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Abra Valley College vs.

Aquino
Facts:
Petitioner, an educational corporation and
institution of higher learning duly
incorporated with the Securities and
Exchange Commission in 1948, filed a
complaint (Annex "1" of Answer by the
respondents Heirs of Paterno Millare; Rollo,
pp. 95-97) on July 10, 1972 in the court a
quo to annul and declare void the "Notice of
Seizure" and the "Notice of Sale" of its lot
and building located at Bangued, Abra, for
non-payment of real estate taxes and
penalties amounting to P5,140.31. Said
"Notice of Seizure" of the college lot and
building covered by Original Certificate of
Title No. Q-83 duly registered in the name
of petitioner, plaintiff below, on July 6,
1972, by respondents Municipal Treasurer
and Provincial Treasurer, defendants below,
was issued for the satisfaction of the said
taxes thereon. The "Notice of Sale" was
caused to be served upon the petitioner by
the respondent treasurers on July 8, 1972 for
the sale at public auction of said college lot
and building, which sale was held on the
same date. Dr. Paterno Millare, then
Municipal Mayor of Bangued, Abra, offered
the highest bid of P6,000.00 which was duly
accepted. The certificate of sale was
correspondingly issued to him.
On August 10, 1972, the respondent Paterno
Millare (now deceased) filed through
counsel a motion to dismiss the complaint
On August 23, 1972, the respondent
Provincial Treasurer and Municipal
Treasurer, through then Provincial Fiscal

Loreto C. Roldan, filed their answer (Annex


"2" of Answer by the respondents Heirs of
Paterno Millare; Rollo, pp. 98-100) to the
complaint this was followed by an amended
answer on August 31, 1972.
On October 12, 1972, with the aforesaid sale
of the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of
the Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109110) the respondents provincial and
municipal treasurers to deliver to the Clerk
of Court the proceeds of the auction sale.
Hence, on December 14, 1972, petitioner,
through Director Borgonia, deposited with
the trial court the sum of P6,000.00
evidenced by PNB Check No. 904369.
Aside from the Stipulation of Facts, the trial
court among others, found the following: (a)
that the school is recognized by the
government and is offering Primary, High
School and College Courses, and has a
school population of more than one
thousand students all in all; (b) that it is
located right in the heart of the town of
Bangued, a few meters from the plaza and
about 120 meters from the Court of First
Instance building; (c) that the elementary
pupils are housed in a two-storey building
across the street; (d) that the high school and
college students are housed in the main
building; (e) that the Director with his
family is in the second floor of the main
building; and (f) that the annual gross
income of the school reaches more than one
hundred thousand pesos.

The succeeding Provincial Fiscal, Hon. Jose


A. Solomon and his Assistant, Hon.
Eustaquio Z. Montero, filed a Memorandum
for the Government on March 25, 1974, and
a Supplemental Memorandum on May 7,
1974, wherein they opined "that based on
the evidence, the laws applicable, court
decisions and jurisprudence, the school
building and school lot used for educational
purposes of the Abra Valley
College, Inc., are exempted from the
payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed
because of the use of the second floor by the
Director of petitioner school for residential
purposes. He thus ruled for the government
and rendered the assailed decision.
After having been granted by the trial court
ten (10) days from August 6, 1974 within
which to perfect its appeal (Per Order dated
August 6, 1974; Annex "G" of Petition;
Rollo, p. 57) petitioner instead availed of the
instant petition for review on certiorari with
prayer for preliminary injunction before this
Court, which petition was filed on August
17, 1974
Petitioner contends that the primary use of
the lot and building for educational
purposes, and not the incidental use thereof,
determines the exemption from property
taxes under Section 22 (3), Article VI of the
1935 Constitution. Hence, the seizure and
sale of subject college lot and building,
which are contrary thereto as well as to the
provision of Commonwealth Act No. 470,

otherwise known as the Assessment Law,


are without legal basis and therefore void.
cdrep
On the other hand, private respondents
maintain that the college lot and building in
question which were subjected to seizure
and sale to answer for the unpaid tax are
used: (1) for the educational purposes of the
college; (2) as the permanent residence of
the President and Director thereof, Mr.
Pedro V. Borgonia, and his family including
the in-laws and grandchildren; and (3) for
commercial purposes because the ground
floor of the college building is being used
and rented by a commercial establishment,
the Northern Marketing Corporation
Issue: whether or not the lot and building in
question are used exclusively for
educational purposes
Ruling:The petition is denied
In this regard petitioner argues that the
primary use of the school lot and building is
the basic and controlling guide, norm and
standard to determine tax exemption, and
not the mere incidental use thereof
In YMCA of Manila vs. Collector of Internal
Revenue, 33 Phil. 217 [1916], this Court
ruled that while it may be true that the
YMCA keeps a lodging and a boarding
house and maintains a restaurant for its
members, still these do not constitute
business in the ordinary acceptance of the
word, but an institution used exclusively for
religious, charitable and educational

purposes, and as such, it is entitled to be


exempted from taxation.
In the case of Bishop of Nueva Segovia v.
Provincial Board of Ilocos Norte, 51 Phil.
352 [1972], this Court included in the
exemption a vegetable garden in an adjacent
lot and another lot formerly used as a
cemetery. It was clarified that the term "used
exclusively" considers incidental use also.
Thus, the exemption from payment of land
tax in favor of the convent includes, not only
the land actually occupied by the building
but also the adjacent garden devoted to the
incidental use of the parish priest. The lot
which is not used for commercial purposes
but serves solely as a sort of lodging place,
also qualifies for exemption because this
constitutes incidental use in religious
functions.
The test of exemption from taxation is the
use of the property for purposes mentioned
in the Constitution (Apostolic Prefect v. City
Treasurer of Baguio , 71 Phil. 547 [1941]).
It must be stressed however, that while this
Court allows a more liberal and
nonrestrictive interpretation of the phrase
"exclusively used for educational purposes"
as provided for in Article VI, Section 22,
paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has
always been made that exemption extends to
facilities which are incidental to and
reasonably necessary for the
accomplishment of the main purposes.
Otherwise stated, the use of the school
building or lot for commercial purposes is

neither contemplated by law, nor by


jurisprudence. Thus, while the use of the
second floor of the main building in the case
at bar for residential purposes of the
Director and his family, may find
justification under the concept of incidental
use, which is complimentary to the main or
primary purpose educational, the lease of
the first floor thereof to the
Northern Marketing Corporation cannot by
any stretch of the imagination be considered
incidental to the purpose of education.
It will be noted however that the
aforementioned lease appears to have been
raised for the first time in this Court. That
the matter was not taken up in the trial court
is really apparent in the decision of
respondent Judge. No mention thereof was
made in the stipulation of facts, not even in
the description of the school building by the
trial judge, both embodied in the decision
nor as one of the issues to resolve in order to
determine whether or not said property may
be exempted from payment of real estate
taxes (Rollo, pp. 17-23). On the other hand,
it is noteworthy that such fact was not
disputed even after it was raised in this
Court.
Indeed it is axiomatic that facts not raised in
the lower court cannot be taken up for the
first time on appeal. Nonetheless, as an
exception to the rule, this Court has held that
although a factual issue is not squarely
raised below, still in the interest of
substantial justice, this Court is not
prevented from considering a pivotal factual
matter. "The Supreme Court is clothed with

ample authority to review palpable errors


not assigned as such if it finds that their
consideration is necessary in arriving at a
just decision." (Perez vs. Court of Appeals,
127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court
correctly arrived at the conclusion that the
school building as well as the lot where it is
built, should be taxed, not because the
second floor of the same is being used by
the Director and his family for residential
purposes, but because the first floor thereof
is being used for commercial purposes.
However, since only a portion is used for
purposes of commerce, it is only fair that
half of the assessed tax be returned to the
school involved.
American Bible Society v. City of Manila
Facts:
Plaintiff-appellant is a foreign, non-stock,
non-profit, religious, missionary corporation
duly registered and doing business in the
Philippines through its Philippine agency
established in Manila in November, 1898,
with its principal office at 636 Isaac Peral in
said City. The defendant-appellee is a
municipal corporation with powers that are
to be exercised in conformity with the
provisions of Republic Act No. 409, known
as the Revised Charter of the City of Manila.
In the course of its ministry, plaintiff's
Philippine agency has been distributing and
selling bibles and/or gospel portions thereof
(except during the Japanese occupation)
throughout the Philippines and translating
the same into several Philippine dialects. On

May 29, 1953, the acting City Treasurer of


the City of Manila informed plaintiff that it
was conducting the business of general
merchandise since November, 1945, without
providing itself with the necessary Mayor's
permit and municipal license, in violation of
Ordinance No. 3000, as amended, and
Ordinances Nos. 2529, 3028 and 3364, and
required plaintiff to secure, within three
days, the corresponding permit and license
fees, together with compromise covering the
period from the 4th quarter of 1945 to the 2nd
quarter of 1953, in the total sum of
P5,821.45
Plaintiff protested against this requirement,
but the City Treasurer demanded that
plaintiff deposit and pay under protest the
sum of P5,891.45, if suit was to be taken in
court regarding the same (Annex B). To
avoid the closing of its business as well as
further fines and penalties in the premises
In its complaint plaintiff prays that judgment
be rendered declaring the said Municipal
Ordinance No. 3000, as amended, and
Ordinances Nos. 2529, 3028 and 3364
illegal and unconstitutional, and that the
defendant be ordered to refund to the
plaintiff the sum of P5,891.45 paid under
protest, together with legal interest thereon,
and the costs, plaintiff further praying for
such other relief and remedy as the court
may deem just and equitable.
Defendant answered the complaint,
maintaining in turn that said ordinances
were enacted by the Municipal Board of the
City of Manila by virtue of the power

granted to it by section 2444, subsection (m


-2) of the Revised
Administrative Code, superseded on June
18, 1949, by section 18, subsection (1) of
Republic Act No. 409, known as the Revised
Charter of the City of Manila, and praying
that the complaint be dismissed, with costs
against plaintiff. This answer was replied by
the plaintiff reiterating the
unconstitutionality of the often repeated
ordinances.
When the case was set for hearing, plaintiff
proved, among other things, that it has been
in existence in the Philippines since 1899,
and that its parent society is in New York,
United States of America; that its contiguous
real properties located at Isaac Peral are
exempt from real estate taxes; and that it
was never required to pay any municipal
license fee or tax before the war, nor does
the American Bible Society in the United
States pay any license fee or sales tax for the
sale of bible therein. Plaintiff further tried to
establish that it never made any profit from
the sale of its bibles, which are disposed of
for as low as one third of the cost, and that
in order to maintain its operating cost it
obtains substantial remittances from its New
York office and voluntary contributions and
gifts from certain churches, both in the
United States and in the Philippines, which
are interested in its missionary work.
Regarding plaintiff's contention of lack of
profit in the sale of bibles, defendant retorts
that the admissions of plaintiff-appellant's
lone witness who testified on crossexamination that bibles bearing the price of
70 cents each from plaintiff-appellant's New

