COMMISSIONER OF INTERNAL G.R. No.

140230 REVENUE,
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,Respondent. Promulgated:

In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner) seeks the
review and reversal of the September 17, 1999 Decision[1] of the Court of Appeals (CA) in CA-G.R. No. SP
47895, affirming, in effect, the February 18, 1998 decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case
No. 5178, a claim for tax refund/credit instituted by respondent Philippine Long Distance Company (PLDT)
against petitioner for taxes it paid to the Bureau of Internal Revenue (BIR) in connection with its importation in
1992 to 1994 of equipment, machineries and spare parts.

The facts:

PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a
telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it imported for its business on different dates from October
1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a)
compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other internal revenue taxes
of P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT
paid P116,041,333.00 value-added tax (VAT).

On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption
privilege under Section 12 of R.A. 7082, which reads:

Sec. 12. The grantee shall be liable to pay the same taxes on their real estate, buildings,
and personal property, exclusive of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay. In addition thereto, the grantee, shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee, its successors or assigns, and the
said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That
the grantee shall continue to be liable for income taxes payable under Title II of the National
Internal Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment
is amended or repealed, in which case the amendment or repeal shall be applicable thereto.
(Emphasis supplied).

Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,[3] pertinently reading, as follows:
PLDT shall be subject only to the following taxes, to wit:

xxx xxx xxx

7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise
or earnings thereof.
xxx xxx xxx
The in lie of all taxes provision under Section 12 of RA 7082 clearly exempts PLDT from
all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the
same Code on its importations of equipment, machineries and spare parts necessary in the
conduct of its business covered by the franchise, except the aforementioned enumerated taxes
for which PLDT is expressly made liable.

xxx xxx xxx

In view thereof, this Office hereby holds that PLDT, is exempt from VAT on its importation of
equipment, machineries and spare parts needed in its franchise operations.

Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim[4] for tax credit/refund of the VAT,
compensating taxes, advance sales taxes and other taxes it had been paying in connection with its importation
of various equipment, machineries and spare parts needed for its operations. With its claim not having been
acted upon by the BIR, and obviously to forestall the running of the prescriptive period therefor, PLDT filed with
the CTA a petition for review,[5]therein seeking a refund of, or the issuance of a tax credit certificate in, the amount
of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue
taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The petition
was docketed in said court as CTA Case No. 5178.
On February 18, 1998, the CTA rendered a decision[6] granting PLDTs petition, pertinently saying:

This Court has noted that petitioner has included in its claim receipts covering the period
prior to December 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find
that the petitioner is entitled to the reduced amount of P223,265,276.00 after excluding from the
final computation those taxes that were paid prior to December 16, 1992 as they fall outside the
 two-year prescriptive period for claiming for a refund as provided by law. The computation of the
refundable amount is summarized as follows:

COMPENSATING TAX

Total amount claimed P126,713.037.00

Less:

a) Amount already prescribed: xxx

Total P 38,015,132.00

b) Waived by petitioner
(Exh. B-216) P 1,440,874.00 P39,456,006.00

Amount refundable P87,257,031.00

ADVANCE SALES TAX

Total amount claimed P12,460.219.00

Less amount already prescribed: P5,043,828.00

Amount refundable P7,416,391.00

OTHER BIR TAXES

Total amount claimed P25,337,697.00

Less amount already prescribed: 11,187,740.00

Amount refundable P14,149,957.00

VALUE ADDED TAX

Total amount claimed P116.041,333.00

Less amount waived by petitioner
(unaccounted receipts) 1,599,436.00

Amount refundable P114,441,897.00

TOTAL AMOUNT REFUNDABLE P223,265,276.00,

============
(Breakdown omitted)

and accordingly disposed, as follows:

WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious
and in accordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE
in favor of petitioner a Tax Credit Certificate in the reduced amount of P223,265,276.00
representing erroneously paid value-added taxes, compensating taxes, advance sales taxes and
other BIR taxes on its importation of equipments (sic), machineries and spare parts for the period
covering the taxable years 1992 to 1994.

Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then CTA Presiding
Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion[7] of Associate Judge Amancio Q.
Saga who maintained that the phrase in lieu of all taxes found in Section 12 of R.A. No. 7082, supra, refers to
exemption from direct taxes only and does not cover indirect taxes, such as VAT, compensating tax and advance
sales tax.

In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution[8] of May 7, 1998,
denied the motion, with Judge Amancio Q. Saga reiterating his dissent.[9]
 Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of Appeals
(CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895.

As stated at the outset hereof, the appellate court, in the herein challenged Decision[10] dated September
17, 1999, dismissed the BIRs petition, thereby effectively affirming the CTAs judgment.

Relying on its ruling in an earlier case between the same parties and involving the same issue CA-G.R. SP No.
40811, decided 16 February 1998 the appellate court partly wrote in its assailed decision:

This Court has already spoken on the issue of what taxes are referred to in the phrase in lieu of
all taxes found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and
the same must be followed pursuant to the doctrine of stare decisis. xxx. Stare decisis et non
quieta movere. Stand by the decision and disturb not what is settled.

Hence, this recourse by the BIR Commissioner on the lone assigned error that:
THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROM
THE PAYMENT OF VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES
TAXES AND OTHER BIR TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION
IN ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE
IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF.

There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently raises
had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal Revenue vs.
Philippine Long Distance Company. There, the Sixteenth Division of the appellate court declared that under the
express provision of Section 12 of R.A. 7082, supra, the payment [by PLDT] of the 3% franchise tax of [its] gross
receipts shall be in lieu of all taxes exempts PLDT from payment of compensating tax, advance sales tax, VAT
and other internal revenue taxes on its importation of various equipment, machinery and spare parts for the use
of its telecommunications system.

Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court a motion
for time to file a petition for review, docketed in this Court as G.R. No. 134386. However, on the last day for the
filing of the intended petition, the then BIR Commissioner had a change of heart and instead manifested [11] that
he will no longer pursue G.R. No. 134386, there being no compelling grounds to disagree with the Court of
Appeals decision in CA-G.R. 40811. Consequently, on September 28, 1998, the Court issued a Resolution[12] in
G.R. No. 134386 notifying the parties that no petition was filed in said case and that the CA judgment sought to
be reviewed therein has now become final and executory. Pursuant to said Resolution, an Entry of
Judgment[13] was issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, the CAs dismissal of CA-
G.R. No. 47895 on the additional ground of stare decisis.

Under the doctrine of stare decisis et non quieta movere, a point of law already established will, generally,
be followed by the same determining court and by all courts of lower rank in subsequent cases where the same
legal issue is raised.[14] For reasons needing no belaboring, however, the Court is not at all concluded by the
ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895.

The Court has time and again stated that the rule on stare decisis promotes stability in the law and should,
therefore, be accorded respect. However, blind adherence to precedents, simply as precedent, no longer rules.
More important than anything else is that the court is right,[15] thus its duty to abandon any doctrine found to be
in violation of the law in force.[16]

As it were, the former BIR Commissioners decision not to pursue his petition in G.R. No. 134386 denied
the BIR, at least as early as in that case, the opportunity to obtain from the Court an authoritative interpretation
of Section 12 of R.A. 7082. All is, however, not lost. For, the government is not estopped by acts or errors of its
agents, particularly on matters involving taxes. Corollarily, the erroneous application of tax laws by public officers
does not preclude the subsequent correct application thereof.[17] Withal, the errors of certain administrative
officers, if that be the case, should never be allowed to jeopardize the governments financial position.[18]

Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the in lieu of all taxes clause found in Section 12 of PLDTs franchise
(R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in no uncertain terms, that
PLDTs payment of the 3% franchise tax on all its gross receipts from businesses transacted by it under its
franchise is in lieu of all taxes on the franchise or earnings thereof. In fine, the appellate court, agreeing with
PLDT, posits the view that the word allencompasses any and all taxes collectible under the National Internal
Revenue Code (NIRC), save those specifically mentioned in PLDTs franchise, such as income and real property
taxes.
 The BIR Commissioner excepts. He submits that the exempting in lieu of all taxes clause covers direct
taxes only, adding that for indirect taxes to be included in the exemption, the intention to include must be specific
and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT exempt from payment of
VAT and other indirect taxes on its importations. To the Commissioner, PLDTs claimed entitlement to tax
refund/credit is without basis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for
or in lieu of indirect taxes.

The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt from
paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations.

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes
may be classified into either direct tax or indirect tax.

In context, direct taxes are those that are exacted from the very person who, it is intended or desired,
should pay them;[19] they are impositions for which a taxpayer is directly liable on the transaction or business he
is engaged in.[20]

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by,
one person in the expectation and intention that he can shift the burden to someone else.[21] Stated elsewise,
indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching
the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the
tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.

To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the
person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.[22] Stated differently, a seller who is directly and legally
liable for payment of an indirect tax, such as the VAT on goods or services, is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or end-user of such goods or services who,
although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.[23]

There can be no serious argument that PLDT, vis--vis its payment of internal revenue taxes on its importations
in question, is effectively claiming exemption from taxes not falling under the category of direct taxes. The claim
covers VAT, advance sales tax and compensating tax.

The NIRC classifies VAT as an indirect tax the amount of [which] may be shifted or passed on to the
buyer, transferee or lessee of the goods.[24] As aptly pointed out by Judge Amancio Q. Saga in his dissent in
C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied on the privilege of
importing articles. It is not a tax on the franchise of a business enterprise or on its earnings. It is imposed on all
taxpayers who import goods (unless such importation falls under the category of an exempt transaction under
Sec. 109 of the Revenue Code) whether or not the goods will eventually be sold, bartered, exchanged or utilized
for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers
who import articles for sale or as raw materials in the manufacture of finished articles for sale. [25]

Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale
or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine Acetylene
Co, Inc. vs. Commissioner of Internal Revenue,[26] lay the economic burden of the tax, on the purchaser, by
subsequently adding the tax to the selling price of the imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles,
whether in the course of business or not.[27] The rationale for compensating tax is to place, for tax purposes,
persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly
from foreign countries.[28]

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods
or services, not in the buyer thereof. Thus, one cannot invoke ones exemption privilege to avoid the passing on
or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased. [29]Hence, it is
important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is
shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those
taxes for which the buyer is directly liable.[30]

Time and again, the Court has stated that taxation is the rule, exemption is the exception. Accordingly,
statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority.[31] To him, therefore, who claims a refund or exemption from tax payments rests the
burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.[32]

As may be noted, the clause in lieu of all taxes in Section 12 of RA 7082 is immediately followed by the
limiting or qualifying clause on this franchise or earnings thereof, suggesting that the exemption is limited to
taxes imposed directly on PLDT since taxes pertaining to PLDTs franchise or earnings are its direct liability.
Accordingly, indirect taxes, not being taxes on PLDTs franchise or earnings, are outside the purview of the in
lieu provision.

If we were to adhere to the appellate courts interpretation of the law that the in lieu of all
taxes clause encompasses the totality of all taxes collectible under the Revenue Code, then, the immediately
following limiting clause on this franchise and its earnings would be nothing more than a pure jargon bereft of
effect and meaning whatsoever. Needless to stress, this kind of interpretation cannot be accorded a governing
sway following the familiar legal maxim redendo singula singulis meaning, take the words distributively and apply
the reference. Under this principle, each word or phrase must be given its proper connection in order to give it
proper force and effect, rendering none of them useless or superfluous. [33]
Significantly, in Manila Electric Company [Meralco] vs. Vera,[34] the Court declared the relatively broader
exempting clause shall be in lieu of all taxes and assessments of whatsoever nature upon the privileges earnings,
income franchise ... of the grantee written in par. # 9 of Meralcos franchise as not so all encompassing as to
embrace indirect tax, like compensating tax. There, the Court said:
It is a well-settled rule or principle in taxation that a compensating tax is an excise tax one
that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of
a privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied
upon property because of its use is an excise duty. .

