not proceed with the auction sale.
MIAA forms part of the national government although not integrated in the department framework." 24 Thus, its airport
lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1) 25 of the Civil
Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that
tollway fees are users tax, but to make the point that airport lands and buildings are properties of public dominion
and that the collection of terminal fees for their use does not make them private properties. Tollway fees are not
taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the
government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for
the construction and maintenance of certain roadways. The tax in such a case goes directly to the government for
the replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to
tax here are fees collected from tollways that are constructed, maintained, and operated by private tollway operators
at their own expense under the build, operate, and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the toll fees essentially end up as earnings of the
tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is
imposed under the taxing power of the government principally for the purpose of raising revenues to fund public
expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the
costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure
them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they
are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government
under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities,
as an attribute of ownership.28
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Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect
tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is
liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In
such a case, what is transferred is not the sellers liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax 30and simply
becomes part of the cost that the buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under
Section 105 of the Code, 31 VAT is imposed on any person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable
for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "users tax."
VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The
shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways. 32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private
investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution in return
of investments that may result from the VAT imposition. She has no interest at all in the profits to be earned under
the TOAs. The interest in and right to recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by imposing VAT on
tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation in the TOAs known
as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on matters
that are manifestly conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based on
uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the
name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The
manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess
collection in an escrow account is also illegal, while the alternative of giving "change" to thousands of motorists in
order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be
capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render a tax imposition invalid "except to the extent that specific
constitutional or statutory limitations are impaired."34 Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or
the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go
about it,35 the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be enforced must first be addressed to the BIR
on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIRs
discretion on the matter, absent any clear violation of law or the Constitution.
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For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll
companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, the date when
the VAT imposition was supposed to take effect. The issuance allegedly violates Section 111(A) 36 of the Code which
grants first time VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway
operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now
can no longer be collected. The tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the
tollway operators who have not questioned the circulars validity. They are thus the ones who have a right to
challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT laws
coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly states that
services of all other franchise grantees are subject to VAT, except as may be provided under Section 119 of the
Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision.
Neither are their services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would
have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on
language in the law too plain to be mistaken.37 But as the law is written, no such exemption obtains for tollway
operators. The Court is thus duty-bound to simply apply the law as it is found.
1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress.
The Courts role is to merely uphold this legislative policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived to result from enforcing such policy must be properly
referred to Congress. The Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded ValueAdded Tax law was passed. It is only now, however, that the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive discretion in matters pertaining to the implementation
and execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenues
motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora
Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts temporary restraining order dated August 13,
2010.
SO ORDERED.
G.R. No. L-23645
October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R. VALENCIA, in his capacity as
Secretary of Public Works and Communications, and DOMINGO GOPEZ, in his capacity as Acting
Postmaster of San Fernando, Pampanga, respondent-appellants.
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Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and Solicitor
Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act 2631,2 which
provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for the period
from August nineteen to September thirty every year the printing and issue of semi-postal stamps of different
denominations with face value showing the regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail matter shall be accepted in the mails
unless it bears such semi-postal stamps: Provided, That no such additional charge of five centavos shall be
imposed on newspapers. The additional proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4) administrative orders
numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these
administrative orders were issued with the approval of the respondent Secretary of Public Works and
Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to September 30,
1957, for lack of time. However, two denominations of such stamps, one at "5 + 5" centavos and another at
"10 + 5" centavos, will soon be released for use by the public on their mails to be posted during the same
period starting with the year 1958.
xxx
xxx
xxx
During the period from August 19 to September 30 each year starting in 1958, no mail matter of whatever
class, and whether domestic or foreign, posted at any Philippine Post Office and addressed for delivery in
this country or abroad, shall be accepted for mailing unless it bears at least one such semi-postal stamp
showing the additional value of five centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions of postage
meters, each piece of such mail shall bear at least one such semi-postal stamp if posted during the period
above stated starting with the year 1958, in addition to being charged the usual postage prescribed by
existing regulations. In the case of business reply envelopes and cards mailed during said period, such
stamp should be collected from the addressees at the time of delivery. Mails entitled to franking privilege like
those from the office of the President, members of Congress, and other offices to which such privilege has
been granted, shall each also bear one such semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or post-office mail boxes
without the required semi-postal stamp, shall be returned to the sender, if known, with a notation calling for
the affixing of such stamp. If the sender is unknown, the mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