York office are sold here by plaintiffappellant at P1.30 each; those bearing the
price of $4.50 each are sold here at P10
each; those bearing the price of $7 each are
sold here at P15 each; and those bearing the
price of $11 each are sold here at P22 each,
clearly show that plaintiff's contention that it
never makes any profit from the sale of its
bible, is evidently untenable.
After hearing the Court rendered judgment
in favor of the respondent city
Issue:
(1) whether or not the ordinances of the City
of Manila, Nos. 3000, as amended, and
2529, 3028 and 3364, are constitutional and
valid;
(2) whether the provisions of said
ordinances are applicable or not to the case
at bar.
Ruling: The petition is granted
Section 1, subsection (7) of Article III of the
Constitution of the Republic of the
Philippines, provides that:
"(7) No law shall be made respecting an
establishment of religion, or prohibiting the
free exercise thereof, and the free exercise
and enjoyment of religious profession and
worship, without discrimination or
preference, shall forever be allowed. No
religion test shall be required for the
exercise of civil or political rights."
Predicated on this constitutional mandate,
plaintiff-appellant contends that Ordinances
Nos. 2529 and 3000, as respectively
amended, are unconstitutional and illegal in

so far as its society is concerned, because


they provide for religious censorship and
restrain the free exercise and enjoyment of
its religious profession, to wit: the
distribution and sale of bibles and other
religious literature to the people of the
Philippines
. The records show that by letter of May 29,
1953 (Annex A), the City Treasurer required
plaintiff to secure a Mayor's permit in
connection with the society's alleged
business of distributing and selling bibles,
etc. and to pay permit dues in the sum of
P35 for the period covered in this litigation,
plus the sum of P35 for compromise on
account of plaintiff's failure to secure the
permit required by Ordinance No. 3000 of
the City of Manila, as amended. This
Ordinance is of general application and not
particularly directed against institutions like
the plaintiff, and it does not contain any
provisions whatsoever prescribing religious
censorship nor restraining the free exercise
and enjoyment of any religious profession.
The business, trade or occupation of the
plaintiff involved in this case is not
particularly mentioned in Section 3 of the
Ordinance, and the record does not show
that a permit is required therefor under
existing laws and ordinances for the proper
supervision and enforcement of their
provisions governing the sanitation, security
and welfare of the public and the health of
the employees engaged in the business of
the plaintiff. However, section 3 of
Ordinance 3000 contains item No. 79

Therefore, the necessity of the permit is


made to depend upon the power of the City
to license or tax said business, trade or
occupation.
As to the license fees that the Treasurer of
the City of Manila required the society to
pay from the 4th quarter of 1945 to the 1st
quarter of 1953 in the sum of P5,821.45,
including the sum of P50 as compromise,
Ordinance No. 2529, as amended by
Ordinances Nos. 2779, 2821 and 3028
As may be seen, the license fees required to
be paid quarterly- in Section 1 of said
Ordinance No. 2529, as amended, are not
imposed directly upon any religious
institution but upon those engaged in any of
the business or occupations therein
enumerated, such as retail "dealers in
general merchandise" which, it is alleged,
cover the business or occupation of selling
bibles, books,
Chapter 60 of the Revised Administrative
Code which includes section 2444,
subsection (m -2) of said legal body, as
amended by Act No. 3659, approved on
December 8, 1929, empowers the Municipal
Board of the City of Manila
Appellee's counsel maintains that City
Ordinances Nos. 2529 and 3000, as
amended, were enacted in virtue of the
power that said Act No. 3669 conferred
upon the City of Manila. Appellant,
however, contends that said ordinances are
no longer in force and effect as the law
under which they were promulgated has

been expressly repealed by Section 102 of


Republic Act No. 409 passed on June 18,
1949, known as the Revised Manila Charter.
Passing upon this point the lower Court
categorically stated that Republic Act No.
409 expressly repealed the provisions of
Chapter 60 of the Revised Administrative
Code but in the opinion of the trial Judge,
although Section 244
(m -2) of the former Manila Charter and
section 18 (o) of the new seemingly differ in
the way the legislative intent was expressed,
yet their meaning is practically the same for
the purpose of taxing the merchandise
mentioned in both legal provisions and,
consequently, Ordinances Nos. 2529 and
3000, as amended, are to be considered as
still in full force and effect uninterruptedly
up to the present
Appellant's counsel states that section 18 (o)
of Republic Act No. 409 introduces a new
and wider concept of taxation and is so
different from the provisions of Section
2444(m -2) that the former cannot be
considered as a substantial re-enactment of
the provisions of the latter.
The only essential difference that We find
between these two provisions that may have
any bearing on the case at bar, is that while
subsection (m -2) prescribes that the
combined total tax of any dealer or
manufacturer, or both, enumerated under
subsections (m -1) and (m - 2), whether
dealing in one or all of the articles
mentioned therein, shall not be in excess of
P500 per annum , the corresponding section

18, subsection (o) of Republic Act No. 409,


does not contain any limitation as to the
amount of tax or license fee that the retail
dealer has to pay per annum. Hence, and in
accordance with the weight of the authorities
above referred to that maintain that "all
rights and liabilities which have accrued
under the original statute are preserved and
may be enforced, since the reenactment
neutralizes the repeal, therefore continuing
the law in force without interruption", We
hold that the questioned ordinances of the
City of Manila are still in force and effect.
Plaintiff, however, argues that the
questioned ordinances, to be valid, must first
be approved by the President of the
Philippines as per section 18, subsection (ii )
of Republic Act No. 409,
But this requirement of the President's
approval was not contained in section 2444
of the former Charter of the City of Manila
under which Ordinance No. 2529 was
promulgated. Anyway, as stated by
appellee's counsel, the business of
"retail dealers in general merchandise" is
expressly enumerated in subsection
(o), section 18 of Republic Act No. 409;
hence, an ordinance prescribing a municipal
tax on said business does not have to be
approved by the President to be effective, as
it is not among those referred to in said
subsection (ii ). Moreover, the questioned
ordinances are still in force, having been
promulgated by the
Municipal Board of the City of Manila
under the authority granted to it by law.

With regard to Ordinance No. 2529, as


amended by Ordinances Nos. 2779, 2821
and 3028, appellant contends that it is
unconstitutional and illegal because it
restrains the free exercise and enjoyment of
the religious profession and worship of
appellant.
Article III, section 1, clause (7) of the
Constitution of the Philippines aforequoted,
guarantees the freedom of religious
profession and worship. "Religion has been
spoken of as 'a profession of faith to an
active power that binds and elevates man to
its Creator' (Aglipay vs. Ruiz, 64 Phil., 201).
It has reference to one's views of his
relations to His Creator and to the
obligations they impose of reverence to His
being and character, and obedience to His
Will (Davis vs. Beason, 133 U.S., 342). The
constitutional guaranty of the free exercise
and enjoyment of religious profession and
worship carries with it the right to
disseminate religious information. Any
restraint of such right can only be justified
like other restraints of freedom of expression
on the grounds that there is a clear and
present danger of any substantive evil which
the State has the right to prevent".
In the case at bar the license fee herein
involved is imposed upon appellant for its
distribution and sale of bibles and other
religious literature
Section 27 of Commonwealth Act No. 466,
otherwise known as the National Internal
Revenue Code

Appellant's counsel claims that the Collector


of Internal Revenue has exempted the
plaintiff from this tax and says that such
exemption clearly indicates that the act of
distributing and selling bibles, etc. is purely
religious and does not fall under the above
legal provisions.
It may be true that in the case at bar the
price asked for the bibles and other religious
pamphlets was in some instances a little bit
higher than the actual cost of the same, but
this cannot mean that appellant was engaged
in the business or occupation of selling said
"merchandise" for profit. For this reason We
believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be
applied to appellant, for in doing so it would
impair its free exercise and enjoyment of its
religious profession and worship as well as
its rights of dissemination of religious
beliefs.
With respect to Ordinance No. 3000, as
amended, which requires the obtention of
the Mayor's permit before any person can
engage in any of the businesses, trades or
occupations enumerated therein, We do not
find that it imposes any charge upon the
enjoyment of a right granted by the
Constitution, nor tax the exercise of
religious practices.
It seems clear, therefore, that Ordinance No.
3000 cannot be considered unconstitutional,
even if applied to plaintiff Society. But as
Ordinance No. 2529 of the City of Manila,
as amended, is not applicable to plaintiffappellant and defendant-appellee is

powerless to license or tax the business of


plaintiff Society involved herein for, as
stated before, it would impair plaintiff's right
to the free exercise and enjoyment of its
religious profession and worship, as well as
its rights of dissemination of religious
beliefs, We find that Ordinance No. 3000, as
amended, is also inapplicable to said
business, trade or occupation of the plaintiff
CONSTITUTIONAL LAW; RELIGIOUS
FREEDOM; DISSEMINATION OF
RELIGIOUS INFORMATION, WHEN
MAY BE RESTRAINED; PAYMENT OF
LICENSE
FEE, IMPAIRS FREE EXERCISE OF
RELIGION. The constitutional guaranty
of the free exercise and enjoyment of
religious profession and worship carries
with it the right to disseminate religious
information. Any restraint of such right can
only be justified like other restraints of
freedom of expression on the grounds that
there is a clear and present danger of any
substantive evil which the State has the right
to prevent." (Taada and Fernando on the
Constitution of the Philippines, Vol. I, 4th
ed., p. 297). In the case at bar, plaintiff is
engaged in the distribution and sales of
bibles and religious articles. The City
Treasurer of Manila informed the plaintiff
that it was conducting the business of
general merchandise without providing itself
with the necessary Mayor's permit and
municipal license, in violation of Ordinance
No. 3000, as amended, and Ordinance No.
2529, as amended, and required plaintiff to
secure the corresponding permit and license.
Plaintiff protested against this requirement

and claimed that it never made any profit


from the sale of its bibles. Held: It is true the
price asked for the religious articles was in
some instances a little bit higher than the
actual cost of the same, but this cannot mean
that plaintiff was engaged in the business or
occupation of selling said "merchandise" for
profit. For this reasons, the provisions of
City Ordinance No. 2529, as amended,
which requires the payment of license fee
for conducting the business of general
merchandise, cannot be applied to plaintiff
society, for in doing so, it would impair its
free exercise and enjoyment of its religious
profession and worship, as well as its rights
of dissemination of religious beliefs. Upon
the other hand, City Ordinance No. 3000, as
amended, which requires the obtention of
the Mayor's permit before any person can
engage in
any of the businesses, trades or occupations
enumerated therein, does not impose any
charge upon the enjoyment of a right
granted by the Constitution, nor tax the
exercise of religious practices. Hence, it
cannot be considered unconstitutional, even
if applied to plaintiff Society. But as
Ordinance No. 2529 is not applicable to
plaintiff and the City of Manila is powerless
to license or tax the business of plaintiff
society involved herein, for the reasons
above stated, Ordinance No. 3000 is also
inapplicable to said business, trade or
occupation of the plaintiff.
Casanovas v. Hord
Facts: The plaintiff brought this action
against the defendant, the Collector of
Internal Revenue, to recover the sum of

P9,600, paid by him under protest as taxes


on certain mining claims owned by him in
the Province of Ambos Camarines.
Judgment was rendered in the court below in
favor of the defendant, and from that
judgment the plaintiff appealed

The defendant accordingly imposed upon


these properties the tax mentioned in section
134, which tax, as has before been stated,
plaintiff paid under protest.

In January, 1897, the Spanish Government,


in accordance with the provisions of the
royal decree of the 14th of May, 1867,
granted to the plaintiff certain mines in the
said Province of Ambos Camarines, of
which mines the plaintiff is now the owner.

It is claimed by the plaintiff that it is void


because it comes within the provision of
section 5 of the act of Congress of July 1,
1902 1 (32 U.S. Stat. L., 691), which
provides "that no law impairing the
obligation of contracts shall be enacted."
The royal decree of the 14th of May, 1867,
provided, among other things

That these were valid perfected mining


concessions granted prior to the 11th of
April, 1899, is conceded. They were so
considered by the Collector of Internal
Revenue and were by him said to fall within
the provisions of section 134 of Act No.
1189, known as the Internal Revenue Act.
SEC. 134. On all valid perfected mining
concessions granted prior to April eleventh,
eighteen hundred and ninety-nine, there
shall be levied and collected on the after
January first, nineteen hundred and five, the
following taxes:
1. (a) On each claim containing an area of
sixty thousand square meters, an annual tax
of one hundred pesos; (b) and at the same
rate proportionately on each claim
containing an area in excess of, or less than,
sixty thousand square meters.
2. (a) On the gross output of each mine an
ad valorem tax equal to three per centum of
the actual market value of such output."