The compensating tax being imposed upon MERALCO, is an impost on its use of imported articles
and is not in the nature of a direct tax on the articles themselves, the latter tax falling within the
exemption. Thus, in International Business Machine Corporation vs. Collector of Internal
Revenue, which involved the collection of a compensating tax from the plaintiff-petitioner on
business machines imported by it, this Court stated in unequivocal terms that it is not the act of
importation that is taxed under section 190 but the uses of imported goods not subjected to a
sales tax because the compensating tax was expressly designated as a substitute to make up or
compensate for the revenue lost to the government through the avoidance of sales taxes by
means of direct purchases abroad.

xxx xxx xxx

xxx If it had been the legislative intent to exempt MERALCO from paying a tax on the use of
imported equipments, the legislative body could have easily done so by expanding the provision
of paragraph 9 and adding to the exemption such words as compensating tax or purchases from
abroad for use in its business, and the like.

It may be so that in Maceda vs. Macaraig, Jr.[35] the Court held that an exemption from all taxes granted to the
National Power Corporation (NPC) under its charter[36] includes both direct and indirect taxes. But far from
providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson
of Maceda being that an exemption from all taxes excludes indirect taxes, unless the exempting statute, like
NPCs charter, is so couched as to include indirect tax from the exemption. Wrote the Court:

xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by
the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of
NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPCs amended charter) amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from all forms of taxes,
duties fees .

The use of the phrase all forms of taxes demonstrate the intention of the law to give NPC all the
tax exemptions it has been enjoying before. .

xxx xxx xxx

It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption
of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D.
380 if it is to attain its goals. (Italics in the original; words in bracket added)

Of similar import is what we said in Borja vs. Collector of Internal Revenue.[37] There, the Court upheld the
decision of the CTA denying a claim for refund of the compensating taxes paid on the importation of materials
and equipment by a grantee of a heat and power legislative franchise containing an in lieuprovision, rationalizing
as follows:

xxx Moreover, the petitioners alleged exemption from the payment of compensating tax in the
present case is not clear or expressed; unlike the exemption from the payment of income tax
which was clear and expressed in the Carcar case. Unless it appears clearly and manifestly that
an exemption is intended, the provision is to be construed strictly against the party claiming
exemption. xxx.
Jurisprudence thus teaches that imparting the in lieu of all taxes clause a literal meaning, as did the Court of
Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it is the duty of courts to seek
the real intent of the legislature, even if, by so doing, they may limit the literal meaning of the broad language. [38]
It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and
must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the taxpayer
who must prove that he falls under the exception. And, if an exemption is found to exist, it must not be 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 extended
beyond dispute in ordinary cases.[39]

All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment
of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown
its eligibility for the desired exemption. None should be granted.

As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDTs allegation that the
Bureau of Customs assessed the company for advance sales tax and compensating tax for importations entered
between October 1, 1992 and May 31, 1994 when the value-added tax system already replaced, if not totally
eliminated, advance sales and compensating taxes.[40] Indeed, pursuant to Executive Order No. 273[41] which
took effect on January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on original
and subsequent sales tax.[42] It stands to reason then, as urged by PLDT, that compensating tax and advance
sales tax were no longer collectible internal revenue taxes under the NILRC when the Bureau of Customs made
the assessments in question and collected the corresponding tax. Stated a bit differently, PLDT was no longer
under legal obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994.

Parenthetically, petitioner has not made an issue about PLDTs allegations concerning the abolition of the
provisions of the Tax Code imposing the payment of compensating and advance sales tax on importations and
the non-existence of these taxes during the period under review. On the contrary, petitioner admits that the VAT
on importation of goods has replace[d] the compensating tax and advance sales tax under the old Tax Code.[43]

Given the above perspective, the amount PLDT paid in the concept of advance sales tax and compensating tax
on the 1992 to 1994 importations were, in context, erroneous tax payments and would theoretically be
refundable. It should be emphasized, however, that, such importations were, when made, already subject to
VAT.
Factoring in the fact that a portion of the claim was barred by prescription, the CTA had determined that PLDT
is entitled to a total refundable amount of P94,673,422.00 (P87,257,031.00 of compensating tax
+ P7,416,391.00 = P94,673,422.00). Accordingly, it behooves the BIR to grant a refund of the advance sales tax
and compensating tax in the total amount of P94,673,422.00, subject to the condition that PLDT present proof
of payment of the corresponding VAT on said transactions.

WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No.
47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue is ORDERED to issue
a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00 advance sales tax and compensating
tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31, 1994, less the VAT which
may have been due on the importations in question, but have otherwise remained uncollected.

SO ORDERED.

493 Phil. 785

CARPIO, J.:
The Case

Before the Court is a petition for review[1] assailing the Decision[2] of 7 January 2000 of the Court of Appeals in CA-
G.R. SP No. 36816. The Court of Appeals affirmed the Decision[3] of 5 January 1995 of the Court of Tax Appeals
("CTA") in CTA Cases Nos. 2514, 2515 and 2516. The CTA ordered the Commissioner of Internal Revenue
("petitioner") to refund a total of P29,575.02 to respondent companies ("respondents").

Antecedent Facts

Respondents are domestic corporations licensed to transact insurance business in the country. From August 1971
to September 1972, respondents paid the Bureau of Internal Revenue under protest the 3% tax imposed on lending
investors by Section 195-A[4] of Commonwealth Act No. 466 ("CA 466"), as amended by Republic Act No. 6110
("RA 6110") and other laws. CA 466 was the National Internal Revenue Code ("NIRC") applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American ("PHILAM") Accident Insurance
Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97 from PHILAM General Insurance
Company. These amounts represented 3% of each company's interest income from mortgage and other
loans. Respondents also paid the taxes required of insurance companies under CA 466.

On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid under
protest. When respondents did not receive a response, each respondent filed on 26 April 1973 a petition for review
with the CTA. These three petitions, which were later consolidated, argued that respondents were not lending
investors and as such were not subject to the 3% lending investors' tax under Section 195-A.

The CTA archived respondents' case for several years while another case with a similar issue was pending before
the higher courts. When respondents' case was reinstated, the CTA ruled that respondents were entitled to their
refund.

The Ruling of the Court of Tax Appeals

The CTA held that respondents are not taxable as lending investors because the term "lending investors" does not
embrace insurance companies. The CTA traced the history of the tax on lending investors, as follows:
Originally, a person who was engaged in lending money at interest was taxed as a money lender. [Sec. 1464(x),
Rev. Adm. Code] The term money lenders was defined as including "all persons who make a practice of lending
money for themselves or others at interest." [Sec. 1465(v), id.] Under this law, an insurance company was not
considered a money lender and was not taxable as such. To quote from an old BIR Ruling:
"The lending of money at interest by insurance companies constitutes a necessary incident of their regular
business. For this reason, insurance companies are not liable to tax as money lenders or real estate brokers for
making or negotiating loans secured by real property. (Ruling, February 28, 1920; BIR 135.2)" (The Internal
Revenue Law, Annotated, 2nd ed., 1929, by B.L. Meer, page 143)
The same rule has been applied to banks.
"For making investments on salary loans, banks will not be required to pay the money lender's tax imposed by this
subsection, for the reason that money lending is considered a mere incident of the banking business. [See Ruling
No. 43, (October 8, 1926) 25 Off. Gaz. 1326)" (The Internal Revenue Law, Annotated, id.)
The term "money lenders" was later changed to "lending investors" but the definition of the term remains the
same. [Sec. 1464(x), Rev. Adm. Code, as finally amended by Com. Act No. 215, and Sec. 1465(v) of the same
Code, as finally amended by Act No. 3963] The same law is embodied in the present National Internal Revenue
Code (Com. Act No. 466) without change, except in the amount of the tax. [See Secs. 182(A) (3) (dd) and 194(u),
National Internal Revenue Code.]

It is a well-settled rule that an administrative interpretation of a law which has been followed and applied for a long
time, and thereafter the law is re-enacted without substantial change, such administrative interpretation is deemed
to have received legislative approval. In short, the administrative interpretation becomes part of the law as it is
presumed to carry out the legislative purpose.[5]
The CTA held that the practice of lending money at interest is part of the insurance business. CA 466 already taxes
the insurance business. The CTA pointed out that the law recognizes and even regulates this practice of lending
money by insurance companies.

The CTA observed that CA 466 also treated differently insurance companies from lending investors in regard to
fixed taxes. Under Section 182(A)(3)(gg), insurance companies were subject to the same fixed tax as banks and
finance companies. The CTA reasoned that insurance companies were grouped with banks and finance companies
because the latter's lending activities were also integral to their business. In contrast, lending investors were taxed
at a different fixed tax under Section 182(A)(3)(dd) of CA 466. The CTA stated that "insurance companies xxx had
never been required by respondent [CIR] to pay the fixed tax imposed on lending investors xxx."[6]

The dispositive portion of the Decision of 5 January 1995 of the Court of Tax Appeals ("CTA Decision") reads:
WHEREFORE, premises considered, petitioners Philippine American Accident Insurance Co., Philippine American
Assurance Co., and Philippine American General Insurance Co., Inc. are not taxable on their lending transactions
independently of their insurance business. Accordingly, respondent is hereby ordered to refund to petitioner[s] the
sum of P7,985.25, P7,047.80 and P14,541.97 in CTA Cases No. 2514, 2515 and 2516, respectively representing
the fixed and percentage taxes when (sic) paid by petitioners as lending investor from August 1971 to September
1972.

No pronouncement as to cost.

SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals.[8]

The Ruling of the Court of Appeals

The Court of Appeals ruled that respondents are not taxable as lending investors. In its Decision of 7 January 2000
("CA Decision"), the Court of Appeals affirmed the ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED, hereby AFFIRMING the decision, dated January
5, 1995, of the Court of Tax Appeals in CTA Cases Nos. 2514, 2515 and 2516.

SO ORDERED.[9]
Petitioner appealed the CA Decision to this Court.

The Issues

Petitioner raises the sole issue:

WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO THE 3% PERCENTAGE TAX AS
LENDING INVESTORS UNDER SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN RELATION TO
SECTION 194(U), ALL OF THE NIRC.[10]
The Ruling of the Court

The petition lacks merit.

On the Additional Issue Raised by Petitioner

Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on lending investors, depending on their
location.[11] The sole question before the CTA was whether respondents were subject to the percentage tax on
lending investors under Section 195-A. Petitioner raised for the first time the issue of the fixed tax in the Petition for
Review[12] petitioner filed before the Court of Appeals.

Ordinarily, a party cannot raise for the first time on appeal an issue not raised in the trial court.[13] The Court of
Appeals should not have taken cognizance of the issue on respondents' supposed liability under Section
182(A)(3)(dd). However, we cannot entirely fault the Court of Appeals or petitioner. Even if the percentage tax on
lending investors was the sole issue before it, the CTA ordered petitioner to refund to the PHILAM companies "the
fixed and percentage taxes [t]hen paid by petitioners as lending investor."[14] Although the amounts for refund
consisted only of what respondents paid as percentage taxes, the CTA Decision also ordered the refund to
respondents of the fixed tax on lending investors. Respondents in their pleadings deny any liability under Section
182(A)(3)(dd), on the same ground that they are not lending investors.

The question of whether respondents should pay the fixed tax under Section 182(A)(3)(dd) revolves around the
same issue of whether respondents are taxable as lending investors. In similar circumstances, the Court has held
that an appellate court may consider an unassigned error if it is closely related to an error that was properly
assigned.[15] This rule properly applies to the present case. Thus, we shall consider and rule on the issue of whether
respondents are subject to the fixed tax under Section 182(A)(3)(dd).

Whether Insurance Companies are

Taxable as Lending Investors

Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section 194(u) of CA 466, petitioner argues that insurance
companies are subject to two fixed taxes and two percentage taxes. Petitioner alleges that:
As a lending investor, an insurance company is subject to an annual fixed tax of P500.00 and another P500.00
under Section 182 (A)(3)(dd) and (gg) of the Tax Code. As an underwriter, an insurance company is subject to the
3% tax of the total premiums collected and another 3% on the gross receipts as a lending investor under Sections
255 and 195-A, respectively of the same Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in the nature of a tax exemption, and cannot be
allowed unless granted explicitly and categorically.