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In the case of the following categories of mail matter and mails entitled to franking privilege which are not
exempted from the payment of the five centavos intended for the Philippine Tuberculosis Society, such extra
charge may be collected in cash, for which official receipt (General Form No. 13, A) shall be issued, instead
of affixing the semi-postal stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra charge of five centavos
for the Philippine Tuberculosis Society shall be collected on each separately-addressed piece of secondclass mail matter, and the total sum thus collected shall be entered in the same official receipt to be issued
for the postage at the second-class rate. In making such entry, the total number of pieces of second-class
mail posted shall be stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall
be entered separate from the postage in both of the official receipt and the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed under permits
issued by this Bureau shall each be charged the usual postage, in addition to the five-centavo extra charge
intended for said society. The total extra charge thus received shall be entered in the same official receipt to
be issued for the postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter under metered mail permit
issued by this Bureau, the extra charge of five centavos for said society shall be collected in cash and an
official receipt issued for the total sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and envelopes to holders
of business reply permits, the five-centavo charge intended for said society shall be collected in cash on
each reply card or envelope delivered, in addition to the required postage which may also be paid in cash.
An official receipt shall be issued for the total postage and total extra charge received, in the manner shown
in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other persons entitled to the
franking privilege under existing laws may pay in cash such extra charge intended for said society, instead of
affixing the semi-postal stamps to their mails, provided that such mails are presented at the post-office
window, where the five-centavo extra charge for said society shall be collected on each piece of such mail
matter. In such case, an official receipt shall be issued for the total sum thus collected, in the manner stated
in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office window shall be affixed
with the necessary semi-postal stamps. If found in mail boxes without such stamps, they shall be treated in
the same way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and Instrumentalities
Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as amended, exempts "copies of
periodical publications received for mailing under any class of mail matter, including newspapers and magazines
admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San
Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street,
Singalong, Manila did not bear the special anti-TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of First Instance of
Pampanga, to test the constitutionality of the statute, as well as the implementing administrative orders issued,
contending that it violates the equal protection clause of the Constitution as well as the rule of uniformity and
equality of taxation. The lower court declared the statute and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
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For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention that declaratory relief is
unavailing because this suit was filed after the petitioner had committed a breach of the statute. While conceding
that the mailing by the petitioner of a letter without the additional anti-TB stamp was a violation of Republic Act 1635,
as amended, the trial court nevertheless refused to dismiss the action on the ground that under section 6 of Rule 64
of the Rules of Court, "If before the final termination of the case a breach or violation of ... a statute ... should take
place, the action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before breach or violation" of the
statute has been committed. Rule 64, section 1 so provides. Section 6 of the same rule, which allows the court to
treat an action for declaratory relief as an ordinary action, applies only if the breach or violation occurs after the filing
of the action but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing of this action, then
indeed the remedy of declaratory relief cannot be availed of, much less can the suit be converted into an ordinary
action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not constitute a breach of
the statute because the statute appears to be addressed only to postal authorities. The statute, it is true, in terms
provides that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamps." It does not
follow, however, that only postal authorities can be guilty of violating it by accepting mails without the payment of the
anti-TB stamp. It is obvious that they can be guilty of violating the statute only if there are people who use the mails
without paying for the additional anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so
in the matter of the anti-TB stamp the mere attempt to use the mails without the stamp constitutes a violation of the
statute. It is not required that the mail be accepted by postal authorities. That requirement is relevant only for the
purpose of fixing the liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this suit was filed not only
with respect to the letter which he mailed on September 15, 1963, but also with regard to any other mail that he
might send in the future. Thus, in his complaint, the petitioner prayed that due course be given to "other mails
without the semi-postal stamps which he may deliver for mailing ... if any, during the period covered by Republic Act
1635, as amended, as well as other mails hereafter to be sent by or to other mailers which bear the required
postage, without collection of additional charge of five centavos prescribed by the same Republic Act." As one
whose mail was returned, the petitioner is certainly interested in a ruling on the validity of the statute requiring the
use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More specifically the claim
is made that it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the
population and that even among postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar exemption to offices performing
governmental functions. .
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The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid upon the
exercise of a privilege, namely, the privilege of using the mails. As such the objections levelled against it must be
viewed in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation and to grant
exemptions.4 This power has aptly been described as "of wide range and flexibility." 5 Indeed, it is said that in the field
of taxation, more than in other areas, the legislature possesses the greatest freedom in classification. 6 The reason
for this is that traditionally, classification has been a device for fitting tax programs to local needs and usages in
order to achieve an equitable distribution of the tax burden. 7
That legislative classifications must be reasonable is of course undenied. But what the petitioner asserts is that
statutory classification of mail users must bear some reasonable relationship to the end sought to be attained, and
that absent such relationship the selection of mail users is constitutionally impermissible. This is altogether a
different proposition. As explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made by the
legislation and its purpose is undoubtedly true in some contexts, it has no application to a measure whose
sole purpose is to raise revenue ... So long as the classification imposed is based upon some standard
capable of reasonable comprehension, be that standard based upon ability to produce revenue or some
other legitimate distinction, equal protection of the law has been afforded. See Allied Stores of Ohio, Inc. v.
Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S.
56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the clearest demonstration that it
sanctions invidious discrimination, which is all that the Constitution forbids. The remedy for unwise legislation must
be sought in the legislature. Now, the classification of mail users is not without any reason. It is based on ability to