The royal decree and regulation for its


enforcement provided that the deeds granted
by the Government should be in a particular
form, which form was inserted in the
regulations. It must be presumed that the
deeds granted to the plaintiff were made as
provided by law, and, in fact, one of such
concessions was exhibited during the
argument in this court, and was found to be
in exact conformity with the form prescribed
by law
Issue: Whether this section 134 is void or
valid.
Ruling: The petition is granted
It seems very clear to us that this deed
constituted a contract between the
Spanish Government and the plaintiff, the
obligation of which contract was impaired
by the enactment of section 134 of the
Internal Revenue Law above cited, thereby
infringing the provisions above quoted from
section 5 of the act of Congress of July 1,

1902. This conclusion seems necessarily to


result from the decisions of the Supreme
Court of the United States in similar cases.
In the case of McGee vs. Mathis (4 Wallace,
143), it appeared that the State of Arkansas,
by an act of the legislature of 1851, provided
for the sale of certain swamp lands granted
to it by the United States; for the issue of
transferable scrip receivable for any lands
not already taken up at the time of selection
by the holder; for contracts for the making
of levees and drains, and for the payment of
contractors in scrip and otherwise. In the
fourteenth section of this act it was provided
that
In 1855 this section was repealed and
provision was made by law for the taxation
of swamp and overflowed lands, sold or to
be sold, precisely as other lands. McGee,
before this appeal, had become the owner by
transfer from contractors of a large amount
of scrip issued under the Act of 1851, and
with this scrip, after the repeal, took up and
paid for many sections and parts of sections
of the granted lands. Taxes were levied by
the State on the lands so taken up by
McGee. The Supreme Court held that these
taxes could not be collected
In the case of the Home of the Friendless vs.
Rouse (8 Wallace, 430), it appeared that on
the 3d day of February, 1853, the legislature
of Missouri passed on act to incorporate the
Home of the Friendless in the city of St.
Louis. Section 1 of the act provided that
"All property of said corporation shall be
exempt from taxation."

The court held that the State had no power


afterwards to pass laws providing for the
levying of taxes upon this institution.
In the case of The Asylum vs. The City of
New Orleans (105 U.S., 362), it appears that
St. Ariva's Asylum was incorporated by an
act of the legislature of Louisiana, approved
April 29, 1853. The law incorporating it
provided that it should enjoy the same
exemption from taxation which was enjoyed
by the Orphan Boys' Asylum of New
Orleans It was held that the State had no
power by subsequent legislation to impose
taxes upon the property of this institution.
The case at bar falls within the cases
hereinbefore cited. It is to be distinguished
from the case of the Metropolitan Street
Railway Company vs. The New York State
Board of Tax Commissioners (199 U.S., 1).
In that case it was provided by various acts
of the legislature, that the companies therein
referred to, should pay annually to the city
of New York, a fixed amount or percentage,
varying from 2 to 8 per cent of their gross
earnings additional taxes was sustained by
the court. It was sustained on the ground
that the prior legislation did not expressly
say that the taxes thus provided for should
be in lieu of all other taxes.
But in the case at bar, there is found not only
the provisions for the payment of certain
taxes annually, but there is also found the
provision contained in article 81, above
quoted, which expressly declares that no
other taxes shall be imposed upon these
mines.

The present case is to be distinguished also


from that class of cases of which Grands
Lodge vs. The City of New Orleans (166
U.S., 143) is a type, and which includes Salt
Company vs. East Saginaw (13 Wall., 373)
and Welch vs. Cook (97 U.S., 541). In these
cases the exemption was a mere bounty and
did not form a part of any contract.
The fact that this concession was made by
the Government of Spain, and not by the
Government of the United States, is not
important. (Trustees of Dartmouth College
vs. Woodward, 4 Wheaton, 518.)
Our conclusion is that the concessions
granted by the Government of Spain to the
plaintiff, constitute contracts between the
parties; that section 134 of the Internal
Revenue Law impairs the obligation of these
contracts, and is therefore void as to them.
We think that this section is also void
because in conflict with section 60 of the act
of Congress of July 1, 1902
This section seems to indicate that
concessions, like those in question, can be
canceled only by reason of illegality in the
procedure by which they were obtained, or
for failure to comply with the conditions
prescribed as requisite for their retention in
the laws under which they were granted.
There is nothing in the section which
indicates that they can be canceled for
failure to comply with the conditions
prescribed by subsequent legislation. In fact,
the real intention of the act seems to be that

such concession should be subject to the


former legislation and not to any subsequent
legislation. There is no claim in this case
that there was any illegality in the procedure
by which these concessions were obtained,
nor is there any claim that the plaintiff has
not complied with the conditions prescribed
in the said royal decree of 1867
In view of the result at which we have
arrived, it is not necessary to consider the
further claim made by the plaintiff that the
taxes imposed by article 134 above quoted,
are in violation of the part of section 5 of the
act of July 1, 1902, which declares "that the
rule of taxation in said Islands shall be
uniform."
Gerochi vs. DOE
Facts: Petitioners Romeo P. Gerochi,
Katulong Ng Bayan (KB), and
Environmentalist
Consumers Network, Inc. (ECN)
(petitioners), come before this Court in this
original action praying that Section 34 of
Republic Act (RA) 9136, otherwise known
as the "Electric Power Industry Reform Act
of 2001" (EPIRA), imposing the Universal
Charge, 1 and Rule 18 of the Rules and
Regulations (IRR) 2 which seeks to
implement the said imposition, be declared
unconstitutional. Petitioners also pray that
the Universal Charge imposed upon the
consumers be refunded and that a
preliminary injunction and/or temporary
restraining order (TRO) be issued directing
the respondents to refrain from
implementing, charging, and collecting the
said charge

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
On June 26, 2003, the ERC rendered its
Decision 13 (for ERC Case No. 2002-165)
modifying its Order of December 20, 2002,
On August 13, 2003, NPC-SPUG filed a
Motion for Reconsideration asking the ERC,
among others, 14 to set aside the abovementioned Decision, which the ERC granted
in its Order dated October 7, 2003
Meanwhile, on April 2, 2003, ERC decided
ERC Case No. 2002-194, authorizing the
NPC to draw up to P70,000,000.00 from
PSALM for its 2003 Watershed

Rehabilitation Budget subject to the


availability of funds for the Environmental
Fund component of the Universal Charge.
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.
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 cases 19 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 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. 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
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
Issue:
(1)Whether or not, the Universal Charge
imposed under Sec. 34 of the
EPIRA is a tax;
2) Whether or not there is undue delegation
of legislative power to tax
on the part of the ERC.
Ruling: The petition is denied.
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. It is based on
the principle that taxes are the lifeblood of
the government, and their prompt and
certain availability is an imperious need.
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.
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. 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. 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.
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.
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 imposed
and which can be amply discerned as
regulatory in character.
From the aforementioned purposes, it can be
gleaned that the assailed Universal Charge is
not a tax, but an exaction in the exercise of
the State's police power. Public welfare is
surely promoted.
Moreover, it is a well-established doctrine
that the taxing power may be used as an
implement of police power. 38 In Valmonte
v. Energy Regulatory Board, et al . 39 and
in Gaston v. Republic Planters Bank , 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. Orbos 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
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.

2. 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.
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.
The Court finds that the EPIRA, read and
appreciated in its entirety, in relation to Sec.
34 thereof, is complete in all its essential
terms and conditions, and that it contains
sufficient standards.
Although Sec. 34 of the EPIRA merely
provides that "within one (1) year from the
effectivity thereof, a Universal Charge to be
determined, fixed and approved by the ERC,
shall be imposed on all electricity endusers," 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.
Moreover, contrary to the petitioners'
contention, the ERC does not enjoy a wide
latitude of discretion in the determination of
the Universal Charge.
Thus, the law is complete and passes the
first test for valid delegation of legislative
power

As to the second test, this Court had, in the


past, accepted as sufficient standards the
following: "interest of law and order;" 51
"adequate and efficient instruction;"
52"public interest;" 53 "justice and equity;"
54 "public convenience and welfare;" 55
"simplicity, economy and efficiency;" 56
"standardization and regulation of medical
education;" 57 and "fair and equitable
employment practices." 58 Provisions of the
EPIRA such as, among others, "to ensure the
total electrification of the country and the
quality, reliability, security and affordability
of the supply of electric power" 59 and
"watershed rehabilitation and management"
60 meet the requirements for valid
delegation, as they provide the limitations
on the ERC's power to formulate the IRR.
These are sufficient standards
It may be noted that this is not the first time
that the ERC's conferred powers were
challenged. In Freedom from Debt Coalition
v. Energy Regulatory Commission
In his Concurring and Dissenting Opinion
62 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
This was reiterated in National Association
of Electricity Consumers for Reforms v.
Energy Regulatory Commission 63 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. 65 Moreover, the determination of
whether or not a tax is excessive, oppressive
or confiscatory is an issue which essentially
involves questions of fact and thus, this
Court is precluded from reviewing the same
Lung Center vs. Quezon City
Facts: The petitioner Lung Center of the
Philippines is a non-stock and non-profit
entity established on January 16, 1981 by
virtue of Presidential Decree No. 1823. The
lot has an area of 121,463 square meters and
is covered by Transfer Certificate of Title
(TCT) No. 261320 of the Registry of Deeds
of Quezon City. Erected in the middle of the
aforesaid lot is a hospital known as the Lung
Center of the Philippines. A big space at the
ground floor is being leased to private
parties, for canteen and small store spaces,
and to medical or professional practitioners
who use the same as their private clinics for
their patients whom they charge for their
professional services. Almost one-half of the

entire area on the left side of the building


along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical
Road, is being leased for commercial
purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.
The petitioner accepts paying and nonpaying patients. It also renders medical
services to out-patients, both paying and
non-paying. Aside from its income from
paying patients, the petitioner receives
annual subsidies from the government.
On June 7, 1993, both the land and the
hospital building of the petitioner were
assessed for real property taxes in the
amount of P4,554,860 by the City Assessor
of Quezon City.
On August 25, 1993, the petitioner filed a
Claim for Exemption from real property
taxes with the City Assessor, predicated on
its claim that it is a charitable institution.
The petitioner's request was denied, and a
petition was, thereafter, filed before the
Local Board of Assessment Appeals of
Quezon City (QCLBAA, for brevity) for the
reversal of the resolution of the City
Assessor. The petitioner alleged that under
Section 28, paragraph 3 of the 1987
Constitution, the property is exempt from
real property taxes. It averred that a
minimum of 60% of its hospital beds are
exclusively used for charity patients and that
the major thrust of its hospital operation is to
serve charity patients. The petitioner
contends that it is a charitable institution

and, as such, is exempt from real property


taxes. The QCLBAA rendered judgment
dismissing the petition and holding the
petitioner liable for real property taxes
The QC-LBAA's decision was, likewise,
affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City
(CBAA, for brevity) 7 which ruled that the
petitioner was not a charitable institution
and that its real properties were not actually,
directly and exclusively used for charitable
purposes; hence, it was not entitled to real
property tax exemption under the
constitution and the law. The petitioner
sought relief from the Court of Appeals,
which rendered judgment affirming the
decision of the CBAA
The petitioner avers that it is a charitable
institution within the context of Section
28(3), Article VI of the 1987 Constitution. It
asserts that its character as a charitable
institution is not altered by the fact that it
admits paying patients and renders medical
services to them, leases portions of the land
to private parties, and rents out portions of
the hospital to private medical practitioners
from which it derives income to be used for
operational expenses. The petitioner points
out that for the years 1995 to 1999, 100% of
its out-patients were charity patients and of
the hospital's 282-bed capacity, 60% thereof,
or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies
from the government attests to its character
as a charitable institution. It contends that
the "exclusivity" required in the Constitution
does not necessarily mean "solely." Hence,