The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax cannot be
presumed.[17] Where there is doubt, tax laws must be construed strictly against the government and in favor of the
taxpayer.[18] This is because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed
beyond what the statutes expressly and clearly import.[19]
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole
year, when not otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred pesos;
2.
3. In second and third class municipalities, two hundred and fifty pesos;
4.
 5. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos; Provided,
That lending investors who do business as such in more than one province shall pay a tax of five hundred
pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending investors. Dealers in securities and lending investors
shall pay a tax equivalent to three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd) provides for
the taxation of lending investors in different localities. Section 195-A refers to dealers in securities and lending
investors. The burden is thus on petitioner to show that insurance companies are lending investors for purposes of
taxation.

In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner merely alleges
that the definition of lending investors under CA 466 is broad enough to encompass insurance
companies. Petitioner insists that because of Section 194(u), the two principal activities of the insurance business,
namely, underwriting and investment, are separately taxable.[20]

Section 194(u) of CA 466 states:

(u) "Lending investor" includes all persons who make a practice of lending money for themselves or others at
interest.

xxx
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what lending investors
are. The question is whether the lending activities of insurance companies make them lending investors for
purposes of taxation.

We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be considered lending
investors under CA 466, as amended.

Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.

The definition in Section 194(u) of CA 466 is not broad enough to include the business of insurance
companies. The Insurance Code of 1978[21] is very clear on what constitutes an insurance company. It provides
that an insurer or insurance company "shall include all individuals, partnerships, associations or corporations xxx
engaged as principals in the insurance business, excepting mutual benefit associations."[22] More specifically,
respondents fall under the category of insurance corporations as defined in Section 185 of the Insurance Code,
thus:
SECTION 185. Corporations formed or organized to save any person or persons or other corporations harmless
from loss, damage, or liability arising from any unknown or future or contingent event, or to indemnify or to
compensate any person or persons or other corporations for any such loss, damage, or liability, or to guarantee the
performance of or compliance with contractual obligations or the payment of debts of others shall be known as
"insurance corporations."
Plainly, insurance companies and lending investors are different enterprises in the eyes of the law. Lending
investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor provide compensation
or indemnity for loss. The underwriting of risks is the prerogative of insurers, the great majority of which are
incorporated insurance companies[23] like respondents.

Granting of Mortgage and

other Loans are Investment
Practices that are Part of the
Insurance Business.

True, respondents granted mortgage and other kinds of loans. However, this was not done independently of
respondents' insurance business. The granting of certain loans is one of several means of investment allowed to
insurance companies. No less than the Insurance Code mandates and regulates this practice.[24]

Unlike the practice of lending investors, the lending activities of insurance companies are circumscribed and strictly
regulated by the State. Insurance companies cannot freely lend to "themselves or others" as lending investors
can,[25] nor can insurance companies grant simply any kind of loan. Even prior to 1978, the Insurance Code
prescribed strict rules for the granting of loans by insurance companies.[26] These provisions on mortgage, collateral
and policy loans were reiterated in the Insurance Code of 1978 and are still in force today.

Petitioner concedes that respondents' investment practices are as much a part of the insurance business as the
task of underwriting. Nevertheless, petitioner argues that such investment practices are separately taxable under
CA 466.

The CTA and the Court of Appeals found that the investment of premiums and other funds received by respondents
through the granting of mortgage and other loans was necessary to respondents' business and hence, should not
be taxed separately.
Insurance companies are required by law to possess and maintain substantial legal reserves to meet their
obligations to policyholders.[27]This obviously cannot be accomplished through the collection of premiums alone, as
the legal reserves and capital and surplus insurance companies are obligated to maintain run into millions of
pesos. As such, the creation of "investment income" has long been held to be generally, if not
necessarily, essential to the business of insurance.[28]

The creation of investment income in the manner sanctioned by the laws on insurance is thus part of the business of
insurance, and the fruits of these investments are essentially income from the insurance business. This is
particularly true if the invested assets are held either as reserved funds to provide for policy obligations or as capital
and surplus to provide an extra margin of safety which will be attractive to insurance buyers.[29]

The Court has also held that when a company is taxed on its main business, it is no longer taxable further for
engaging in an activity or work which is merely a part of, incidental to and is necessary to its main
business.[30] Respondents already paid percentage and fixed taxes on their insurance business. To require them to
pay percentage and fixed taxes again for an activity which is necessarily a part of the same business, the law must
expressly require such additional payment of tax. There is, however, no provision of law requiring such additional
payment of tax.

Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance companies to pay double percentage and
fixed taxes. They merely tax lending investors, not lending activities. Respondents were not transformed into
lending investors by the mere fact that they granted loans, as these investments were part of, incidental and
necessary to their insurance business.

Different Tax Treatment of

Insurance Companies and
Lending Investors.

Section 182(A)(3) of CA 466 accorded different tax treatments to lending investors and insurance companies. The
relevant portions of Section 182 state:

Sec. 182. Fixed taxes. (A) On business xxx

(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole
year, when not otherwise specified;

xxx
(dd) Lending investors

1. In chartered cities and first class municipalities, five hundred pesos;

2.
3. In second and third class municipalities, two hundred and fifty pesos;
4.
5. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five pesos; Provided,
That lending investors who do business as such in more than one province shall pay a tax of five hundred
pesos.
xxx
(gg) Banks, insurance companies, finance and investment companies doing business in the Philippines and
franchise grantees, five hundred pesos.

xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance companies demonstrate an intention to treat these
businesses differently. If Congress intended insurance companies to be taxed as lending investors, there would be
no need for Section 182(A)(3)(gg). Section 182(A)(3)(dd) would have been sufficient. That insurance companies
were included with banks, finance and investment companies also supports the CTA's conclusion that insurance
companies had more in common with the latter enterprises than with lending investors. As the CTA pointed out,
banks also regularly lend money at interest, but are not taxable as lending investors.

We find no merit in petitioner's contention that Congress intended to subject respondents to two percentage taxes
and two fixed taxes. Petitioner's argument goes against the doctrine of strict interpretation of tax impositions.

Petitioner's argument is likewise not in accord with existing jurisprudence. In Commissioner of Internal Revenue
v. Michel J. Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different tax treatment accorded to pawnshops
and lending investors in the NIRC of 1977 and the NIRC of 1986 showed "the intent of Congress to deal with both
subjects differently." The same reasoning applies squarely to the present case.

Even the current tax law does not treat insurance companies as lending investors. Under Section 108(A)[32] of the
NIRC of 1997, lending investors and non-life insurance companies, except for their crop insurances, are subject to
value-added tax ("VAT"). Life insurance companies are exempt from VAT, but are subject to percentage tax under
Section 123 of the NIRC of 1997.

Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance companies already
implies the latter's exclusion from the coverage of these provisions. When a statute enumerates the things upon
which it is to operate, everything else by implication must be excluded from its operation and effect.[33]

Definition of Lending
Investors in CA 466 is Not
New.

Petitioner does not dispute that it issued a ruling in 1920 to the effect that the lending of money at interest was a
necessary incident of the insurance business, and that insurance companies were thus not subject to the tax on
money lenders. Petitioner argues only that the 1920 ruling does not apply to the instant case because RA 6110
introduced the definition of lending investors to CA 466 only in 1969.

The subject definition was actually introduced much earlier, at a time when lending investors were still referred to as
money lenders. Sections 45 and 46 of the Internal Revenue Law of 1914[34] ("1914 Tax Code") state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business shall be collected as follows, the amount stated
being for the whole year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the provisions of the preceding section words and phrases
shall be taken in the sense and extension indicated below:
xxx
"Money lender" includes all persons who make a practice of lending money for themselves or others at
interest. (Emphasis supplied)
As can be seen, the definitions of "money lender" under the 1914 Tax Code and "lending investor" under CA 466
are identical. The term "money lender" was merely changed to "lending investor" when Act No. 3963 amended the
Revised Administrative Code in 1932.[35] This same definition of lending investor has since appeared in Section
194(u) of CA 466 and later tax laws.

Note that insurance companies were not included among the businesses subject to an annual fixed tax under the
1914 Tax Code.[36] That Congress later saw the need to introduce Section 182(A)(3)(gg) in CA 466 bolsters our
view that there was no legislative intent to tax insurance companies as lending investors. If insurance companies
were already taxed as lending investors, there would have been no need for a separate provision specifically
requiring insurance companies to pay fixed taxes.

The Court Accords Great

Weight to the Factual Findings
of the CTA.

Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily developed an
expertise in the subject of taxation that this Court has recognized time and again. For this reason, the findings of
fact of the CTA, particularly when affirmed by the Court of Appeals, are generally conclusive on this Court absent
grave abuse of discretion or palpable error,[37] which are not present in this case.

WHEREFORE, we DENY the instant petition and AFFIRM the Decision of 7 January 2000 of the Court of Appeals in
CA-G.R. SP No. 36816.

SO ORDERED.

G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals in CA-G.R. SP No.
49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April
3, 2001 Resolution3 denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement4 with Baguio
Gold Mining Company ("Baguio Gold") for the former to manage and operate the latters mining claim, known as the
Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was denominated as "Power
of Attorney" and provided for the following terms:
 4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the
MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from
time to time may be required by the MANAGERS within the said 3-year period, for use in the
MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be
added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino
PROJECT, in accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior
approval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in
cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until
termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL to
extend to the MANAGERS the benefit of subsequent appreciation of property, upon a projected
termination of this Agency, the ratio which the MANAGERS account has to the owners account will
be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will be valueless, or
of slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their option
that property originally transferred by them to the Sto. Nino PROJECT be re-transferred to them.
Until such assets are transferred to the MANAGERS, this Agency shall remain subsisting.

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino
PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on their
compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after
deduction therefrom of the MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may
incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as security
for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as
a means to fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account. After all
obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency
shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the
contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such withdrawal.
Paragraph 5(d) hereof shall be operative in case of the MANAGERS withdrawal.

x x x x5

In the course of managing and operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of
mine operations on February 20, 1982.6

Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in Payment"7 wherein Baguio
Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds
equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in Payment"8 where the
parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities
pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America
NT & SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its
tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to
petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as
"loss on settlement of receivables from Baguio Gold against reserves and allowances."9 However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The
bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed
part of Baguio Golds "pecuniary obligations" to petitioner. It also included payments made by petitioner as
guarantor of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the
original creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be able to
recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell
or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to
enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the alleged
debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects net profit.10

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit.
The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount of
P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent

Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency interest due
computed from February 10, 1995, which is the date after the 20-day grace period given by the respondent
within which petitioner has to pay the deficiency amount x x x up to actual date of payment.

SO ORDERED.11

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature of a
loan. It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the "Power of Attorney" executed by
petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature
of an investment, it could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could not
be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since its
loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the notice
sent by Bank of America showing that it was merely demanding payment of the installment and interests due.
Moreover, Citibank imposed and collected a "pre-termination penalty" for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.
 The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto.
Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a loan.

II.

The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine
indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding
the clear absence of any intent on the part of Philex and Baguio Gold to form a partnership.

III.

The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the
advances made by Philex.

IV.

The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-off.14

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not only rely
on the "Power of Attorney", but also on the subsequent "Compromise with Dation in Payment" and "Amended
Compromise with Dation in Payment" that the parties executed in 1982. These documents, allegedly evinced the
parties intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between
them.

The petition lacks merit.

The lower courts correctly held that the "Power of Attorney" is the instrument that is material in determining the true
nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered from the expressed language of the
primary contract under which the parties business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to the termination of their business
relationship created under the "Power of Attorney". On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or contemporaneous
act that is reflective of the parties true intent. The compromise agreements were executed eleven years after the
"Power of Attorney" and merely laid out a plan or procedure by which petitioner could recover the advances and
payments it made under the "Power of Attorney". The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define that relationship or indicate its real
character.

An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.15 While a corporation, like
petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar community of interest in the
business, sharing of profits and losses, and a mutual right of control. x x x The main distinction cited by most
opinions in common law jurisdictions is that the partnership contemplates a general business with some
degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of
a temporary nature. x x x This observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular partnership may have for its object a
specific undertaking. x x x It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint venture with others. x x x (Citations
omitted) 16

Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had intended to create a
partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business
as shown by a 50-50 sharing in the income of the mine.

Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property and industry to
the common fund known as the Sto. Nio mine.17 In this regard, we note that there is a substantive equivalence in
the respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4
and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contribute P11M under its owners account plus any of its income that is left
in the project, in addition to its actual mining claim. Meanwhile, petitioners contribution would consist of
its expertise in the management and operation of mines, as well as the managers account which is comprised
of P11M in funds and property and petitioners "compensation" as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold because it
did not "bind" itself to contribute money or property to the project; that under paragraph 5 of the agreement, it was
only optional for petitioner to transfer funds or property to the Sto. Nio project "(w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO MINE."18

The wording of the parties agreement as to petitioners contribution to the common fund does not detract from the
fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing
the advances until termination of the parties business relations. As can be seen, petitioner became bound by its
contributions once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner
had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances should
not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only showed
that what the parties entered into was actually a contract of agency coupled with an interest which is not revocable
at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual interest of both principal and agent.19 In this case, the
non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that
the parties relation under the agreement is one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one of
agency and not a partnership. Although the said provision states that "this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account," it
does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.

It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favor of petitioner
to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and
Baguio Gold, in which the former was to manage and operate the latters mine through the parties mutual
contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations between the latter and third
persons.20 Where representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract of agency,
but some other agreement depending on the ultimate undertaking of the parties.21

In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner
under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business relations, "the
ratio which the MANAGERS account has to the owners account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the claims" shall be transferred to petitioner.22 As
pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines assets
upon dissolution of the parties business relations. There was nothing in the agreement that would require Baguio
Gold to make payments of the advances to petitioner as would be recognized as an item of obligation or "accounts
payable" for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Nio mine
upon termination, a provision that is more consistent with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality.23 In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had
advanced, but only the return of an amount pegged at a ratio which the managers account had to the owners
account.

In this connection, we find no contractual basis for the execution of the two compromise agreements in which
Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The "Power of Attorney" clearly provides that petitioner would only be entitled to
the return of a proportionate share of the mine assets to be computed at a ratio that the managers account had to
the owners account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and
above the proportion agreed upon in the "Power of Attorney".

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of
pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due
and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the
advances were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive 50% of the
net profits as "compensation" under paragraph 12 of the agreement. The entirety of the parties contractual
stipulations simply leads to no other conclusion than that petitioners "compensation" is actually its share in the
income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the profits of a
business is prima facie evidence that he is a partner in the business." Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio project was in the nature of
compensation or "wages of an employee", under the exception provided in Article 1769 (4) (b).24

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid
"wages" pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the project
and had put substantial sums into the venture in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary
employee.

Consequently, we find that petitioners "compensation" under paragraph 12 of the agreement actually constitutes its
share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of
the mine if it were just an employee of Baguio Gold.25 It is not surprising that petitioner was to receive a 50% share
in the net profits, considering that the "Power of Attorney" also provided for an almost equal contribution of the
parties to the St. Nino mine. The "compensation" agreed upon only serves to reinforce the notion that the parties
relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a partnership known as the
Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the "Power of Attorney". As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual
finding that Baguio Golds debts were not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.26

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income
tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must
prove by convincing evidence that he is entitled to the deduction claimed.27 In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its
gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June
30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner
Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date given for
the payment of the deficiency income tax, up to the actual date of payment.

SO ORDERED.

.R. No. 167919 February 14, 2007

PLARIDEL M. ABAYA, COMMODORE PLARIDEL C. GARCIA (retired) and PMA 59 FOUNDATION, INC., rep.
by its President, COMMODORE CARLOS L. AGUSTIN (retired), Petitioners,
vs.
HON. SECRETARY HERMOGENES E. EBDANE, JR., in his capacity as Secretary of the DEPARTMENT OF
PUBLIC WORKS and HIGHWAYS, HON. SECRETARY EMILIA T. BONCODIN, in her capacity as Secretary of
the DEPARTMENT OF BUDGET and MANAGEMENT, HON. SECRETARY CESAR V. PURISIMA, in his
capacity as Secretary of the DEPARTMENT OF FINANCE, HON. TREASURER NORMA L. LASALA, in her
capacity as Treasurer of the Bureau of Treasury, and CHINA ROAD and BRIDGE
CORPORATION, Respondents.

DECISION
CALLEJO, SR., J.:

Before the Court is the petition for certiorari and prohibition under Rule 65 of the Rules of Court seeking to set aside
and nullify Resolution No. PJHL-A-04-012 dated May 7, 2004 issued by the Bids and Awards Committee (BAC) of
the Department of Public Works and Highways (DPWH) and approved by then DPWH Acting Secretary Florante
Soriquez. The assailed resolution recommended the award to private respondent China Road & Bridge Corporation
of the contract for the implementation of civil works for Contract Package No. I (CP I), which consists of the
improvement/rehabilitation of the San Andres (Codon)-Virac-Jct. Bago-Viga road, with the length of 79.818
kilometers, in the island province of Catanduanes.

The CP I project is one of the four packages comprising the project for the improvement/rehabilitation of the
Catanduanes Circumferential Road, covering a total length of about 204.515 kilometers, which is the main highway
in Catanduanes Province. The road section (Catanduanes Circumferential Road) is part of the Arterial Road Links
Development Project (Phase IV) funded under Loan Agreement No. PH-P204 dated December 28, 1999 between
the Japan Bank for International Cooperation (JBIC) and the Government of the Republic of the Philippines.

Background

Based on the Exchange of Notes dated December 27, 1999,1 the Government of Japan and the Government of the
Philippines, through their respective representatives, namely, Mr. Yoshihisa Ara, Ambassador Extraordinary and
Plenipotentiary of Japan to the Republic of the Philippines, and then Secretary of Foreign Affairs Domingo L.
Siazon, have reached an understanding concerning Japanese loans to be extended to the Philippines. These loans
were aimed at promoting our countrys economic stabilization and development efforts.

The Exchange of Notes consisted of two documents: (1) a Letter from the Government of Japan, signed by
Ambassador Ara, addressed to then Secretary of Foreign Affairs Siazon, confirming the understanding reached
between the two governments concerning the loans to be extended by the Government of Japan to the Philippines;
and (2) a document denominated as Records of Discussion where the salient terms of the loans as set forth by the
Government of Japan, through the Japanese delegation, were reiterated and the said terms were accepted by the
Philippine delegation. Both Ambassador Ara and then Secretary Siazon signed the Records of Discussion as
representatives of the Government of Japan and Philippine Government, respectively.

The Exchange of Notes provided that the loans to be extended by the Government of Japan to the Philippines
consisted of two loans: Loan I and Loan II. The Exchange of Notes stated in part:

1. A loan in Japanese yen up to the amount of seventy-nine billion eight hundred and sixty-one million yen
(Y79,861,000,000) (hereinafter referred to as "the Loan I") will be extended, in accordance with the relevant
laws and regulations of Japan, to the Government of the Republic of the Philippines (hereinafter referred to
as "the Borrower I") by the Japan Bank for International Cooperation (hereinafter referred to as "the Bank")
to implement the projects enumerated in the List A attached hereto (hereinafter referred to as "the List A")
according to the allocation for each project as specified in the List A.

2. (1) The Loan I will be made available by loan agreements to be concluded between the Borrower I and
the Bank. The terms and conditions of the Loan I as well as the procedure for its utilization will be governed
by said loan agreements which will contain, inter alia, the following principles:

...

(2) Each of the loan agreements mentioned in sub-paragraph (1) above will be concluded after the
Bank is satisfied of the feasibility, including environmental consideration, of the project to which such
loan agreement relates.

3. (1) The Loan I will be made available to cover payments to be made by the Philippine executing agencies
to suppliers, contractors and/or consultants of eligible source countries under such contracts as may be
entered into between them for purchases of products and/or services required for the implementation of the
projects enumerated in the List A, provided that such purchases are made in such eligible source countries
for products produced in and/or services supplied from those countries.

(2) The scope of eligible source countries mentioned in sub-paragraph (1) above will be agreed upon
between the authorities concerned of the two Governments.

(3) A part of the Loan I may be used to cover eligible local currency requirements for the
implementation of the projects enumerated in the List A.

4. With regard to the shipping and marine insurance of the products purchased under the Loan I, the
Government of the Republic of the Philippines will refrain from imposing any restrictions that may hinder fair
and free competition among the shipping and marine insurance companies.
 x x x x2 1awphi1.net

Pertinently, List A, which specified the projects to be financed under the Loan I, includes the Arterial Road Links
Development Project (Phase IV), to wit:

LIST A

Maximum amount in million yen)

1. Secondary Education Development and Improvement Project 7,210

2. Rural Water Supply Project (Phase V) 951

3. Bohol Irrigation Project (Phase II) 6,078

4. Agrarian Reform Infrastructure Support Project (Phase II) 16,990

5. Arterial Road Links Development Project (Phase IV) 15,384

6. Cordillera Road Improvement Project 5,852

7. Philippines-Japan Friendship Highway Mindanao Section Rehabilitation Project (Phase II) 7,434

8. Rehabilitation and Maintenance of Bridges Along Arterial Roads Project (Phase IV) 5,068

9. Maritime Safety Improvement Project (Phase C) 4,714

10. Pinatubo Hazard Urgent Mitigation Project (Phase II) 9,013

11. Pasig-Marikina River Channel Improvement Project (Phase I) 1,167

Total 79,8613

The Exchange of Notes further provided that:

III

xxxx

3. The Government of the Republic of the Philippines will ensure that the products and/or services mentioned in
sub-paragraph (1) of paragraph 3 of Part I and sub-paragraph (1) of paragraph 4 of Part II are procured in
accordance with the guidelines for procurement of the Bank, which set forth, inter alia, the procedures of
international tendering to be followed except where such procedures are inapplicable or inappropriate.

x x x x4

The Records of Discussion, which formed part of the Exchange of Notes, also stated in part, thus:

xxxx

1. With reference to sub-paragraph (3) of paragraph 3 of Part I of the Exchange of Notes concerning the financing of
eligible local currency requirements for the implementation of the projects mentioned in the said sub-paragraph, the
representative of the Japanese delegation stated that:

(1) such requirement of local currency as general administrative expenses, interest during construction,
taxes and duties, expenses concerning office, remuneration to employees of the executing agencies and
housing, not directly related to the implementation of the said projects, as well as purchase of land
properties, compensation and the like, however, will not be considered as eligible for financing under the
Loan I; and

(2) the procurement of products and/or services will be made in accordance with the procedures of
international competitive tendering except where such procedures are inapplicable and inappropriate.

x x x x5

Thus, in accordance with the agreement reached by the Government of Japan and the Philippine Government, as
expressed in the Exchange of Notes between the representatives of the two governments, the Philippines obtained
from and was granted a loan by the JBIC. Loan Agreement No. PH-P204 dated December 28, 1999, in particular,
stated as follows:

Loan Agreement No. PH-P204, dated December 28, 1999, between JAPAN BANK FOR INTERNATIONAL
COOPERATION and the GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES.

In the light of the contents of the Exchange of Notes between the Government of Japan and the Government of the
Republic of the Philippines dated December 27, 1999, concerning Japanese loans to be extended with a view to
promoting the economic stabilization and development efforts of the Republic of the Philippines.