pay, let alone the enjoyment of a privilege, and on administrative convinience. In the allocation of the tax burden,
Congress must have concluded that the contribution to the anti-TB fund can be assured by those whose who can
afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it is now a settled principle
of law that "consideration of practical administrative convenience and cost in the administration of tax laws afford
adequate ground for imposing a tax on a well recognized and defined class." 9 In the case of the anti-TB stamps,
undoubtedly, the single most important and influential consideration that led the legislature to select mail users as
subjects of the tax is the relative ease and convenienceof collecting the tax through the post offices. The small
amount of five centavos does not justify the great expense and inconvenience of collecting through the regular
means of collection. On the other hand, by placing the duty of collection on postal authorities the tax was made
almost self-enforcing, with as little cost and as little inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users were
already a class by themselves even before the enactment of the statue and all that the legislature did was merely to
select their class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law;
to disregard [them] and concentrate on some abstract identities is lifeless logic." 10
Granted the power to select the subject of taxation, the State's power to grant exemption must likewise be conceded
as a necessary corollary. Tax exemptions are too common in the law; they have never been thought of as raising
issues under the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted from the levy the law and
administrative officials have sanctioned an invidious discrimination offensive to the Constitution. The application of
87 | P a g e
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the lower courts theory would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of the tax in order to foster
what it conceives to be a beneficent enterprise. 11 This is the case of newspapers which, under the amendment
introduced by Republic Act 2631, are exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's sovereign immunity from
taxation. The State cannot be taxed without its consent and such consent, being in derogation of its sovereignty, is
to be strictly construed.12 Administrative Order 9 of the respondent Postmaster General, which lists the various
offices and instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but a restatement
of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the exclusion of other
diseases which, it is said, are equally a menace to public health. But it is never a requirement of equal protection
that all evils of the same genus be eradicated or none at all. 13 As this Court has had occasion to say, "if the law
presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it
might have been applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public purpose as
no special benefits accrue to mail users as taxpayers, and second, because it violates the rule of uniformity in
taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a
taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is
constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society,
established and safeguarded by the devotion of taxes to public purposes. Any other view would preclude the levying
of taxes except as they are used to compensate for the burden on those who pay them and would involve the
abandonment of the most fundamental principle of government that it exists primarily to provide for the common
good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduated
tax. A tax need not be measured by the weight of the mail or the extent of the service rendered. We have said that
considerations of administrative convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction,
operating equally on all persons within the class regardless of the amount involved. 16 As Mr. Justice Holmes said in
sustaining the validity of a stamp act which imposed a flat rate of two cents on every $100 face value of stock
transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The inequality of the
tax, so far as actual values are concerned, is manifest. But, here again equality in this sense has to yield to
practical considerations and usage. There must be a fixed and indisputable mode of ascertaining a stamp
tax. In another sense, moreover, there is equality. When the taxes on two sales are equal, the same number
of shares is sold in each case; that is to say, the same privilege is used to the same extent. Valuation is not
the only thing to be considered. As was pointed out by the court of appeals, the familiar stamp tax of 2 cents
on checks, irrespective of income or earning capacity, and many others, illustrate the necessity and practice
of sometimes substituting count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the benefit of the
Philippine Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General
points out, the Society is not really the beneficiary but only the agency through which the State acts in carrying out
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what is essentially a public function. The money is treated as a special fund and as such need not be appropriated
by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed, this is one of the grounds on which the lower court
invalidated Republic Act 1631, as amended, namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain classes of mail
matters (such as mail permits, metered mails, business reply cards, etc.), the five-centavo charge may be paid in
cash instead of the purchase of the anti-TB stamp. It further states that mails deposited during the period August 19
to September 30 of each year in mail boxes without the stamp should be returned to the sender, if known, otherwise
they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except through the sale of anti-TB
stamps, but such authority may be implied in so far as it may be necessary to prevent a failure of the undertaking.
The authority given to the Postmaster General to raise funds through the mails must be liberally construed,
consistent with the principle that where the end is required the appropriate means are given. 19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional charge but
also that of the regular postage. In the case of business reply cards, for instance, it is obvious that to require mailers
to affix the anti-TB stamp on their cards would be to make them pay much more because the cards likewise bear the
amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not bear the anti-TB stamp,
but a declaration therein that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamp"
is a declaration that such mail matter is nonmailable within the meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a restatement of the law for the guidance of postal officials
and employees. As for Administrative Order 9, we have already said that in listing the offices and entities of the
Government exempt from the payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without pronouncement as to
costs.
3. Theoretical Justice
G. Theory and Basis of Taxation
1. Lifeblood Theory
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
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The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a
letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest
in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not
taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be
served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed
its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR
a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant
was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the
said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of
the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact,
as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
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Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to
the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the
end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or
her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction.
The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was
the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision
of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for salaries