even if a portion of its real estate is leased


out to private individuals from whom it
derives income, it does not lose its character
as a charitable institution, and its exemption
from the payment of real estate taxes on its
real property. The petitioner cited our ruling
in Herrera v. QC-BAA to bolster its pose.
The petitioner further contends that even if
P.D. No. 1823 does not exempt it from the
payment of real estate taxes, it is not
precluded from seeking tax exemption under
the 1987 Constitution.
In their comment on the petition, the
respondents aver that the petitioner is not a
charitable entity. The petitioner's real
property is not exempt from the payment of
real estate taxes under P.D. No. 1823 and
even under the 1987 Constitution because it
failed to prove that it is a charitable
institution and that the said property is
actually, directly and exclusively used for
charitable purposes. The respondents noted
that in a newspaper report, it appears that
graft charges were filed with the
Sandiganbayan against the director of the
petitioner, its administrative officer, and
Zenaida Rivera, the proprietress of the
Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13
square meters of the property in 1990 for
only P20,000 a month, when the monthly
rental should be P357,000 a month as
determined by the Commission on Audit;
and that instead of complying with the
directive of the COA for the cancellation of
the contract for being grossly prejudicial to
the government, the petitioner renewed the
same on March 13, 1995 for a monthly

rental of only P24,000. They assert that the


petitioner uses the subsidies granted by the
government for charity patients and uses the
rest of its income from the property for the
benefit of paying patients, among other
purposes. They aver that the petitioner failed
to adduce substantial evidence that 100% of
its outpatients and 170 beds in the hospital
are reserved for indigent patients. The
respondents further assert
Issue:
(a) whether the petitioner is a charitable
institution within the context of Presidential
Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of
Republic Act No. 7160;
(b) whether the real properties of the
petitioner are exempt from real property
taxes.
Ruling: The petition is denied.
On the first issue, we hold that the petitioner
is a charitable institution within the context
of the 1973 and 1987 Constitutions. To
determine whether an enterprise is a
charitable institution/entity or not, the
elements which should be considered
include the statute creating the enterprise, its
corporate purposes, its constitution and bylaws, the methods of administration, the
nature of the actual work performed, the
character of the services rendered, the
indefiniteness of the beneficiaries, and the
use and occupation of the properties. 11
In the legal sense, a charity may be fully
defined as a gift, to be applied consistently
with existing laws, for the benefit of an

indefinite number of persons, either by


bringing their minds and hearts under the
influence of education or religion, by
assisting them to establish themselves in life
or otherwise lessening the burden of
government. It may be applied to almost
anything that tend to promote the welldoing
and well-being of social man. It embraces
the improvement and promotion of the
happiness of man. The word "charitable" is
not restricted to relief of the poor or sick. 14
The test of a charity and a charitable
organization are in law the same. The test
whether an enterprise is charitable or not is
whether it exists to carry out a purpose
reorganized in law as charitable or whether
it is maintained for gain, profit, or private
advantage
Under P.D. No. 1823, the petitioner is a nonprofit and non-stock corporation which,
subject to the provisions of the decree, is to
be administered by the Office of the
President of the Philippines with the
Ministry of Health and the Ministry of
Human Settlements. It was organized for the
welfare and benefit of the Filipino people
principally to help combat the high
incidence of lung and pulmonary diseases in
the Philippines.
Hence, the medical services of the petitioner
are to be rendered to the public in general in
any and all walks of life including those who
are poor and the needy without
discrimination. After all, any person, the rich
as well as the poor, may fall sick or be
injured or wounded and become a subject of
charity.

As a general principle, a charitable


institution does not lose its character as
such and its exemption from taxes simply
because it derives income from paying
patients, whether out-patient, or confined in
the hospital, or receives subsidies from the
government, so long as the money received
is devoted or used altogether to the
charitable object which it is intended to
achieve; and no money inures to the private
benefit of the persons managing or
operating the institution. 18 I n
Congregational
Sunday School, etc. v. Board of Review
The money received by the petitioner
becomes a part of the trust fund and must be
devoted to public trust purposes and cannot
be diverted to private profit or benefit
Under P.D. No. 1823, the petitioner is
entitled to receive donations. The petitioner
does not lose its character as a charitable
institution simply because the gift or
donation is in the form of subsidies granted
by the government. As held by the State
Supreme Court of Utah in Yorgason v .
County Board of Equalization of Salt Lake
County
In this case, the petitioner adduced
substantial evidence that it spent its income,
including the subsidies from the government
for 1991 and 1992 for its patients and for the
operation of the hospital. It even incurred a
net loss in 1991 and 1992 from its
operations.

2. Even as we find that the petitioner is a


charitable institution, we hold, anent the
second issue, that those portions of its real
property that are leased to private entities
are not exempt from real property taxes as
these are not actually, directly and
exclusively used for charitable purposes.
The settled rule in this jurisdiction is that
laws granting exemption from tax are
construed strictissimi juris against the
taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is
the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a
claim for exemption from tax payments
must be clearly shown and based on
language in the law too plain to be mistaken.
26 As held in Salvation Army v. Hoehn
Section 2 of Presidential Decree No. 1823,
relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the
tax exemptions and privileges
It is plain as day that under the decree, the
petitioner does not enjoy any property tax
exemption privileges for its real properties
as well as the building constructed thereon .
If the intentions were otherwise, the same
should have been among the enumeration of
tax exempt privileges under Section 2
The exemption must not be so enlarged by
construction since the reasonable
presumption is that the State has granted in
express terms all it intended to grant at all,
and that unless the privilege is limited to the

very terms of the statute the favor would be


intended beyond what was meant.
The tax exemption under this constitutional
provision covers property taxes only. As
Chief Justice Hilario G. Davide, Jr., then a
member of the 1986 Constitutional
Commission, explained: ". . . what is
exempted is not the institution itself . . .;
those exempted from real estate taxes are
lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes."
Consequently, the constitutional provision is
implemented by Section 234(b) of Republic
Act No. 7160 (otherwise known as the Local
Government Code of 1991
We note that under the 1935 Constitution,
". . . all lands, buildings, and improvements
used 'exclusively' for charitable . . .
purposes shall be exempt from taxation." 36
However, under the 1973 and the present
Constitutions, for "lands, buildings, and
improvements" of the charitable institution
to be considered exempt, the same should
not only be "exclusively" used for charitable
purposes; it is required that such property be
used "actually" and "directly" for such
purposes
In light of the foregoing substantial changes
in the Constitution, the petitioner cannot rely
on our ruling in Herrera v. Quezon City
Board of Assessment Appeals which was
promulgated on September 30, 1961 before
the 1973 and 1987
Constitutions took effect

Under the 1973 and 1987 Constitutions and


Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that
(a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable
purposes.
"Exclusive" is defined as possessed and
enjoyed to the exclusion of others; debarred
from participation or enjoyment; and
"exclusively" is defined, "in a manner to
exclude; as enjoying a privilege
exclusively." If real property is used for one
or more commercial purposes, it is not
exclusively used for the exempted purposes
but is subject to taxation. The words
"dominant use" or "principal use" cannot be
substituted for the words "used exclusively"
without doing violence to the Constitutions
and the law. Solely is synonymous with
exclusively.
What is meant by actual, direct and
exclusive use of the property for charitable
purposes is the direct and immediate and
actual application of the property itself to
the purposes for which the charitable
institution is organized. It is not the use of
the income from the real property that is
determinative of whether the property is
used for tax-exempt purposes.
The petitioner failed to discharge its burden
to prove that the entirety of its real property
is actually, directly and exclusively used for
charitable purposes. While portions of the
hospital are used for the treatment of

patients and the dispensation of medical


services to them, whether paying or nonpaying, other portions thereof are being
leased to private individuals for their clinics
and a canteen. Further, a portion of the land
is being leased to a private individual for her
business enterprise under the business name
"Elliptical Orchids and Garden Center."
Indeed, the petitioner's evidence shows that
it collected P1,136,483.45 as rentals in 1991
and P1,679,999.28 for 1992 from the said
lessees.
Accordingly, we hold that the portions of the
land leased to private entities as well as
those parts of the hospital leased to private
individuals are not exempt from such taxes.
On the other hand, the portions of the land
occupied by the hospital and portions of the
hospital used for its patients, whether paying
or non-paying, are exempt from real
property taxes.
MCIAA vs. Marcos
Facts: Petitioner Mactan Cebu International
Airport Authority (MCIAA) was created by
virtue of Republic Act No. 6958, mandated
to "principally undertake the economical,
efficient and effective control, management
and supervision of the Mactan International
Airport in the Province of Cebu and the
Lahug Airport in Cebu City, . . . and such
other airports as may be established in the
Province of Cebu
Since the time of its creation, petitioner
MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance
with Section 14 of its Charter

On October 11, 1994, however, Mr.


Eustaquio B. Cesa, Officer-in-Charge,
Office of the Treasurer of the City of Cebu,
demanded payment for realty taxes on
several parcels of land belonging to the
petitioner
Petitioner objected to such demand for
payment as baseless and unjustified,
claiming in its favor the aforecited Section
14 of RA 6958 which exempts it from
payment of realty taxes. It was also asserted
that it is an instrumentality of the
government performing governmental
functions, citing Section 133 of the Local
Government Code of 1991 which puts
limitations on the taxing powers of local
government units
Respondent City refused to cancel and set
aside petitioner's realty tax account, insisting
that the MCIAA is a government-controlled
corporation whose tax exemption privilege
has been withdrawn by virtue of Sections
193 and 234 of the Local Government Code
that took effect on January 1, 1992
Issue:
I. RESPONDENT JUDGE ERRED IN
FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH
GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE
SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF
THE GOVERNMENT.

II. RESPONDENT JUDGE ERRED IN


RULING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAXES TO
THE CITY OF CEBU.
Ruling: The petition is denied.
Anent the first assigned error, the petitioner
asserts that although it is a governmentowned or controlled corporation, it is
mandated to perform functions in the same
category as an instrumentality of
Government. An instrumentality of
Government is one created to perform
governmental functions primarily to
promote certain aspects of the economic life
of the people. 6 Considering its task "not
merely to efficiently operate and manage the
Mactan-Cebu International Airport, but
more importantly, to carry out the
Government policies of promoting and
developing the Central Visayas and
Mindanao regions as centers of international
trade and tourism, and accelerating the
development of the means of transportation
and communication in the country," 7 and
that it is an attached agency of the
Department of Transportation and
Communication (DOTC), 8 the petitioner
"may stand in [sic] the same footing as an
agency or instrumentality of the national
government." Hence, its tax exemption
privilege under Section 14 of its Charter
"cannot be considered withdrawn with the
passage of the Local Government Code of
1991 (hereinafter LGC ) because Section
133 thereof specifically states that the
'taxing powers of local government units
shall not extend to the levy of taxes or fees
or charges of any kind on the national

government, its agencies and


instrumentalities.'"
As to the second assigned error, the
petitioner contends that being an
instrumentality of the National Government,
respondent City of Cebu has no power nor
authority to impose realty taxes upon it in
accordance with the aforesaid
Section 133 of the LGC, as explained in
Basco vs. Philippine Amusement and
Gaming Corporation
It then concludes that the respondent Judge
"cannot therefore correctly say that then
questioned provisions of the Code do not
contain any distinction between a
government corporation performing
governmental functions as against one
performing merely proprietary ones such
that the exemption privilege withdrawn
under the said Code would apply to all
government corporations." For it is clear
from Section 133, in relation to Section 234,
of the LGC that the legislature meant to
exclude instrumentalities of the national
government from the taxing powers of the
local government units.
In its comment, respondent City of Cebu
alleges that as a local government unit and a
political subdivision, it has the power to
impose, levy, assess, and collect taxes within
its jurisdiction. Such power is guaranteed by
the Constitution 10 and enhanced further by
the LGC. While it may be true that under its
Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption
was withdrawn by Section 234 of the LGC.
In response to the petitioner's claim that