JAPAN BANK FOR INTERNATIONAL COOPERATION (hereinafter referred to as "the BANK") and THE
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES (hereinafter referred to as "the Borrower") herewith
conclude the following Loan Agreement (hereinafter referred to as "the Loan Agreement", which includes all
agreements supplemental hereto).

x x x x6

Under the terms and conditions of Loan Agreement No. PH-P204, JBIC agreed to lend the Philippine Government
an amount not exceeding FIFTEEN BILLION THREE HUNDRED EIGHTY-FOUR MILLION Japanese Yen
(Y15,384,000,000) as principal for the implementation of the Arterial Road Links Development Project (Phase IV) on
the terms and conditions set forth in the Loan Agreement and in accordance with the relevant laws and regulations
of Japan.7 The said amount shall be used for the purchase of eligible goods and services necessary for the
implementation of the above-mentioned project from suppliers, contractors or consultants.8

Further, it was provided under the said loan agreement that other terms and conditions generally applicable thereto
shall be set forth in the General Terms and Conditions, dated November 1987, issued by the Overseas Economic
Cooperation Fund (OECF) and for the purpose, reference to "the OECF" and "Fund" therein (General Terms and
Conditions) shall be substituted by "the JBIC" and "Bank," respectively.9 Specifically, the guidelines for procurement
of all goods and services to be financed out of the proceeds of the said loan shall be as stipulated in the Guidelines
for Procurement under OECF Loans dated December 1997 (herein referred to as JBIC Procurement Guidelines).10

As mentioned earlier, the proceeds of Loan Agreement No. PH-P204 was to be used to finance the Arterial Road
Links Development Project (Phase IV), of which the Catanduanes Circumferential Road was a part. This road
section, in turn, was divided into four contract packages (CP):

CP I: San Andres (Codon)-Virac-Jct. Bato- Viga Road - 79.818 kms

CP II: Viga-Bagamanoc Road - 10.40 kms.

CP III: Bagamanoc-Pandan Road - 47.50 kms.

CP IV: Pandan-Caramoran-Codon Road - 66.40 kms.11

Subsequently, the DPWH, as the government agency tasked to implement the project, caused the publication of the
"Invitation to Prequalify and to Bid" for the implementation of the CP I project in two leading national newspapers,
namely, the Manila Times and Manila Standard on November 22 and 29, and December 5, 2002.

A total of twenty-three (23) foreign and local contractors responded to the invitation by submitting their accomplished
prequalification documents on January 23, 2003. In accordance with the established prequalification criteria, eight
contractors were evaluated or considered eligible to bid as concurred by the JBIC. One of them, however, withdrew;
thus, only seven contractors submitted their bid proposals.

The bid documents submitted by the prequalified contractors/bidders were examined to determine their compliance
with the requirements as
stipulated in Article 6 of the Instruction to Bidders.12 After the lapse of the deadline for the submission of bid
proposals, the opening of the bids commenced immediately. Prior to the opening of the respective bid proposals, it
was announced that the Approved Budget for the Contract (ABC) was in the amount of 738,710,563.67.

The result of the bidding revealed the following three lowest bidders and their respective bids vis--vis the ABC:13

Original Bid As Read As-Corrected Bid Amount

Name of Bidder Variance
(Pesos) (Pesos)
1) China Road And Bridge
993,183,904.98 952,564,821.71 28.95%
Corporation

2) Cavite Ideal Intl Const.

1,099,926,598.11 1,099,926,598.11 48.90%
Devt. Corp.
 3) Italian Thai Devt. Public
1,125,022,075.34 1,125,392,475.36 52.35%
Company, Ltd.

The bid of private respondent China Road & Bridge Corporation was corrected from the original 993,183,904.98
(with variance of 34.45% from the ABC) to 952,564,821.71 (with variance of 28.95% from the ABC) based on their
letter clarification dated April 21, 2004.14

After further evaluation of the bids, particularly those of the lowest three bidders, Mr. Hedifume Ezawa, Project
Manager of the Catanduanes Circumferential Road Improvement Project (CCRIP), in his Contractors Bid Evaluation
Report dated April 2004, recommended the award of the contract to private respondent China Road & Bridge
Corporation:

In accordance with the Guidelines for the Procurements under ODA [Official Development Assistance] Loans, the
Consultant hereby recommends the award of the contract for the construction of CP I, San Andres (Codon) Virac
Jct. Bato Viga Section under the Arterial Road Links Development Projects, Phase IV, JBIC Loan No. PH-P204
to the Lowest Complying Bidder, China Road and Bridge Corporation, at its total corrected bid amount of Nine
Hundred Fifty-Two Million Five Hundred Sixty-Four Thousand Eight Hundred Twenty-One & 71/100 Pesos.15

The BAC of the DPWH, with the approval of then Acting Secretary Soriquez, issued the assailed Resolution No.
PJHL-A-04-012 dated May 7, 2004 recommending the award in favor of private respondent China Road & Bridge
Corporation of the contract for the implementation of civil works for CP I, San Andres (Codon) Virac Jct. Bato
Viga Road (Catanduanes Circumferential Road Improvement Project) of the Arterial Roads Links Development
Project, Phase IV, located in Catanduanes Province, under JBIC Loan Agreement No. PH-P204.16 On September
29, 2004, a Contract of Agreement was entered into by and between the DPWH and private respondent China Road
& Bridge Corporation for the implementation of the CP I project.

The Parties

Petitioner Plaridel M. Abaya claims that he filed the instant petition as a taxpayer, former lawmaker, and a Filipino
citizen. Petitioner Plaridel C. Garcia likewise claims that he filed the suit as a taxpayer, former military officer, and a
Filipino citizen. Petitioner PMA 59 Foundation, Inc., on the other hand, is a non-stock, non-profit corporation
organized under the existing Philippine laws. It claims that its members are all taxpayers and alumni of the
Philippine Military Academy. It is represented by its President, Carlos L. Agustin.

Named as public respondents are the DPWH, as the government agency tasked with the implementation of
government infrastructure projects; the Department of Budget and Management (DBM) as the government agency
that authorizes the release and disbursement of public funds for the implementation of government infrastructure
projects; and the Department of Finance (DOF) as the government agency that acts as the custodian and manager
of all financial resources of the government. Also named as individual public respondents are Hermogenes E.
Ebdane, Jr., Emilia T. Boncodin and Cesar V. Purisima in their capacities as former Secretaries of the DPWH, DBM
and DOF, respectively. On the other hand, public respondent Norma L. Lasala was impleaded in her capacity as
Treasurer of the Bureau of Treasury.

Private respondent China Road & Bridge Corporation is a duly organized corporation engaged in the business of
construction.

The Petitioners Case

The petitioners mainly seek to nullify DPWH Resolution No. PJHL-A-04-012 dated May 7, 2004, which
recommended the award to private respondent China Road & Bridge Corporation of the contract for the
implementation of the civil works of CP I. They also seek to annul the contract of agreement subsequently entered
into by and between the DPWH and private respondent China Road & Bridge Corporation pursuant to the said
resolution.

They pose the following issues for the Courts resolution:

I. Whether or not Petitioners have standing to file the instant Petition.

II. Whether or not Petitioners are entitled to the issuance of a Writ of Certiorari reversing and setting aside
DPWH Resolution No. PJHL-A-04-012, recommending the award of the Contract Agreement for the
implementation of civil works for CPI, San Andres (CODON)-VIRAC-JCT BATO-VIGA ROAD
(CATANDUANES CIRCUMFERENTIAL ROAD IMPROVEMENT PROJECT) of the Arterial Road Links
Development Project, Phase IV, located in Catanduanes Province, under JBIC L/A No. PH-P204, to China
Road & Bridge Corporation.

III. Whether or not the Contract Agreement executed by and between the Republic of the Philippines,
through the Department of Public Works and Highways, and the China Road & Bridge Corporation, for the
implementation of civil works for CPI, San Andres (CODON)-VIRAC-JCT BATO-VIGA ROAD
 (CATANDUANES CIRCUMFERENTIAL ROAD IMPROVEMENT PROJECT) of the Arterial Road Links
Development Project, Phase IV, located in Catanduanes Province, under JBIC L/A No. PH-P204, is void ab
initio.

IV. Whether or not Petitioners are entitled to the issuance of a Writ of Prohibition permanently prohibiting the
implementation of DPWH Resolution No. PJHL-A-04-012 and the Contract Agreement executed by and
between the Republic of the Philippines (through the Department of Public Works and Highways) and the
China Road & Bridge Corporation, and the disbursement of public funds by the [D]epartment of [B]udget and
[M]anagement for such purpose.

V. Whether or not Petitioners are entitled to a Preliminary Injunction and/or a Temporary Restraining Order
immediately enjoining the implementation of DPWH Resolution No. PJHL-A-04-012 and the Contract
Agreement executed by and between the Republic of the Philippines (through the Department of Public
Works and Highways) and the China Road & Bridge Corporation, and the disbursement of public funds by
the Department of Budget and Management for such purpose, during the pendency of this case.17

Preliminarily, the petitioners assert that they have standing or locus standi to file the instant petition. They claim that
as taxpayers and concerned citizens, they have the right and duty to question the expenditure of public funds on
illegal acts. They point out that the Philippine Government allocates a peso-counterpart for CP I, which amount is
appropriated by Congress in the General Appropriations Act; hence, funds that are being utilized in the
implementation of the questioned project also partake of taxpayers money. The present action, as a taxpayers suit,
is thus allegedly proper.

They likewise characterize the instant petition as one of transcendental importance that warrants the Courts
adoption of a liberal stance on the issue of standing. It cited several cases where the Court brushed aside
procedural technicalities in order to resolve issues involving paramount public interest and transcendental
importance.18 Further, petitioner Abaya asserts that he possesses the requisite standing as a former member of the
House of Representatives and one of the principal authors of Republic Act No. 9184 (RA 9184)19 known as the
Government Procurement Reform Act, the law allegedly violated by the public respondents.

On the substantive issues, the petitioners anchor the instant petition on the contention that the award of the contract
to private respondent China Road & Bridge Corporation violates RA 9184, particularly Section 31 thereof which
reads:

SEC. 31. Ceiling for Bid Prices. The ABC shall be the upper limit or ceiling for the Bid prices. Bid prices that
exceed this ceiling shall be disqualified outright from further participating in the bidding. There shall be no lower limit
to the amount of the award.

In relation thereto, the petitioners cite the definition of the ABC, thus:

SEC. 5. Definition of Terms.

xxx

(a) Approved Budget for the Contract (ABC). refers to the budget for the contract duly approved by the Head of the
Procuring Entity, as provided for in the General Appropriations Act and/or continuing appropriations, in the case of
National Government Agencies; the Corporate Budget for the contract approved by the governing Boards, pursuant
to E.O. No. 518, series of 1979, in the case of Government-Owned and/or Controlled Corporations, Government
Financial Institutions and State Universities and Colleges; and the Budget for the contract approved by the
respective Sanggunian, in the case of Local Government Units.

xxx

The petitioners theorize that the foregoing provisions show the mandatory character of ceilings or upper limits of
every bid. Under the above-quoted provisions of RA 9184, all bids or awards should not exceed the ceilings or
upper limits; otherwise, the contract is deemed void and inexistent.

Resolution No. PJHL-A-04-012 was allegedly issued with grave abuse of discretion because it recommended the
award of the contract to private respondent China Road & Bridge Corporation whose bid was more than 200
million overpriced based on the ABC. As such, the award is allegedly illegal and unconscionable.

In this connection, the petitioners opine that the contract subsequently entered into by and between the DPWH and
private respondent China Road & Bridge Corporation is void ab initio for being prohibited by RA 9184. They stress
that Section 31 thereof expressly provides that "bid prices that exceed this ceiling shall be disqualified outright from
participating in the bidding." The upper limit or ceiling is called the ABC and since the bid of private respondent
China Road & Bridge Corporation exceeded the ABC for the CP I project, it should have been allegedly disqualified
from the bidding process and should not, by law, have been awarded the said contract. They invoke Article 1409 of
the Civil Code:
ART. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;

(7) Those expressly prohibited or declared void by law.

For violating the above provision, the contract between the DPWH and private respondent China Road & Bridge
Corporation is allegedly inexistent and void ab initio and can produce no effects whatsoever.

It is the contention of the petitioners that RA 9184 is applicable to both local- and foreign-funded procurement
contracts. They cite the following excerpt of the deliberations of the Bicameral Conference Committee on the
Disagreeing Provisions of Senate Bill No. 2248 and House Bill No. 4809:20

REP. ABAYA. Mr. Chairman, can we just propose additional amendments? Can we go back to Section 4, Mr.
Chairman?

THE CHAIRMAN (SEN. ANGARA). Section? Section ano, Del, 4? Definition definition of terms.

REP. ABAYA. Sa House bill, it is sa scope and application.

THE CHAIRMAN (SEN. ANGARA). Okay.