or other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical application may
be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
91 | P a g e
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whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted
by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship
is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
2. Necessity Theory
G.R. No. L-22074
April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
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The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various
dates, with foreign insurance companies not doing business in the Philippines namely: Imperio Compaia de
Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza,
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff
Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the
premiums on insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine
Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a register in
Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to
be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to
5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their
contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the
following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .
P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . .
721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April
13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on
the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .
P768,580.00
Withholding tax due thereon at 24% . . . . . . . .
P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
46,114.00
Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . .
P780.880.68
Withholding tax due thereon at 24% . . . . . . . .
P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
P184,411.00
Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
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TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the
Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office
here.
The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were
performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of
Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of
the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign resinsurers, localizing in
the Philippines the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing insurance
business in the Philippines were payable by the foreign reinsurers when the same were not recoverable from the
original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded
premiums, in consideration for administration and management by the latter of the affairs of the former in the
Philippines in regard to their reinsurance activities here. Disputes and differences between the parties were subject
to arbitration in the City of Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were
signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both
parties in Switzerland, the same specifically provided that its provision shall be construed according to the laws of
the Philippines, thereby manifesting a clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines.
The word "sources" has been interpreted as the activity, property or service giving rise to the income. 1 The
reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as explained
above, took place in the Philippines. These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of activity. Business should not be
continuity and progression of transactions 2 while activity may consist of only a single transaction. An activity may
occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place
ofactivity that created an income.
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Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines
because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive
enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other kinds of income should not be considered likewise.
1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend
its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal Revenue
requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty to pay the
corresponding withholding tax thereon. This defense of petitioner may free if from the payment of surcharges or
penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate if from
liability to pay such withholding tax The Government is not estopped from collecting taxes by the mistakes or errors
of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in
the Philippines are subject to withholding tax under Section 53 and 54 of the Tax Code, suffice it to state that this
question has already been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually remitted to the
foreign reinsurers instead of from the total amount ceded. And since it did not remit any amount to its foreign
insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the Philippines and not having any office or
place of business therein, there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof, and such
tax shall be returned and paid in the same manner and subject to the same conditions as provided in that
section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships (compaias colectivas), in
what ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in
any trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers
and employees of the Government of the Philippines having the control, receipt, custody, disposal, or
payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the Philippines and not having any
office or place of business therein, shall (except in the case provided for in subsection [a] of this section)
deduct and withhold from such annual or periodical gains, profits, and income a tax equal to twelveper
centum thereof: Provided That no deductions or withholding shall be required in the case of dividends paid
by a foreign corporation unless (1) such corporation is engaged in trade or business within the Philippines or
has an office or place of business therein, and (2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the close of its taxable year preceding the declaration
of such dividends (or for such part of such period as the corporation has been in existence)was derived from
95 | P a g e
TAXATION I
sources within the Philippines as determined under the provisions of section thirty-seven: Provided, further,
That the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the interest
upon any securities the owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining the amount to
be withheld. According, in computing the withholding tax due on the reinsurance premium in question, no deduction
shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to pay to
the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a total amount of
P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid
within 30 days from the date this judgement becomes final, there shall be collected a surcharged of 5% on the
amount unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to
a period of three (3) years. With costs againsts petitioner.
3. Benefits-protection Theory (Symbiotic Relationship)

CIR vs Aligue (SUPRA)
4. Jurisdiction over subjects and objects
96 | P a g e

Tax 1

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TAXATION I

A. Definition and Concept of Taxation

Now for the substantive question.

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

January 29, 1968

D. Power of Taxation Compared with Other Powers

July 17, 2007

March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner,

December 22, 1955

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,

On February 26, 2004, RA 9257 amended certain provisions of RA 7432, to wit:

In that case, we ruled:

Police power versus eminent domain.

But this is not the case here.

The above paragraph, in full, states

2. Power of Eminent Domain

Receipt by PIATCO of Proferred

September 28, 2011

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

New Specific Tax

(1) Net Retail Price

(2) Net Retail Price

(3) Net Retail Price

July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

Withholding tax due thereon at 24% . . . . . . . .

Compromise for non-filing of withholding

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

Gross premium per investigation . . . . . . . . . .

Withholding tax due thereon at 24% . . . . . . . .

Compromise for non-filing of withholding

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

3. Benefits-protection Theory (Symbiotic Relationship)

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