such exemption was not repealed because


being an instrumentality of the National
Government, Section 133 of the LGC
prohibits local government units from
imposing taxes, fees, or charges of any kind
on it, respondent City of Cebu points out
that the petitioner is likewise a governmentowned corporation, and Section
234 thereof does not distinguish between
government-owned or controlled
corporations performing governmental and
purely proprietary functions.
Respondent City of Cebu urges this Court to
apply by analogy its ruling that the Manila
International Airport Authority is a
government-owned corporation, and to
reject the application of Basco because it
was "promulgated . . . before the enactment
and the signing into law of R.A. No. 7160,"
and was not, therefore, decided "in the light
of the spirit and intention of the framers of"
the said law.
POLITICAL LAW; GOVERNMENT;
POWER OF TAXATION; CONSTRUED.
As a general rule, the power to tax is an
incident of sovereignty and is unlimited in
its range, acknowledging in its very nature
no limits, so that security against its abuse is
to be found only in the responsibility of the
legislature which imposes the tax on the
constituency who are to pay it. Nevertheless,
effective limitations thereon may be
imposed by the people through their
Constitution. Our Constitution, for instance,
provides that the rule of taxation shall be
uniform and equitable and Congress shall
evolve a progressive system of taxation. So

potent indeed is the power that it was once


opined that "the power to tax involves the
power to destroy." Verily, taxation is a
destructive power which interferes with the
personal and property rights of the people
and takes from them a portion of their
property for the support of the government.
Accordingly, tax statutes must be construed
strictly against the government and liberally
in favor of the taxpayer. But since taxes are
what we pay for civilized society, or are the
lifeblood of the nation, the law frowns
against exemptions from taxation and
statutes granting the exemptions are thus
construed strictissimi juris against the
taxpayer and liberally in favor of the taxing
authority. A claim of exemption from tax
payments must be clearly shown and based
on language in the law too plain to be
mistaken. Elsewise stated, taxation is the
rule, exemption therefrom is the exception.
However, if the grantee of the exemption is
a political subdivision or instrumentality, the
rigid rule of construction does not apply
because the practical effect of the exemption
is merely to reduce the amount of money
that has to be handled by the government in
the course of its operation.
MAYBE EXERCISED BY THE LOCAL
LEGISLATIVE BODIES. The power to
tax is primarily vested in the Congress;
however, in our jurisdictions, it may be
exercised by local legislative bodies, no
longer merely by virtue of a valid delegation
as before, but pursuant to direct authority
conferred by Section 5, Article
X of the Constitution. Under the latter, the
exercise of the power may be subject to such

guidelines and limitations as the Congress


may provide which, however, must be
consistent with the basic policy of local
autonomy. The LGC, enacted pursuant to
Section 3, Article X of the Constitution,
provides for the exercise by local
government units of their power to tax, the
scope thereof or its limitations, and the
exemptions from taxation. Section 133 of
the LGC prescribes the common limitations
on the taxing powers of local government
units.
EXEMPTION FROM PAYMENT OF TAX
MAYBE WITHDRAWN AT THE
PLEASURE OF THE TAXING
AUTHORITY; EXCEPTION. There can
be no question that under Section 14 of R.A.
No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the
National Government or any of its political
subdivisions, agencies, and
instrumentalities. Nevertheless, since
taxation is the rule and exemption therefrom
the exception, the exemption may thus be
withdrawn at the pleasure of the taxing
authority. The only exception to this rule is
where the exemption was granted to private
parties based on material consideration of a
mutual nature, which then becomes
contractual and is thus covered by the nonimpairment claim of the Constitution.
LOCAL GOVERNMENT CODE; SEC. 234
PROVIDES FOR THE EXEMPTION
FROM THE PAYMENT OF REAL
PROPERTY TAX; BASIS THEREOF.
Section 234 of the LGC provides for the
exemptions from payment of real property

taxes and withdraws previous exemptions


therefrom granted to natural and juridical
persons, including government-owned and
controlled corporations, except as provided
therein. These exemptions are based on the
ownership, character, and use of the
property. Thus: (a) Ownership Exemptions.
Exemptions from real property taxes on the
basis of ownership are real properties owned
by: (i) the Republic, (ii) a province,
(iii) a city, (iv) a municipality, (v) a
barangay, (vi) registered cooperatives. (b)
character exemptions . Exempted from real
property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages
or convents appurtenant thereto, mosques,
and (iii) non-profit or religious cemeteries.
(c) Usage exemptions . Exempted from real
property taxes on the basis of the actual,
direct and exclusive use to which they are
devoted are: (i) all lands, buildings and
improvements which are actually, directly
and exclusively used for religious, charitable
or educational purposes; (ii) all machineries
and equipment actually, directly and
exclusively used by local water districts or
by government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation and
transmission of electric power; and (iii) all
machinery and equipment used for pollution
control and environmental protection. To
help provide a healthy environment in the
midst of the modernization of the country,
all machinery and equipment for pollution
control and environmental protection may
not be taxed by local governments

2. Other Exemptions Withdrawn . All other


exemptions previously granted to natural or
juridical persons including governmentowned or controlled corporations are
withdrawn upon effectivity of the Code.
REPUBLIC OF THE PHILIPPINES AS
DISTINGUISHED FROM NATIONAL
GOVERNMENT. The terms "Republic
of the Philippines" and "National
Government" are not interchangeable. The
former is broader and synonymous with
"Government of the Republic of the
Philippines" which the Administrative Code
of 1987 defines as the "corporate
governmental entity through which the
functions of government are exercised
throughout the Philippines, including, save
as the contrary appears from the context, the
various arms through which political
authority is made effective in the
Philippines, whether pertaining to the
autonomous regions, the provincial, city,
municipal or barangay subdivisions or other
forms of local government." (Section 2[1],
Introductory Provisions, Administrative
Code of 1987.) These "autonomous regions,
provincial, city, municipal or barangay
subdivisions" are the political subdivisions.
(Section l, Article X, 1987 Constitution.) On
the other hand, "National Government"
refers "to the entire machinery of the central
government, as distinguished from the
different forms of local government."
(Section 2[2], Introductory Provisions,
Administrative Code of 1987. The National
Government then is composed of the three
great departments: the executive, the
legislative and the judicial.

GOVERNMENT; AGENCY AS
DISTINGUISHED FROM
INSTRUMENTALITY. An "agency" of
the Government refers to "any of the various
units of the Government, including a
department, bureau, office, instrumentality,
or government-owned or controlled
corporation, or a local government or a
distinct unit therein," while an
"instrumentality" refers to "any agency of
the National Government, not integrated
within the department framework, vested
with special functions or jurisdiction by law,
endowed with some if not all corporate
powers, administering special funds, and
enjoying operational autonomy, usually,
through a charter. This term includes
regulatory agencies, chartered institutions
and government-owned and controlled
corporations."
As to the issue (a) whether the parcels of
land in question belong to the Republic of
the Philippines whose beneficial use has
been granted to the petitioner, and (b)
whether the petitioner is a "taxable person
The "airports" referred to are the "Lahug Air
Port" in Cebu City and the "Mactan
International Airport in the Province of
Cebu," 36 which belonged to the Republic
of the Philippines, then under the Air
Transportation Office (ATO). It may be
reasonable to assume that the term "lands"
refer to "lands" in Cebu City then
administered by the Lahug Air Port and
included the parcels of land the respondent
City of Cebu seeks to levy on for real

property taxes. This section involves a


"transfer" of the "lands," among other
things, to the petitioner and not just the
transfer of the beneficial use thereof, with
the ownership being retained by the
Republic of the Philippines. This "transfer"
is actually an absolute conveyance of the
ownership thereof because the petitioner's
authorized capital stock consists of, inter
alia, "the value of such real estate owned
and/or administered by the airports." 38
Hence, the petitioner is now the owner of
the land in question and the exception in
Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it
was never a "taxable person" under its
Charter. It was only exempted from the
payment of real property taxes . The grant of
the privilege only in respect of this tax is
conclusive proof of the legislative intent to
make it a taxable person subject to all taxes,
except real property tax.
Finally, even if the petitioner was originally
not a taxable person for purposes of real
property tax, in light of the foregoing
disquisitions, it had already become, even if
it be conceded to be an "agency" or
"instrumentality" of the Government, a
taxable person for such purpose in view of
the withdrawal in the last paragraph of
Section 234 of exemptions from the
payment of real property taxes, which, as
earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the
petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming

Corporation 39 is unavailing since it was


decided before the effectivity of the LGC.
Besides, nothing can prevent Congress from
decreeing that even instrumentalities or
agencies of the Government performing
governmental functions may be subject to
tax. Where it is done precisely to fulfill a
constitutional mandate and national policy,
no one can doubt its wisdom.
MIAA vs. CA
Facts:
Petitioner Manila International Airport
Authority (MIAA) operates the Ninoy
Aquino International Airport (NAIA)
Complex in Paraaque City under Executive
Order No. 903, otherwise known as the
Revised Charter of the Manila International
Airport
Authority ("MIAA Charter"). Executive
Order No. 903 was issued on 21 July 1983
by then President Ferdinand E. Marcos.
Subsequently, Executive Order Nos. 909 1
and 298 2 amended the MIAA Charter.
As operator of the international airport,
MIAA administers the land, improvements
and equipment within the NAIA Complex.
The MIAA Charter transferred to MIAA
approximately 600 hectares of land, 3
including the runways and buildings
("Airport Lands and Buildings") then under
the Bureau of Air Transportation. The MIAA
Charter further provides that no portion of
the land transferred to MIAA shall be
disposed of through sale or any other mode
unless specifically approved by the
President of the Philippines

On 21 March 1997, the Office of the


Government Corporate Counsel (OGCC)
issued Opinion No. 061. The OGCC opined
that the Local Government Code of 1991
withdrew the exemption from real estate tax
granted to MIAA under Section 21 of the
MIAA Charter. Thus, MIAA negotiated with
respondent City of Paraaque to pay the real
estate tax imposed by the City. MIAA then
paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final
Notices of Real Estate Tax Delinquency
from the City of Paraaque for the taxable
years 1992 to 2001
On 17 July 2001, the City of Paraaque,
through its City Treasurer, issued notices of
levy and warrants of levy on the Airport
Lands and Buildings. The Mayor of the City
of Paraaque threatened to sell at public
auction the Airport Lands and Buildings
should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a
clarification of OGCC
On 5 October 2001, the Court of Appeals
dismissed the petition because MIAA filed it
beyond the 60-day reglementary period. The
Court of Appeals also denied on 27
September 2002 MIAA's motion for
reconsideration and supplemental motion for
reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for
review.
Meanwhile, in January 2003, the City of
Paraaque posted notices of auction sale at
the Barangay Halls of Barangays Vitalez,
Sto. Nio, and Tambo, Paraaque City; in

the public market of Barangay La Huerta;


and in the main lobby of the Paraaque
City Hall. The City of Paraaque published
the notices in the 3 and 10 January 2003
issues of the Philippine Daily Inquirer, a
newspaper of general circulation in the
Philippines. The notices announced the
public auction sale of the Airport Lands and
Buildings to the highest bidder on 7
February 2003, 10:00 a.m., at the Legislative
Session Hall Building of Paraaque City.

insists that it is also exempt from real estate


tax under Section 234 of the Local
Government Code because the Airport
Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA
invokes the principle that the government
cannot tax itself. MIAA points out that the
reason for tax exemption of public property
is that its taxation would not inure to any
public advantage, since in such a case the
tax debtor is also the tax creditor

On 29 March 2005, the Court heard the


parties in oral arguments. In compliance
with the directive issued during the hearing,
MIAA, respondent City of Paraaque, and
the Solicitor General subsequently submitted
their respective Memoranda.