REP. ABAYA. It should read as follows: "This Act shall apply to the procurement of goods, supplies and materials,
infrastructure projects and consulting services regardless of funding source whether local or foreign by the
government."

THE CHAIRMAN (SEN. ANGARA). Okay, accepted. We accept. The Senate accepts it.21

xxx xxx xxx

THE CHAIRMAN (SEN ANGARA). Just take note of that ano. Medyo nga problematic yan eh. Now, just for the
record Del, can you repeat again the justification for including foreign funded contracts within the scope para
malinaw because the World Bank daw might raise some objection to it.

REP. ABAYA. Well, Mr. Chairman, we should include foreign funded projects kasi these are the big projects. To give
an example, if you allow bids above government estimate, lets say take the case of 500 million project, included in
that 500 million is the 20 percent profit. If you allow them to bid above government estimate, they will add another
say 28 percent of (sic) 30 percent, 30 percent of 500 million is another 150 million. Ito, this is a rich source of graft
money, aregluhan na lang, 150 million, five contractors will gather, "O eto 20 million, 20 million, 20 million." So, it is
rigged. Yun ang practice na nangyayari. If we eliminate that, if we have a ceiling then, it will not be very tempting
kasi walang extra money na pwedeng ibigay sa ibang contractor. So this promote (sic) collusion among bidders, of
course, with the cooperation of irresponsible officials of some agencies. So we should have a ceiling to include
foreign funded projects.22

The petitioners insist that Loan Agreement No. PH-P204 between the JBIC and the Philippine Government is
neither a treaty, an international nor an executive agreement that would bar the application of RA 9184. They point
out that to be considered a treaty, an international or an executive agreement, the parties must be two sovereigns or
States whereas in the case of Loan Agreement No. PH-P204, the parties are the Philippine Government and the
JBIC, a banking agency of Japan, which has a separate juridical personality from the Japanese Government.

They further insist on the applicability of RA 9184 contending that while it took effect on January 26, 200323 and
Loan Agreement No. PH-P204 was executed prior thereto or on December 28, 1999, the actual procurement or
award of the contract to private respondent China Road & Bridge Corporation was done after the effectivity of RA
9184. The said law is allegedly specific as to its application, which is on the actual procurement of infrastructure and
other projects only, and not on the loan agreements attached to such projects. Thus, the petition only prays for the
annulment of Resolution No. PJHL-A-04-012 as well as the contract between the DPWH and private respondent
China Road & Bridge Corporation. The petitioners clarify that they do not pray for the annulment of Loan Agreement
No. PH-P204. Since the subject procurement and award of the contract were done after the effectivity of RA 9184,
necessarily, the procurement rules established by that law allegedly apply, and not Presidential Decree No. 1594
(PD 1594)24 and Executive Order No. 40 (EO 40), series of 2001, 25 as contended by the respondents. The latter
laws, including their implementing rules, have allegedly been repealed by RA 9184. Even RA 4860, as amended,
known as the Foreign Borrowings Act, the petitioners posit, may have also been repealed or modified by RA 9184
insofar as its provisions are inconsistent with the latter.

The petitioners also argue that the "Implementing Rules and Regulations (IRR) of RA 9184, Otherwise Known as
the Government Procurement Reform Act, Part A" (IRR-A) cited by the respondents is not applicable as these rules
only govern domestically-funded procurement contracts. They aver that the implementing rules to govern foreign-
funded procurement, as in the present case, have yet to be drafted and in fact, there are concurrent resolutions
drafted by both houses of Congress for the Reconvening of the Joint Congressional Oversight Committee for the
formulation of the IRR for foreign-funded procurements under RA 9184.

The petitioners maintain that disbursement of public funds to implement a patently void and illegal contract is itself
illegal and must be enjoined. They bring to the Courts attention the fact that the works on the CP I project have
already commenced as early as October 2004. They thus urge the Court to issue a writ of certiorari to set aside
Resolution No. PJHL-A-04-012 as well as to declare null and void the contract entered into between the DPWH and
private respondent China Road & Bridge Corporation. They also pray for the issuance of a temporary restraining
order and, eventually, a writ of prohibition to permanently enjoin the DPWH from implementing Resolution No.
PJHL-A-04-012 and its contract with private respondent China Road & Bridge Corporation as well as the DBM from
disbursing funds for the said purpose.

The Respondents Counter-Arguments

The public respondents, namely the DPWH, DBM and DOF, and their respective named officials, through the Office
of the Solicitor General, urge the Court to dismiss the petition on grounds that the petitioners have no locus standi
and, in any case, Resolution No. PJHL-A-04-012 and the contract between the DPWH and private respondent
China Road & Bridge Corporation are valid.

According to the public respondents, a taxpayers locus standi was recognized in the following cases: (a) where a
tax measure is assailed as unconstitutional;26 (b) where there is a question of validity of election laws;27 (c) where
legislators questioned the validity of any official action upon the claim that it infringes on their prerogatives as
legislators;28 (d) where there is a claim of illegal disbursement or wastage of public funds through the enforcement of
an invalid or unconstitutional law;29 (e) where it involves the right of members of the Senate or House of
Representatives to question the validity of a presidential veto or condition imposed on an item in an appropriation
bill;30 or (f) where it involves an invalid law, which when enforced will put the petitioner in imminent danger of
sustaining some direct injury as a result thereof, or that he has been or is about to be denied some right or privilege
to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the
statute complained of.31 None of the above considerations allegedly obtains in the present case.

It is also the view of the public respondents that the fact that petitioner Abaya was a former lawmaker would not
suffice to confer locus standi on himself. Members of Congress may properly challenge the validity of an official act
of any department of the government only upon showing that the assailed official act affects or impairs their rights
and prerogatives as legislators.

The public respondents further assail the standing of the petitioners to file the instant suit claiming that they failed to
allege any specific injury suffered nor an interest that is direct and personal to them. If at all, the interest or injuries
claimed by the petitioners are allegedly merely of a general interest common to all members of the public. Their
interest is allegedly too vague, highly speculative and uncertain to satisfy the requirements of locus standi.

The public respondents find it noteworthy that the petitioners do not raise issues of constitutionality but only of
contract law, which the petitioners not being privies to the agreement cannot raise. This is following the principle that
a stranger to a contract cannot sue either or both the contracting parties to annul and set aside the same except
when he is prejudiced on his rights and can show detriment which would positively result to him from the
implementation of the contract in which he has no intervention. There being no particularized interest or elemental
substantial injury necessary to confer locus standi, the public respondents implore the Court to dismiss the petition.

On the merits, the public respondents maintain that the imposition of ceilings or upper limits on bid prices in RA
9184 does not apply because the CP I project and the entire Catanduanes Circumferential Road Improvement
Project, financed by Loan Agreement No. PH-P204 executed between the Philippine Government and the JBIC, is
governed by the latters Procurement Guidelines which precludes the imposition of ceilings on bid prices. Section
5.06 of the JBIC Procurement Guidelines reads:

Section 5.06. Evaluation and Comparison of Bids.

xxx
(e) Any procedure under which bids above or below a predetermined bid value assessment are automatically
disqualified is not permitted.

It was explained that other foreign banks such as the Asian Development Bank (ADB) and the World Bank (WB)
similarly prohibit the bracketing or imposition of a ceiling on bid prices.

The public respondents stress that it was pursuant to Loan Agreement No. PH-P204 that the assailed Resolution
No. PJHL-A-04-012 and the subsequent contract between the DPWH and private respondent China Road & Bridge
Corporation materialized. They likewise aver that Loan Agreement No. PH-P204 is governed by RA 4860, as
amended, or the Foreign Borrowings Act. Section 4 thereof states:

SEC. 4. In the contracting of any loan, credit or indebtedness under this Act, the President of the Philippines may,
when necessary, agree to waive or modify, the application of any law granting preferences or imposing restrictions
on international competitive bidding, including among others [Act No. 4239, Commonwealth Act No. 138], the
provisions of [CA 541], insofar as such provisions do not pertain to constructions primarily for national defense or
security purposes, [RA 5183]; Provided, however, That as far as practicable, utilization of the services of qualified
domestic firms in the prosecution of projects financed under this Act shall be encouraged: Provided, further, That in
case where international competitive bidding shall be conducted preference of at least fifteen per centum shall be
granted in favor of articles, materials or supplies of the growth, production or manufacture of the Philippines:
Provided, finally, That the method and procedure in comparison of bids shall be the subject of agreement between
the Philippine Government and the lending institution.

DOJ Opinion No. 46, Series of 1987, is relied upon by the public respondents as it opined that an agreement for the
exclusion of foreign assisted projects from the coverage of local bidding regulations does not contravene existing
legislations because the statutory basis for foreign loan agreements is RA 4860, as amended, and under Section 4
thereof, the President is empowered to waive the application of any law imposing restrictions on the procurement of
goods and services pursuant to such loans.

Memorandum Circular Nos. 104 and 108, issued by the President, to clarify RA 4860, as amended, and PD 1594,
relative to the award of foreign-assisted projects, are also invoked by the public respondents, to wit:

Memorandum Circular No. 104:

In view of the provisions of Section 4 of Republic Act No. 4860, as amended, otherwise known as the "Foreign
Borrowings Act"

xxx

It is hereby clarified that foreign-assisted infrastructure projects may be exempted from the application for the
pertinent provisions of the Implementing Rules and Regulations (IRR) of Presidential Decree (P.D.) No. 1594
relative to the method and procedure in the comparison of bids, which matter may be the subject of agreement
between the infrastructure agency concerned and the lending institution. It should be made clear however that
public bidding is still required and can only be waived pursuant to existing laws.

Memorandum Circular No. 108:

In view of the provisions of Section 4 of Republic Act No. 4860, as amended, otherwise known as the "Foreign
Borrowings Act", it is hereby clarified that, for projects supported in whole or in part by foreign assistance awarded
through international or local competitive bidding, the government agency concerned may award the contract to the
lowest evaluated bidder at his bid price consistent with the provisions of the applicable loan/grant agreement.

Specifically, when the loan/grant agreement so stipulates, the government agency concerned may award the
contract to the lowest bidder even if his/its bid exceeds the approved agency estimate.

It is understood that the concerned government agency shall, as far as practicable, adhere closely to the
implementing rules and regulations of Presidential Decree No. 1594 during loan/grant negotiation and the
implementation of the projects.32

The public respondents characterize foreign loan agreements, including Loan Agreement No. PH-P204, as
executive agreements and, as such, should be observed pursuant to the fundamental principle in international law of
pacta sunt servanda.33 They cite Section 20 of Article VII of the Constitution as giving the President the authority to
contract foreign loans:

SEC. 20. The President may contract or guarantee foreign loans on behalf of the Republic of the Philippines with the
prior concurrence of the Monetary Board, and subject to such limitations as may be provided by law. The Monetary
Board shall, within thirty days from the end of every quarter of the calendar year, submit to the Congress a complete
report of its decisions on applications for loans to be contracted or guaranteed by the Government or Government-
owned and Controlled Corporations which would have the effect of increasing the foreign debt, and containing other
matters as may be provided by law.
The Constitution, the public respondents emphasize, recognizes the enforceability of executive agreements in the
same way that it recognizes generally accepted principles of international law as forming part of the law of the
land.34 This recognition allegedly buttresses the binding effect of executive agreements to which the Philippine
Government is a signatory. It is pointed out by the public respondents that executive agreements are essentially
contracts governing the rights and obligations of the parties. A contract, being the law between the parties, must be
faithfully adhered to by them. Guided by the fundamental rule of pacta sunt servanda, the Philippine Government
bound itself to perform in good faith its duties and obligations under Loan Agreement No. PH-P204.

The public respondents further argue against the applicability of RA 9184 stating that it was signed into law on
January 10, 2003.35 On the other hand, Loan Agreement No. PH-P204 was executed on December 28, 1999, where
the laws then in force on government procurements were PD 1594 and EO 40. The latter law (EO 40), in particular,
excluded from its application "any existing and future government commitments with respect to the bidding and
award of contracts financed partly or wholly with funds from international financing institutions as well as from
bilateral and other similar foreign sources."