Respondents invoke Section 193 of the


Local Government Code, which expressly
withdrew the tax exemption privileges of
"government-owned and-controlled
corporations" upon the effectivity of the
Local Government Code. Respondents also
argue that a basic rule of statutory
construction is that the express mention of
one person, thing, or act excludes all others.
An international airport is not among the
exceptions mentioned in Section 193 of the
Local Government Code. Thus, respondents
assert that MIAA cannot claim that the
Airport Lands and Buildings are exempt
from real estate tax.

MIAA admits that the MIAA Charter has


placed the title to the Airport Lands and
Buildings in the name of MIAA. However,
MIAA points out that it cannot claim
ownership over these properties since the
real owner of the Airport Lands and
Buildings is the Republic of the Philippines.
The MIAA Charter mandates MIAA to
devote the Airport Lands and Buildings for
the benefit of the general public. Since the
Airport Lands and Buildings are devoted to
public use and public service, the ownership
of these properties remains with the State.
The Airport Lands and Buildings are thus
inalienable and are not subject to real estate
tax by local governments.
MIAA also points out that Section 21 of the
MIAA Charter specifically exempts MIAA
from the payment of real estate tax. MIAA

Respondents also cite the ruling of this


Court in Mactan International Airport v.
Marcos where we held that the Local
Government Code has withdrawn the
exemption from real estate tax granted to
international airports. Respondents further
argue that since MIAA has already paid
some of the real estate tax assessments, it is
now estopped from claiming that the Airport
Lands and Buildings are exempt from real
estate tax.

Issue: Whether the Airport Lands and


Buildings of MIAA are exempt from real
estate tax under existing laws. If so exempt,
then the real estate tax assessments issued
by the City of Paraaque
Ruling: The petition is granted.
We rule that MIAA's Airport Lands and
Buildings are exempt from real estate tax
imposed by local governments.
First , MIAA is not a government-owned or
controlled corporation but an instrumentality
of the National Government and thus
exempt from local taxation.
Second, the real properties of MIAA are
owned by the Republic of the Philippines
and thus exempt from real estate tax.
1.MIAA is Not a Government-Owned or
Controlled Corporation
Respondents argue that MIAA, being a
government-owned or controlled
corporation, is not exempt from real estate
tax. Respondents claim that the deletion of
the phrase "any government-owned or
controlled so exempt by its charter" in
Section 234(e) of the Local Government
Code withdrew the real estate tax exemption
of government-owned or controlled
corporations. The deleted phrase appeared in
Section 40(a) of the 1974 Real Property Tax
Code enumerating the entities exempt from
real estate tax.

There is no dispute that a governmentowned or controlled corporation is not


exempt from real estate tax. However,
MIAA is not a government-owned or
controlled corporation. Section 2(13) of the
Introductory Provisions of the
Administrative Code of 1987 defines a
government-owned or controlled
corporation
A government-owned or controlled
corporation must be "organized as a stock or
non-stock corporation." MIAA is not
organized as a stock or non-stock
corporation. MIAA is not a stock
corporation because it has no capital stock
divided into shares. MIAA has no
stockholders or voting shares. Section 10 of
the MIAA Charter
Clearly, under its Charter, MIAA does not
have capital stock that is divided into shares.
Section 3 of the Corporation Code 10
defines a stock corporation as one whose
"capital stock is divided into shares and . . .
authorized to distribute to the holders of
such shares dividends . . . ." MIAA has
capital but it is not divided into shares of
stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock
corporation.
MIAA is also not a non-stock corporation
because it has no members. Section 87 of
the Corporation Code defines a non-stock
corporation as "one where no part of its
income is distributable as dividends to its
members, trustees or officers." A nonstick

corporation must have members. Even if we


assume that the Government is considered as
the sole member of MIAA, this will not
make MIAA a non-stock corporation. Nonstock corporations cannot distribute any part
of their income to their members. Section 11
of the MIAA Charter mandates MIAA to
remit 20% of its annual gross operating
income to the National Treasury. This
prevents MIAA from qualifying as a nonstock corporation.
Section 88 of the Corporation Code provides
that non-stock corporations are "organized
for charitable, religious, educational,
professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or
similar purposes, like trade, industry,
agriculture and like chambers." MIAA is not
organized for any of these purposes. MIAA,
a public utility, is organized to operate an
international and domestic airport for public
use.
MIAA is a government instrumentality
vested with corporate powers to perform
efficiently its governmental functions.
MIAA is like any other government
instrumentality, the only difference is that
MIAA is vested with corporate powers.
Section 2(10) of the Introductory Provisions
of the Administrative Code defines a
government "instrumentality"
When the law vests in a government
instrumentality corporate powers, the
instrumentality does not become a
corporation. Unless the government
instrumentality is organized as a stock or

non-stock corporation, it remains a


government instrumentality exercising not
only governmental but also corporate
powers. Thus, MIAA exercises the
governmental powers of eminent domain, 12
police authority 13 and the levying of fees
and charges. 14 At the same time, MIAA
exercises "all the powers of a corporation
under the Corporation Law, insofar as these
powers are not inconsistent with the
provisions of this Executive Order
Likewise, when the law makes a
government instrumentality operationally
autonomous, the instrumentality remains
part of the National Government machinery
although not integrated with the department
framework. The MIAA
Charter expressly states that transforming
MIAA into a "separate and autonomous
body" will make its operation more
"financially viable.
Many government instrumentalities are
vested with corporate powers but they do
not become stock or non-stock corporations,
which is a necessary condition before an
agency or instrumentality is deemed a
government-owned or controlled
corporation. Examples are the Mactan
International Airport Authority, the
Philippine Ports Authority, the University of
the Philippines and Bangko Sentral ng
Pilipinas. All these government
instrumentalities exercise corporate powers
but they are not organized as stock or nonstock corporations as required by Section
2(13) of the Introductory Provisions of the
Administrative Code. These government

instrumentalities are sometimes loosely


called government corporate entities.
However, they are not government-owned or
controlled corporations in the strict sense as
understood under the Administrative Code,
which is the governing law defining the
legal relationship and status of government
entities.
Section 133(o) recognizes the basic
principle that local governments cannot tax
the national government, which historically
merely delegated to local governments the
power to tax. While the 1987 Constitution
now includes taxation as one of the powers
of local governments, local governments
may only exercise such power "subject to
such guidelines and limitations as the
Congress may provide."
1. When local governments invoke the
power to tax on national government
instrumentalities, such power is construed
strictly against local governments. The rule
is that a tax is never presumed and there
must be clear language in the law imposing
the tax. Any doubt whether a person, article
or activity is taxable is resolved against
taxation. This rule applies with greater force
when local governments seek to tax national
government instrumentalities.
2. Another rule is that a tax exemption is
strictly construed against the taxpayer
claiming the exemption. However, when
Congress grants an exemption to a national
government instrumentality from local
taxation, such exemption is construed

liberally in favor of the national government


instrumentality. As this
Court declared in Maceda v. Macaraig, Jr
There is also no reason for local
governments to tax national government
instrumentalities for rendering essential
public services to inhabitants of local
governments. The only exception is when
the legislature clearly intended to tax
government instrumentalities for the
delivery of essential public services for
sound and compelling policy considerations.
There must be express language in the law
empowering local governments to tax
national government instrumentalities. Any
doubt whether such power exists is resolved
against local governments.
Thus, Section 133 of the Local Government
Code states that "unless otherwise provided"
in the Code, local governments cannot tax
national government instrumentalities. As
this Court held in Basco v. Philippine
Amusements and
Gaming Corporation
2. a. Airport Lands and Buildings of MIAA
are Owned by the Republic
The Airport Lands and Buildings of MIAA
are property of public dominion and
therefore owned by the State or the Republic
of the Philippines.
No one can dispute that properties of public
dominion mentioned in Article 420 of the
Civil Code, like "roads, canals, rivers,
torrents, ports and bridges constructed by

the State," are owned by the State. The term


"ports" includes seaports and airports. The
MIAA Airport Lands and Buildings
constitute a "port" constructed by the State.
Under Article 420 of the Civil Code, the
MIAA Airport Lands and Buildings are
properties of public dominion and thus
owned by the State or the Republic of the
Philippines
The Airport Lands and Buildings are
devoted to public use because they are used
by the public for international and domestic
travel and transportation. The fact that the
MIAA collects terminal fees and other
charges from the public does not remove the
character of the Airport Lands and Buildings
as properties for public use.
The operation by the government of a
tollway does not change the character of the
road as one for public use. Someone must
pay for the maintenance of the road, either
the public indirectly through the taxes they
pay the government, or only those among
the public who actually use the road through
the toll fees they pay upon using the road.
The tollway system is even a more efficient
and equitable manner of taxing the public
for the maintenance of public roads.
The charging of fees to the public does not
determine the character of the property
whether it is of public dominion or not.
Article 420 of the Civil Code defines
property of public dominion as one
"intended for public use." Even if the
government collects toll fees, the road is still
"intended for public use" if anyone can use
the road under the same terms and

conditions as the rest of the public. The


charging of fees, the limitation on the kind
of vehicles that can use the road, the speed
restrictions and other conditions for the use
of the road do not affect the public character
of the road.
The terminal fees MIAA charges to
passengers, as well as the landing fees
MIAA charges to airlines, constitute the
bulk of the income that maintains the
operations of MIAA. The collection of such
fees does not change the character of MIAA
as an airport for public use. Such fees are
often termed user's tax. This means taxing
those among the public who actually use a
public facility instead of taxing all the public
including those who never use the particular
public facility. A user's tax is more equitable
a principle of taxation mandated in the
1987 Constitution.
b. Airport Lands and Buildings are Outside
the Commerce of Man

or private sale. Any encumbrance, levy on


execution or auction sale of any property of
public dominion is void for being contrary
to public policy. Essential public services
will stop if properties of public dominion are
subject to encumbrances, foreclosures and
auction sale. This will happen if the City of
Paraaque can foreclose and compel the
auction sale of the 600-hectare runway of
the MIAA for non-payment of real estate
tax.
Before MIAA can encumber 26 the Airport
Lands and Buildings, the President must
first withdraw from public use the Airport
Lands and Buildings. Sections 83 and 88 of
the Public Land Law or Commonwealth Act
No. 141, which "remains to this day the
existing general law governing the
classification and disposition of lands of the
public domain other than timber and mineral
lands

The Airport Lands and Buildings of MIAA


are devoted to public use and thus are
properties of public dominion. As properties
of public dominion, the Airport Lands and
Buildings are outside the commerce of man.
The Court has ruled repeatedly that
properties of public dominion are outside the
commerce of man. As early as 1915, this
Court already ruled in Municipality of
Cavite v. Rojas

Thus, unless the President issues a


proclamation withdrawing the Airport Lands
and Buildings from public use, these
properties remain properties of public
dominion and re inalienable. Since the
Airport Lands and Buildings are inalienable
in their present status as properties of public
dominion, they are not subject to levy on
execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for
public use, their ownership remains with the
State or the Republic of the Philippines.

Properties of public dominion, being for


public use, are not subject to levy,
encumbrance or disposition through public

The authority of the President to reserve


lands of the public domain for public use,
and to withdraw such public use, is

reiterated in Section 14, Chapter 4, Title I,


Book III of the Administrative Code of 1987
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport
Lands and Buildings in trust for the
Republic. Section 48, Chapter 12, Book I of
the Administrative Code allows
instrumentalities like MIAA to hold title to
real properties owned by the Republic.
In MIAA's case, its status as a mere trustee
of the Airport Lands and Buildings is clearer
because even its executive head cannot sign
the deed of conveyance on behalf of the
Republic. Only the President of the Republic
can sign such deed of conveyance.
d. Transfer to MIAA was Meant to
Implement a Reorganization
The MIAA Charter, which is a law,
transferred to MIAA the title to the Airport
Lands and Buildings from the Bureau of Air
Transportation of the Department of
Transportation and Communications
The MIAA Charter transferred the Airport
Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes
or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter
explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA,

The transfer of the Airport Lands and


Buildings from the Bureau of Air
Transportation to MIAA was not meant to
transfer beneficial ownership of these assets
from the Republic to MIAA. The purpose
was merely to reorganize a division in the
Bureau of Air Transportation into a separate
and autonomous body. The Republic
remains the beneficial owner of the Airport
Lands and Buildings. MIAA itself is owned
solely by the Republic. No party claims any
ownership rights over MIAA's assets
adverse to the Republic
The MIAA Charter expressly provides that
the Airport Lands and Buildings "shall not
be disposed through sale or through any
other mode unless specifically approved by
the President of the Philippines." This only
means that the
Republic retained the beneficial ownership
of the Airport Lands and Buildings because
under Article 428 of the Civil Code, only the
"owner has the right to . . . dispose of a
thing." Since MIAA cannot dispose of the
Airport Lands and Buildings, MIAA does
not own the Airport Lands and Buildings.
At any time, the President can transfer back
to the Republic title to the Airport Lands and
Buildings without the Republic paying
MIAA any consideration. Under Section 3
of the MIAA Charter, the President is the
only one who can authorize the sale or
disposition of the Airport Lands and
Buildings. This only confirms that the
Airport Lands and Buildings belong to the
Republic.

e. Real Property Owned by the Republic is


Not Taxable
Section 234(a) of the Local Government
Code exempts from real estate tax any "
[r]eal property owned by the Republic of the
Philippines
This exemption should be read in relation
with Section 133(o) of the same Code,
which prohibits local governments from
imposing "[t]axes, fees or charges of any
kind on the National Government, its
agencies and instrumentalities . . . ." The real
properties owned by the Republic are titled
either in the name of the Republic itself or in
the name of agencies or instrumentalities of
the National Government. The
Administrative Code allows real property
owned by the Republic to be titled in the
name of agencies or instrumentalities of the
national government. Such real properties
remain owned by the Republic and continue
to be exempt from real estate tax.
The Republic may grant the beneficial use
of its real property to an agency or
instrumentality of the national government.
This happens when title of the real property
is transferred to an agency or instrumentality
even as the Republic remains the owner of
the real property. Such arrangement does not
result in the loss of the tax exemption.
Section 234(a) of the Local Government
Code states that real property owned by the
Republic loses its tax exemption only if the
"beneficial use thereof has been granted, for
consideration or otherwise, to a taxable
person." MIAA, as a government

instrumentality, is not a taxable person under


Section 133(o) of the Local Government
Code. Thus, even if we assume that the
Republic has granted to MIAA the beneficial
use of the Airport Lands and Buildings, such
fact does not make these real properties
subject to real estate tax.
However, portions of the Airport Lands and
Buildings that MIAA leases to private
entities are not exempt from real estate tax.
For example, the land area occupied by
hangars that MIAA leases to private
corporations is subject to real estate tax. In
such a case, MIAA has granted the
beneficial use of such land area for a
consideration to a taxable person and
therefore such land area is subject to real
estate tax. In LungCenter of the
Philippines v. Quezon City

taxation is its status whether MIAA is a


juridical person or not. The minority also
insists that "Sections 193 and 234 may be
examined in isolation from Section 133(o) to
ascertain MIAA's claim of exemption."
By express mandate of the Local
Government Code, local governments
cannot impose any kind of tax on national
government instrumentalities like the
MIAA. Local governments are devoid of
power to tax the national government, its
agencies and instrumentalities. The taxing
powers of local governments do not extend
to the national government, its agencies and
instrumentalities, "[u]nless otherwise
provided in this Code" as stated in the
saving clause of Section 133. The saving
clause refers to Section 234(a) on the
exception to the exemption from real estate
tax of real property owned by the Republic.

3. Refutation of Arguments of Minority


The minority asserts that the MIAA is not
exempt from real estate tax because
Section 193 of the Local Government Code
of 1991 withdrew the tax exemption of "all
persons, whether natural or juridical" upon
the effectivity of the Code.
The minority states that MIAA is
indisputably a juridical person. The minority
argues that since the Local Government
Code withdrew the tax exemption of all
juridical persons, then MIAA is not exempt
from real estate tax.
The minority posits that the "determinative
test" whether MIAA is exempt from local

The minority, however, theorizes that unless


exempted in Section 193 itself, all juridical
persons are subject to tax by local
governments. The minority insists that the
juridical persons exempt from local taxation
are limited to the three classes of entities
specifically enumerated as exempt in
Section 193
The minority's theory directly contradicts
and completely negates Section 133(o) of
the Local Government Code. This theory
will result in gross absurdities. It will make
the national government, which itself is a
juridical person, subject to tax by local
governments since the national government
is not included in the enumeration of exempt

entities in Section 193. Under this theory,


local governments can impose any kind of
local tax, and not only real estate tax, on the
national government.
Under the minority's theory, many national
government instrumentalities with juridical
personalities will also be subject to any kind
of local tax, and not only real estate tax.
Some of the national government
instrumentalities vested by law with
juridical personalities are: Bangko Sentral
ng Pilipinas , 30 Philippine Rice Research
Institute, 31 Laguna Lake Development
Authority, 32 Fisheries
Development Authority, 33 Bases
Conversion Development Authority, 34
Philippine
Ports Authority, 35 Cagayan de Oro Port
Authority, 36 San Fernando Port Authority,
37 Cebu Port Authority, 38 and Philippine
National Railways
The minority's theory violates Section
133(o) of the Local Government Code
which expressly prohibits local governments
from imposing any kind of tax on national
government instrumentalities. Section
133(o) does not distinguish between national
government instrumentalities with or
without juridical personalities. Where the
law does not distinguish, courts should not
distinguish. Thus, Section 133(o) applies to
all national government instrumentalities,
with or without juridical personalities. The
determinative test whether MIAA is exempt
from local taxation is not whether MIAA is a
juridical person, but whether it is a national
government instrumentality under Section

133(o) of the Local Government Code.


Section 133(o) is the specific provision of
law prohibiting local governments from
imposing any kind of tax on the national
government, its agencies and
instrumentalities.
Section 133 of the Local Government Code
starts with the saving clause "[u]nless
otherwise provided in this Code." This
means that unless the Local Government
Code grants an express authorization, local
governments have no power to tax the
national government, its agencies and
instrumentalities. Clearly, the rule is local
governments have no power to tax the
national government, its agencies and
instrumentalities. As an exception to this
rule, local governments may tax the national
government, its agencies and
instrumentalities only if the Local
Government Code expressly so provides.
The saving clause in Section 133 refers to
the exception to the exemption in Section
234(a) of the Code, which makes the
national government subject to real estate
tax when it gives the beneficial use of its
real properties to a taxable entity.
Under Section 234(a), real property owned
by the Republic is exempt from real estate
tax. The exception to this exemption is when
the government gives the beneficial use of
the real property to a taxable entity.
The exception to the exemption in Section
234(a) is the only instance when the national
government, its agencies and

instrumentalities are subject to any kind of


tax by local governments. The exception to
the exemption applies only to real estate tax
and not to any other tax. The justification for
the exception to the exemption is that the
real property, although owned by the
Republic, is not devoted to public use or
public service but devoted to the private
gain of a taxable person.
The minority also argues that since Section
133 precedes Section 193 and 234 of the
Local Government Code, the later
provisions prevail over Section 133.
The minority assumesthat there is an
irreconcilable conflict between Section 133
on one hand, and Sections 193 and 234 on
the other. No one has urged that there is such
a conflict, much less has any one presented a
persuasive argument that there is such a
conflict. The minority's assumption of an
irreconcilable conflict in the statutory
provisions is an egregious error for two
reasons.
First , there is no conflict whatsoever
between Sections 133 and 193 because
Section 193 expressly admits its
subordination to other provisions of the
Code when Section 193 states "[u]nless
otherwise provided in this Code." By its
own words, Section 193 admits the
superiority of other provisions of the Local
Government Code that limit the exercise of
the taxing power in Section 193. When a
provision of law grants a power but
withholds such power on certain matters,
there is no conflict between the grant of

power and the withholding of power. The


grantee of the power simply cannot exercise
the power on matters withheld from its
power.
Second, Section 133 is entitled "Common
Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the
grant to local governments of the power to
tax, and not merely the exercise of a
delegated power to tax. Section 133 states
that the taxing powers of local governments
"shall not extend to the levy" of any kind of
tax on the national government, its agencies
and instrumentalities. There is no clearer
limitation on the taxing power than this
Since Section 133 prescribes the "common
limitations" on the taxing powers of local
governments, Section 133 logically prevails
over Section 193 which grants local
governments such taxing powers. By their
very meaning and purpose, the "common
limitations" on the taxing power prevail over
the grant or exercise of the taxing power. If
the taxing power of local governments in
Section 193 prevails over the limitations on
such taxing power in Section 133, then local
governments can impose any kind of tax on
the national government, its agencies and
instrumentalities a gross absurdity.
Local governments have no power to tax the
national government, its agencies and
instrumentalities, except as otherwise
provided in the Local Government Code
pursuant to the saving clause in Section 133
stating "[u]nless otherwise provided in this
Code." This exception which is an

exception to the exemption of the Republic


from real estate tax imposed by local
governments refers to Section 234(a) of
the Code. The exception to the exemption in
Section 234(a) subjects real property owned
by the Republic, whether titled in the name
of the national government, its agencies or
instrumentalities, to real estate tax if the
beneficial use of such property is given to a
taxable entity.
The minority then concludes that reliance on
the Administrative Code definition is
"flawed."
The minority's argument is a non sequitur.
True, Section 2 of the Administrative Code
recognizes that a statute may require a
different meaning than that defined in the
Administrative Code. However, this does
not automatically mean that the definition in
the Administrative Code does not apply to
the Local Government Code.
Section 2 of the Administrative Code clearly
states that "unless the specific words . . . of a
particular statute shall require a different
meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus,
unless there is specific language in the Local
Government Code defining the phrase
"governmentowned or controlled
corporation" differently from the definition
in the Administrative Code, the definition in
the Administrative Code prevails.
The minority does not point to any provision
in the Local Government Code defining the
phrase "government-owned or controlled
corporation" differently from the definition

in the Administrative Code. Indeed, there is


none. The Local Government Code is silent
on the definition of the phrase
"governmentowned or controlled
corporation." The Administrative Code,
however, expressly defines the phrase
"government-owned or controlled
corporation." The inescapable conclusion is
that the Administrative Code definition of
the phrase "governmentowned or controlled
corporation" applies to the Local
Government Code.
The third whereas clause of the
Administrative Code states that the Code
"incorporates in a unified document the
major structural, functional and procedural
principles and rules of governance." Thus,
the Administrative Code is the governing
law defining the status and relationship of
government departments, bureaus, offices,
agencies and instrumentalities. Unless a
statute expressly provides for a different
status and relationship for a specific
government unit or entity, the provisions of
the Administrative Code prevail.
The minority also contends that the phrase
"government-owned or controlled
corporation" should apply only to
corporations organized under the
Corporation Code, the general incorporation
law, and not to corporations created by
special charters. The minority sees no reason
why government corporations with special
charters should have a capital stock.
The contention of the minority is seriously
flawed. It is not in accord with the

Constitution and existing legislations. It will


also result in gross absurdities.
First , the Administrative Code definition of
the phrase "government-owned or controlled
corporation" does not distinguish between
one incorporated under the Corporation
Code or under a special charter. Where the
law does not distinguish, courts should not
distinguish.
Second, Congress has created through
special charters several government-owned
corporations organized as stock
corporations. Prime examples are the Land
Bank of the Philippines and the
Development Bank of the Philippines
Other government-owned corporations
organized as stock corporations under their
special charters are the Philippine Crop
Insurance Corporation, 42 Philippine
International Trading Corporation, 43 and
the Philippine National Bank 44 before it
was reorganized as a stock corporation
under the Corporation Code. All these
government-owned corporations organized
under special charters as stock corporations
are subject to real estate tax on real
properties owned by them. To rule that they
are not government-owned or controlled
corporations because they are not registered
with the Securities and Exchange
Commission would remove them from the
reach of Section 234 of the Local
Government Code, thus exempting them
from real estate tax.