The applicability of EO 40, not RA 9184, is allegedly bolstered by the fact that the "Invitation to Prequalify and to
Bid" for the implementation of the CP I project was published in two leading national newspapers, namely, the
Manila Times and Manila Standard on November 22, 29 and December 5, 2002, or before the signing into law of RA
9184 on January 10, 2003. In this connection, the public respondents point to Section 77 of IRR-A, which reads:

SEC. 77. Transitory Clause.

In all procurement activities, if the advertisement or invitation for bids was issued prior to the effectivity of the Act,
the provisions of EO 40 and its IRR, PD 1594 and its IRR, RA 7160 and its IRR, or other applicable laws as the case
may be, shall govern.

In cases where the advertisements or invitations for bids were issued after the effectivity of the Act but before the
effectivity of this IRR-A, procuring entities may continue adopting the procurement procedures, rules and regulations
provided in EO 40 and its IRR, or other applicable laws, as the case may be.

Section 4 of RA 9184 is also invoked by the public respondents as it provides:

SEC. 4. Scope and Applications. This Act shall apply to the Procurement of Infrastructure Projects, Goods and
Consulting Services, regardless of source of funds, whether local or foreign, by all branches and instrumentalities of
government, its departments, offices and agencies, including government-owned and/or controlled corporations
and local government units, subject to the provisions of Commonwealth Act No. 138. Any treaty or international or
executive agreement affecting the subject matter of this Act to which the Philippine government is a signatory shall
be observed.

It is also the position of the public respondents that even granting arguendo that Loan Agreement No. PH-P204
were an ordinary loan contract, still, RA 9184 is inapplicable under the non-impairment clause36 of the Constitution.
The said loan agreement expressly provided that the procurement of goods and services for the project financed by
the same shall be governed by the Guidelines for Procurement under OECF Loans dated December 1997. Further,
Section 5.06 of the JBIC Procurement Guidelines categorically provides that "[a]ny procedure under which bids
above or below a predetermined bid value assessment are automatically disqualified is not permitted."

The public respondents explain that since the contract is the law between the parties and Loan Agreement No. PH-
P204 states that the JBIC Procurement Guidelines shall govern the parties relationship and further dictates that
there be no ceiling price for the bidding, it naturally follows that any subsequent law passed contrary to the letters of
the said contract would have no effect with respect to the parties rights and obligations arising therefrom.

To insist on the application of RA 9184 on the bidding for the CP I project would, notwithstanding the terms and
conditions of Loan Agreement No. PH-P204, allegedly violate the constitutional provision on non-impairment of
obligations and contracts, and destroy vested rights duly acquired under the said loan agreement.

Lastly, the public respondents deny that there was illegal disbursement of public funds by the DBM. They
asseverate that all the releases made by the DBM for the implementation of the entire Arterial Road Links Project
Phase IV, which includes the Catanduanes Circumferential Road Improvement Project, were covered by the
necessary appropriations made by law, specifically the General Appropriations Act (GAA). Further, the requirements
and procedures prescribed for the release of the said funds were duly complied with.

For its part, private respondent China Road & Bridge Corporation similarly assails the standing of the petitioners,
either as taxpayers or, in the case of petitioner Abaya, as a former lawmaker, to file the present suit. In addition, it is
also alleged that, by filing the petition directly to this Court, the petitioners failed to observe the hierarchy of courts.

On the merits, private respondent China Road & Bridge Corporation asserts that the applicable law to govern the
bidding of the CP I project was EO 40, not RA 9184, because the former was the law governing the procurement of
government projects at the time that it was bidded out. EO 40 was issued by the Office of the President on October
8, 2001 and Section 1 thereof states that:
SEC. 1. Scope and Application. This Executive Order shall apply to the procurement of: (a) goods, supplies,
materials and related services; (b) civil works; and (c) consulting services, by all National Government agencies,
including State Universities and Colleges (SUCs), Government-Owned or Controlled Corporations (GOCCs) and
Government Financial Institutions (GFIs), hereby referred to as the Agencies. This Executive Order shall cover the
procurement process from the pre-procurement conference up to the award of contract.

xxx

The Invitation to Prequalify and to Bid was first published on November 22, 2002. On the other hand, RA 9184 was
signed into law only on January 10, 2003. Since the law in effect at the time the procurement process was initiated
was EO 40, private respondent China Road & Bridge Corporation submits that it should be the said law which
should govern the entire procurement process relative to the CP I project.

EO 40 expressly recognizes as an exception from the application of the provisions thereof on approved budget
ceilings, those projects financed by international financing institutions (IFIs) and foreign bilateral sources. Section 1
thereof, quoted in part earlier, further states:

SEC. 1. Scope and Application. x x x

Nothing in this Order shall negate any existing and future government commitments with respect to the bidding and
award of contracts financed partly or wholly with funds from international financing institutions as well as from
bilateral and other similar foreign sources.

Section 1.2 of the Implementing Rules and Regulations of EO 40 is likewise invoked as it provides:

For procurement financed wholly or partly from Official Development Assistance (ODA) funds from International
Financing Institutions (IFIs), as well as from bilateral and other similar foreign sources, the corresponding loan/grant
agreement governing said funds as negotiated and agreed upon by and between the Government and the
concerned IFI shall be observed.

Private respondent China Road & Bridge Corporation thus postulates that following EO 40, the procurement of
goods and services for the CP I project should be governed by the terms and conditions of Loan Agreement No. PH-
P204 entered into between the JBIC and the Philippine Government. Pertinently, Section 5.06 of the JBIC
Procurement Guidelines prohibits the setting of ceilings on bid prices.

Private respondent China Road & Bridge Corporation claims that when it submitted its bid for the CP I project, it
relied in good faith on the provisions of EO 40. It was allegedly on the basis of the said law that the DPWH awarded
the project to private respondent China Road & Bridge Coporation even if its bid was higher than the ABC. Under
the circumstances, RA 9184 could not be applied retroactively for to do so would allegedly impair the vested rights
of private respondent China Road & Bridge Corporation arising from its contract with the DPWH.

It is also contended by private respondent China Road & Bridge Corporation that even assuming arguendo that RA
9184 could be applied retroactively, it is still the terms of Loan Agreement No. PH-P204 which should govern the
procurement of goods and services for the CP I project. It supports its theory by characterizing the said loan
agreement, executed pursuant to the Exchange of Notes between the Government of Japan and the Philippine
Government, as an executive agreement.

Private respondent China Road & Bridge Corporation, like the public respondents, cites RA 4860 as the basis for
the Exchange of Notes and Loan Agreement No. PH-P204. As an international or executive agreement, the
Exchange of Notes and Loan Agreement No. PH-P204 allegedly created a legally binding obligation on the parties.

The following excerpt of the deliberations of the Bicameral Conference Committee on the Disagreeing Provision of
Senate Bill No. 2248 and House Bill No. 4809 is cited by private respondent China Road & Bridge Corporation to
support its contention that it is the intent of the lawmakers to exclude from the application of RA 9184 those foreign-
funded projects:

xxx

REP. MARCOS. Yes, Mr. Chairman, to respond and to put into the record, a justification for the inclusion of foreign
contracts, may we just state that foreign contracts have, of course, been brought into the ambit of the law because
of the Filipino counterpart for this foreign projects, they are no longer strictly foreign in nature but fall under the laws
of the Philippine government.

THE CHAIRMAN (SEN. ANGARA). Okay. I think thats pretty clear. I think the possible concern is that some ODA
are with strings attached especially the Japanese. The Japanese are quite strict about that, that they are (sic) even
provide the architect and the design, etcetera, plus, of course, the goods that will be supplied.
Now, I think weve already provided that this is open to all and we will recognize our international agreements so
that this bill will not also restrict the flow of foreign funding, because some countries now make it a condition that
they supply both services and goods especially the Japanese.

So I think we can put a sentence that we continue to honor our international obligations, di ba Laura?

MR. ENCARNACION. Actually, subject to any treaty.

THE CHAIRMAN (SEN. ANGARA). Yun pala eh. That should allay their anxiety and concern. Okay, buti na lang for
the record para malaman nila na we are conscious sa ODA.37

Private respondent China Road & Bridge Corporation submits that based on the provisions of the Exchange of
Notes and Loan Agreement No. PH-P204, it was rightfully and legally awarded the CP I project. It urges the Court to
dismiss the petition for lack of merit.

The Courts Rulings

Petitioners, as taxpayers, possess locus standi to file the present suit

Briefly stated, locus standi is "a right of appearance in a court of justice on a given question."38 More particularly, it is
a partys personal and substantial interest in a case such that he has sustained or will sustain direct injury as a
result of the governmental act being challenged. It calls for more than just a generalized grievance. The term
"interest" means a material interest, an interest in issue affected by the decree, as distinguished from mere interest
in the question involved, or a mere incidental interest.39 Standing or locus standi is a peculiar concept in
constitutional law40 and the rationale for requiring a party who challenges the constitutionality of a statute to allege
such a personal stake in the outcome of the controversy is "to assure that concrete adverseness which sharpens
the presentation of issues upon which the court so largely depends for illumination of difficult constitutional
questions."41

Locus standi, however, is merely a matter of procedure42 and it has been recognized that in some cases, suits are
not brought by parties who have been personally injured by the operation of a law or any other government act but
by concerned citizens, taxpayers or voters who actually sue in the public interest.43 Consequently, the Court, in a
catena of cases,44 has invariably adopted a liberal stance on locus standi, including those cases involving taxpayers.

The prevailing doctrine in taxpayers suits is to allow taxpayers to question contracts entered into by the national
government or government- owned or controlled corporations allegedly in contravention of law.45 A taxpayer is
allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being
deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid
or unconstitutional law.46 Significantly, a taxpayer need not be a party to the contract to challenge its validity.47

In the present case, the petitioners are suing as taxpayers. They have sufficiently demonstrated that,
notwithstanding the fact that the CP I project is primarily financed from loans obtained by the government from the
JBIC, nonetheless, taxpayers money would be or is being spent on the project considering that the Philippine
Government is required to allocate a peso-counterpart therefor. The public respondents themselves admit that
appropriations for these foreign-assisted projects in the GAA are composed of the loan proceeds and the peso-
counterpart. The counterpart funds, the Solicitor General explains, refer to the component of the project cost to be
financed from government-appropriated funds, as part of the governments commitment in the implementation of the
project.48 Hence, the petitioners correctly asserted their standing since a part of the funds being utilized in the
implementation of the CP I project partakes of taxpayers money.

Further, the serious legal questions raised by the petitioners, e.g., whether RA 9184 applies to the CP I project, in
particular, and to foreign-funded government projects, in general, and the fact that public interest is indubitably
involved considering the public expenditure of millions of pesos, warrant the Court to adopt in the present case its
liberal policy on locus standi.

In any case, for reasons which will be discussed shortly, the substantive arguments raised by the petitioners fail to
persuade the Court as it holds that Resolution No. PJHL-A-04-012 is valid. As a corollary, the subsequent contract
entered into by and between the DPWH and private respondent China Road & Bridge Corporation is likewise valid.

History of Philippine Procurement Laws

It is necessary, at this point, to give a brief history of Philippine laws pertaining to procurement through public
bidding. The United States Philippine Commission introduced the American practice of public bidding through Act
No. 22, enacted on October 15, 1900, by requiring the Chief Engineer, United States Army for the Division of the
Philippine Islands, acting as purchasing agent under the control of the then Military Governor, to advertise and call
for a competitive bidding for the purchase of the necessary materials and lands to be used for the construction of
highways and bridges in the Philippine Islands.49 Act No. 74, enacted on January 21, 1901 by the Philippine
Commission, required the General Superintendent of Public Instruction to purchase office supplies through
competitive public bidding.50 Act No. 82, approved on January 31, 1901, and Act No. 83, approved on February 6,
1901, required the municipal and provincial governments, respectively, to hold competitive public biddings in the
making of contracts for public works and the purchase of office supplies.51

On June 21, 1901, the Philippine Commission, through Act No. 146, created the Bureau of Supply and with its
creation, public bidding became a popular policy in the purchase of supplies, materials and equipment for the use of
the national government, its subdivisions and instrumentalities.52 On February 3, 1936, then President Manuel L.
Quezon issued Executive Order No. 16 declaring as a matter of general policy that government contracts for public
service or for furnishing supplies, materials and equipment to the government should be subjected to public
bidding.53 The requirement of public bidding was likewise imposed for public works of construction or repair pursuant
to the Revised Administrative Code of 1917.