Third, the government-owned or controlled


corporations created through special charters
are those that meet the two conditions
prescribed in Section 16, Article XII of the
Constitution. The first condition is that the
government-owned or controlled
corporation must be established for the
common good. The second condition is that
the government-owned or controlled
corporation must meet the test of economic
viability
The Constitution expressly authorizes the
legislature to create "government-owned or
controlled corporations" through special
charters only if these entities are required to
meet the twin conditions of common good
and economic viability. In other words,
Congress has no power to create
government-owned or controlled
corporations with special charters unless
they are made to comply with the two
conditions of common good and economic
viability.
The test of economic viability applies only
to government-owned or controlled
corporations that perform economic or
commercial activities and need to compete
in the market place. Being essentially
economic vehicles of the State for the
common good meaning for economic
development purposes these governmentowned or controlled corporations with
special charters are usually organized as
stock corporations just like ordinary private
corporations.
In contrast, government instrumentalities
vested with corporate powers and

performing governmental or public


functions need not meet the test of economic
viability. These instrumentalities perform
essential public services for the common
good, services that every modern State must
provide its citizens. These instrumentalities
need not be economically viable since the
government may even subsidize their entire
operations. These instrumentalities are not
the "government-owned
or controlled corporations" referred to in
Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation
when the legislature creates government
instrumentalities vested with corporate
powers but performing essential
governmental or public functions. Congress
has plenary authority to create government
instrumentalities vested with corporate
powers provided these instrumentalities
perform essential government functions or
public services. However, when the
legislature creates through special charters
corporations that perform economic or
commercial activities, such entities
known as "government-owned or controlled
corporations" must meet the test of
economic viability because they compete in
the market place.
Clearly, the test of economic viability does
not apply to government entities vested with
corporate powers and performing essential
public services. The State is obligated to
render essential public services regardless of
the economic viability of providing such
service. The non-economic viability of

rendering such essential public service does


not excuse the State from withholding such
essential services from the public.
However, government-owned or controlled
corporations with special charters, organized
essentially for economic or commercial
objectives, must meet the test of economic
viability. These are the government-owned
or controlled corporations that are usually
organized under their special charters as
stock corporations, like the Land Bank of
the Philippines and the Development Bank
of the Philippines. These are the
government-owned or controlled
corporations, along with governmentowned
or controlled corporations organized under
the Corporation Code, that fall under the
definition of "government-owned or
controlled corporations" in Section 2(10) of
the Administrative Code.
The MIAA need not meet the test of
economic viability because the legislature
did not create MIAA to compete in the
market place. MIAA does not compete in the
market place because there is no competing
international airport operated by the private
sector. MIAA performs an essential public
service as the primary domestic and
international airport of the Philippines
MIAA performs an essential public service
that every modern State must provide its
citizens. MIAA derives its revenues
principally from the mandatory fees and
charges MIAA imposes on passengers and
airlines. The terminal fees that MIAA
charges every passenger are regulatory or

administrative fees 47 and not income from


commercial transactions.
MIAA falls under the definition of a
government instrumentality under Section
2(10) of the Introductory Provisions of the
Administrative Code
The fact alone that MIAA is endowed with
corporate powers does not make MIAA a
government-owned or controlled
corporation. Without a change in its capital
structure, MIAA remains a government
instrumentality under Section 2(10) of the
Introductory Provisions of the
Administrative Code. More importantly, as
long as MIAA renders essential public
services, it need not comply with the test of
economic viability. Thus, MIAA is outside
the scope of the phrase "governmentowned
or controlled corporations" under Section
16, Article XII of the 1987 Constitution.
The minority belittles the use in the Local
Government Code of the phrase
"government-owned or controlled
corporation" as merely "clarificatory or
illustrative." This is fatal. The 1987
Constitution prescribes explicit conditions
for the creation of "government-owned or
controlled corporations." The Administrative
Code defines what constitutes a
"government-owned or controlled
corporation." To belittle this phrase as
"clarificatory or illustrative" is grave error.
To summarize, MIAA is not a governmentowned or controlled corporation under

Section 2(13) of the Introductory Provisions


of the Administrative Code because it is not
organized as a stock or non-stock
corporation. Neither is MIAA a
governmentowned or controlled corporation
under Section 16, Article XII of the 1987
Constitution because MIAA is not required
to meet the test of economic viability. MIAA
is a government instrumentality vested with
corporate powers and performing essential
public services pursuant to Section 2(10) of
the Introductory Provisions of the
Administrative Code. As a government
instrumentality, MIAA is not subject to any
kind of tax by local governments under
Section 133(o) of the Local Government
Code. The exception to the exemption in
Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under
the Local Government Code. Such exception
applies only if the beneficial use of real
property owned by the Republic is given to a
taxable entity.
4. Conclusion
Under Section 2(10) and (13) of the
Introductory Provisions of the
Administrative Code, which governs the
legal relation and status of government
units, agencies and offices within the entire
government machinery, MIAA is a
government instrumentality and not a
government-owned or controlled
corporation. Under Section 133(o) of the
Local Government Code, MIAA as a
government instrumentality is not a taxable
person because it is not subject to "[t]axes,
fees or charges of any kind" by local
governments. The only exception is when

MIAA leases its real property to a "taxable


person" as provided in Section 234(a) of the
Local
Government Code, in which case the
specific real property leased becomes
subject to real estate tax. Thus, only portions
of the Airport Lands and Buildings leased to
taxable persons like private parties are
subject to real estate tax by the City of
Paraaque.
Under Article 420 of the Civil Code, the
Airport Lands and Buildings of MIAA,
being devoted to public use, are properties
of public dominion and thus owned by the
State or the Republic of the Philippines.
Article 420 specifically mentions "ports . . .
constructed by the State," which includes
public airports and seaports, as properties of
public dominion and owned by the
Republic. As properties of public dominion
owned by the Republic, there is no doubt
whatsoever that the Airport Lands and
Buildings are expressly exempt from real
estate tax under Section 234(a) of the Local
Government Code. This Court has also
repeatedly ruled that properties of public
dominion are not subject to execution or
foreclosure sale.
Planters Products vs. Fertiphil Corp
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.

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.

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

On November 20, 1991, the RTC rendered


judgment in favor of Fertiphil,

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.

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.

Fertiphil filed a complaint for collection and


damages 8 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

Ruling that the imposition of the P10 CRC


was an exercise of the State's inherent power
of taxation, the RTC invalidated the levy for
violating the basic principle that taxes can
only be levied for public purpose

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 did not accept PPI's claim that the
levy imposed under LOI No. 1465 was for
the benefit of Planters Foundation, Inc., a
foundation created to hold in trust the stock
ownership of PPI.

PPI moved for reconsideration but its


motion was denied. 19 It then filed the
present petition with this Court.
Issue: 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
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.
THE PRINCIPLE OF UNJUST
VEXATION (SHOULD BE
ENRICHMENT) FINDS
NO APPLICATION IN THE INSTANT
CASE
Ruling: The petition is denied.

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. 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, 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
In Philippine Airlines, Inc. v. Edu, 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.
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. A plain
reading of the LOI also supports the
conclusion that the levy was for revenue
generation. The LOI expressly provided that
the levy was imposed "until adequate capital
is raised to make PPI viable".
Taxes are exacted only for a public purpose.
The 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. 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".
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
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.
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 PPI's
debts to its foreign creditors. To fund the
payment, President Marcos issued LOI No.
1465
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.
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
The general rule is that an unconstitutional
law is void; the doctrine of operative fact is
inapplicable
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
The doctrine of operative fact, as an
exception to the general rule, only applies as
a matter of equity and fair play. 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.
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 jeopardy 57 or would
put in limbo the acts done by a municipality
in reliance upon a law creating it.
Punsalan vs. Municipal Board of the City
of Manila
Facts: This suit was commenced in the
Court of First Instance of Manila by two
lawyers, a medical practitioner, a public
accountant, a dental surgeon and a
pharmacist, purportedly "in their own behalf
and in behalf of other professionals
practicing in the City of Manila who may
desire to join it.
The ordinance in question, which was
approved by the municipal board of the City
of Manila on July 25, 1950, imposes a

municipal occupation tax on persons


exercising various professions in the city
and penalizes non-payment of the tax "by a
fine of not more than two hundred pesos or
by imprisonment of not more than six
months, or by both such fine and
imprisonment in the discretion of the court."
Among the professions taxed were those to
which plaintiffs belong.
The ordinance was enacted pursuant to
paragraph (1) of section 18 of the Revised
Charter of the City of Manila (as amended
by Republic Act No. 409), which empowers
the Municipal Board of said city to impose a
municipal occupation tax, not to exceed P50
per annum, on persons engaged in the
various professions above referred to
Having already paid their occupation tax
under section 201 of the National Internal
Revenue Code, plaintiffs, upon being
required to pay the additional tax prescribed
in the ordinance, paid the same under protest
and then brought the present suit for the
purpose already stated. The lower court
upheld the validity of the provision of law
authorizing the enactment of the ordinance
but declared the ordinance itself illegal and
void on the ground that the penalty therein
provided for non-payment of the tax was not
legally authorized. From this decision both
parties appealed to this Court
Issue: Whether this ruling is correct or not,
for though the decision is silent on the
refund of taxes paid plaintiffs make no
assignment of error on this point.
Ruling: The petition is granted.

We find that the lower court was in error in


saying that the imposition of the penalty
provided for in the ordinance was without
the authority of law. The last paragraph (kk )
of the very section that authorizes the
enactment of this tax ordinance (section 18
of the Manila Charter) in express terms also
empowers the Municipal Board "to fix
penalties for the violation of ordinances
which shall not exceed to (sic) two hundred
pesos fine or six months' imprisonment, or
both such fine and imprisonment, for a
single offense." Hence, the pronouncement
below that the ordinance in question is
illegal and void because it imposes a penalty
not authorized by law is clearly without
basis.
Plaintiffs' complaint is that while the law has
authorized the City of Manila to impose the
said tax, it has withheld that authority from
other chartered cities, not to mention
municipalities. We do not think it is for the
courts to judge what particular cities or
municipalities should be empowered to
impose occupation taxes in addition to those
imposed by the National Government. That
matter is peculiarly within the domain of the
political departments and the courts would
do well not to encroach upon it.
Moreover, as the seat of the National
Government and with a population and
volume of trade many times that of any
other Philippine city or municipality,
Manila, no doubt, offers a more lucrative
field for the practice of the professions, so
that it is but fair that the professionals in

Manila be made to pay a higher occupation


tax than their brethren in the provinces.
As to plaintiffs' appeal, the contention in
substance is that this ordinance and the law
authorizing it constitute class legislation, are
unjust and oppressive, and authorize what
amounts to double taxation.
Plaintiffs brand the ordinance unjust and
oppressive because they say that it creates
discrimination within a class in that while
professionals with offices in Manila have to

pay the tax, outsiders who have no offices in


the city but practice their profession therein
are not subject to the tax. Plaintiffs make a
distinction that is not found in the ordinance.
The ordinance imposes the tax upon every
person "exercising" or "pursuing" in the
City of Manila naturally any one of the
occupations named, but does not say that
such person must have his office in
Manila. What constitutes exercise or pursuit
of a profession in the city is a matter of
judicial determination.

The argument against double taxation may


not be invoked where one tax is imposed by
the state and the other is imposed by the city
(1 Cooley on Taxation, 4th ed., p. 492), it
being widely recognized that there is
nothing inherently obnoxious in the
requirement that license fees or taxes be
exacted with respect to the same occupation,
calling or activity by both the state and the
political subdivisions thereof.