Then President Diosdado Macapagal, in Executive Order No. 40 dated June 1, 1963, reiterated the directive that no
government contract for public service or for furnishing supplies, materials and equipment to the government or any
of its branches, agencies or instrumentalities, should be entered into without public bidding except for very
extraordinary reasons to be determined by a Committee constituted thereunder. Then President Ferdinand Marcos
issued PD 1594 prescribing guidelines for government infrastructure projects and Section 454 thereof stated that
they should generally be undertaken by contract after competitive public bidding.

Then President Corazon Aquino issued Executive Order No. 301 (1987) prescribing guidelines for government
negotiated contracts. Pertinently, Section 62 of the Administrative Code of 1987 reiterated the requirement of
competitive public bidding in government projects. In 1990, Congress passed RA 6957,55 which authorized the
financing, construction, operation and maintenance of infrastructure by the private sector. RA 7160 was likewise
enacted by Congress in 1991 and it contains provisions governing the procurement of goods and locally-funded civil
works by the local government units.

Then President Fidel Ramos issued Executive Order No. 302 (1996), providing guidelines for the procurement of
goods and supplies by the national government. Then President Joseph Ejercito Estrada issued Executive Order
No. 201 (2000), providing additional guidelines in the procurement of goods and supplies by the national
government. Thereafter, he issued Executive Order No. 262 (2000) amending EO 302 (1996) and EO 201 (2000).

On October 8, 2001, President Gloria Macapagal-Arroyo issued EO 40, the law mainly relied upon by the
respondents, entitled Consolidating Procurement Rules and Procedures for All National Government Agencies,
Government-Owned or Controlled Corporations and Government Financial Institutions, and Requiring the Use of the
Government Procurement System. It accordingly repealed, amended or modified all executive issuances, orders,
rules and regulations or parts thereof inconsistent therewith.56

On January 10, 2003, President Arroyo signed into law RA 9184. It took effect on January 26, 2004, or fifteen days
after its publication in two newspapers of general circulation.57 It expressly repealed, among others, EO 40, EO 262
(2000), EO 302(1996) and PD 1594, as amended:

SEC. 76. Repealing Clause. This law repeals Executive Order No. 40, series of 2001, entitled "Consolidating
Procurement Rules and Procedures for All National Government Agencies, Government Owned or Controlled
Corporations and/or Government Financial Institutions, and Requiring the Use of the Government Electronic
Procurement System"; Executive Order No. 262, series of 1996, entitled "Amending Executive Order No. 302, series
of 1996, entitled Providing Policies, Guidelines, Rules and Regulations for the Procurement of Goods/Supplies by
the National Government" and Section 3 of Executive Order No. 201, series of 2000, entitled "Providing Additional
Policies and Guidelines in the Procurement of Goods/Supplies by the National Government"; Executive Order No.
302, series of 1996, entitled "Providing Policies, Guidelines, Rules and Regulations for the Procurement of
Goods/Supplies by the National Government" and Presidential Decree No. 1594 dated June 11, 1978, entitled
"Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts." This law amends
Title Six, Book Two of Republic Act No. 7160, otherwise known as the "Local Government Code of 1991"; the
relevant provisions of Executive Order No. 164, series of 1987, entitled "Providing Additional Guidelines in the
Processing and Approval of Contracts of the National Government"; and the relevant provisions of Republic Act No.
7898 dated February 23, 1995, entitled "An Act Providing for the Modernization of the Armed Forces of the
Philippines and for Other Purposes." Any other law, presidential decree or issuance, executive order, letter of
instruction, administrative order, proclamation, charter, rule or regulation and/or parts thereof contrary to or
inconsistent with the provisions of this Act is hereby repealed, modified or amended accordingly.

In addition to these laws, RA 4860, as amended, must be mentioned as Section 4 thereof provides that "[i]n the
contracting of any loan, credit or indebtedness under this Act, the President of the Philippines may, when necessary,
agree to waive or modify the application of any law granting preferences or imposing restrictions on international
competitive bidding x x x Provided, finally, That the method and procedure in the comparison of bids shall be the
subject of agreement between the Philippine Government and the lending institution."

EO 40, not RA 9184, is applicable to the procurement

process undertaken for the CP I project. RA 9184

cannot be given retroactive application.

It is not disputed that with respect to the CP I project, the Invitation to Prequalify and to Bid for its implementation
was published in two leading national newspapers, namely, the Manila Times and Manila Standard on November
22, 29 and December 5, 2002. At the time, the law in effect was EO 40. On the other hand, RA 9184 took effect two
months later or on January 26, 2003. Further, its full implementation was even delayed as IRR-A was only approved
by President Arroyo on September 18, 2003 and subsequently published on September 23, 2003 in the Manila
Times and Malaya newspapers.58

The provisions of EO 40 apply to the procurement process pertaining to the CP I project as it is explicitly provided in
Section 1 thereof that:

SEC. 1. Scope and Application. This Executive Order shall apply to see procurement of (a) goods, supplies,
materials and related service; (b) civil works; and (c) consulting services, by all National Government agencies,
including State Universities and Colleges (SUCs), Government-Owned or Controlled Corporations (GOCCs) and
Government Financial Institutions (GFIs), hereby referred to as "Agencies." This Executive Order shall cover the
procurement process from the pre-procurement conference up to the award of the contract.

Nothing in this Order shall negate any existing and future government commitments with respect to the bidding and
award of contracts financed partly or wholly with funds from international financing institutions as well as from
bilateral and similar foreign sources.

The procurement process basically involves the following steps: (1) pre-procurement conference; (2) advertisement
of the invitation to bid; (3) pre-bid conference; (4) eligibility check of prospective bidders; (5) submission and receipt
of bids; (6) modification and withdrawal of bids; (7) bid opening and examination; (8) bid evaluation; (9) post
qualification; (10) award of contract and notice to proceed.59 Clearly then, when the Invitation to Prequalify and to
Bid for the implementation of the CP I project was published on November 22, 29 and December 5, 2002, the
procurement process thereof had already commenced and the application of EO 40 to the procurement process for
the CP I project had already attached.

RA 9184 cannot be applied retroactively to govern the procurement process relative to the CP I project because it is
well settled that a law or regulation has no retroactive application unless it expressly provides for
retroactivity.60Indeed, Article 4 of the Civil Code is clear on the matter: "[l]aws shall have no retroactive effect, unless
the contrary is provided." In the absence of such categorical provision, RA 9184 will not be applied retroactively to
the CP I project whose procurement process commenced even before the said law took effect.

That the legislators did not intend RA 9184 to have retroactive effect could be gleaned from the IRR-A formulated by
the Joint Congressional Oversight Committee (composed of the Chairman of the Senate Committee on
Constitutional Amendments and Revision of Laws, and two members thereof appointed by the Senate President
and the Chairman of the House Committee on Appropriations, and two members thereof appointed by the Speaker
of the House of Representatives) and the Government Procurement Policy Board (GPPB). Section 77 of the IRR-A
states, thus:

SEC. 77. Transitory Clause

In all procurement activities, if the advertisement or invitation for bids was issued prior to the effectivity of the Act,
the provisions of E.O. 40 and its IRR, P.D. 1594 and its IRR, R.A. 7160 and its IRR, or other applicable laws, as the
case may be, shall govern.

In cases where the advertisements or invitations for bids were issued after the effectivity of the Act but before the
effectivity of this IRR-A, procuring entities may continue adopting the procurement procedures, rules and regulations
provided in E.O. 40 and its IRR, P.D. 1594 and its IRR, R.A. 7160 and its IRR, or other applicable laws, as the case
may be.

In other words, under IRR-A, if the advertisement of the invitation for bids was issued prior to the effectivity of RA
9184, such as in the case of the CP I project, the provisions of EO 40 and its IRR, and PD 1594 and its IRR in the
case of national government agencies, and RA 7160 and its IRR in the case of local government units, shall govern.

Admittedly, IRR-A covers only fully domestically-funded procurement activities from procurement planning up to
contract implementation and that it is expressly stated that IRR-B for foreign-funded procurement activities shall be
subject of a subsequent issuance.61 Nonetheless, there is no reason why the policy behind Section 77 of IRR-A
cannot be applied to foreign-funded procurement projects like the CP I project. Stated differently, the policy on the
prospective or non-retroactive application of RA 9184 with respect to domestically-funded procurement projects
cannot be any different with respect to foreign-funded procurement projects like the CP I project. It would be
incongruous, even absurd, to provide for the prospective application of RA 9184 with respect to domestically-funded
procurement projects and, on the other hand, as urged by the petitioners, apply RA 9184 retroactively with respect
to foreign- funded procurement projects. To be sure, the lawmakers could not have intended such an absurdity.

Thus, in the light of Section 1 of EO 40, Section 77 of IRR-A, as well as the fundamental rule embodied in Article 4
of the Civil Code on prospectivity of laws, the Court holds that the procurement process for the implementation of
the CP I project is governed by EO 40 and its IRR, not RA 9184.
Under EO 40, the award of the contract to private

respondent China Road & Bridge Corporation is valid

Section 25 of EO 40 provides that "[t]he approved budget of the contract shall be the upper limit or ceiling of the bid
price. Bid prices which exceed this ceiling shall be disqualified outright from further participating in the bidding.
There shall be no lower limit to the amount of the award. x x x" It should be observed that this text is almost similar
to the wording of Section 31 of RA 9184, relied upon by the petitioners in contending that since the bid price of
private respondent China Road & Bridge Corporation exceeded the ABC, then it should not have been awarded the
contract for the CP I project.

Nonetheless, EO 40 expressly recognizes as an exception to its scope and application those government
commitments with respect to bidding and award of contracts financed partly or wholly with funds from international
financing institutions as well as from bilateral and other similar foreign sources. The pertinent portion of Section 1 of
EO 40 is quoted anew:

SEC. 1. Scope and Application. x x x

Nothing in this Order shall negate any existing and future government commitments with respect to the bidding and
award of contracts financed partly or wholly with funds from international financing institutions as well as from
bilateral and similar foreign sources.

In relation thereto, Section 4 of RA 4860, as amended, was correctly cited by the respondents as likewise
authorizing the President, in the contracting of any loan, credit or indebtedness thereunder, "when necessary, agree
to waive or modify the application of any law granting preferences or imposing restrictions on international
competitive bidding x x x." The said provision of law further provides that "the method and procedure in the
comparison of bids shall be the subject of agreement between the Philippine Government and the lending
institution."

Consequently, in accordance with these applicable laws, the procurement of goods and services for the CP I project
is governed by the corresponding loan agreement entered into by the government and the JBIC, i.e., Loan
Agreement No. PH-P204. The said loan agreement stipulated that the procurement of goods and services for the
Arterial Road Links Development Project (Phase IV), of which CP I is a component, is to be governed by the JBIC
Procurement Guidelines. Section 5.06, Part II (International Competitive Bidding) thereof quoted earlier reads:

Section 5.06. Evaluation and Comparison of Bids

xxx

(e) Any procedure under which bids above or below a predetermined bid value assessment are automatically
disqualified is not permitted.62

It is clear that the JBIC Procurement Guidelines proscribe the imposition of ceilings on bid prices. On the other
hand, it enjoins the award of the contract to the bidder whose bid has been determined to be the lowest evaluated
bid. The pertinent provision, quoted earlier, is reiterated, thus:

Section 5.09. Award of Contract

The contract is to be awarded to the bidder whose bid has been determined to be the lowest evaluated bid and who
meets the appropriate standards of capability and financial resources. A bidder shall not be required as a condition
of award to undertake responsibilities or work not stipulated in the specifications or to modify the bid.63

Since these terms and conditions are made part of Loan Agreement No. PH-P204, the government is obliged to
observe and enforce the same in the procurement of goods and services for the CP I project. As shown earlier,
private respondent China Road & Bridge Corporations bid was the lowest evaluated bid, albeit 28.95% higher than
the ABC. In accordance with the JBIC Procurement Guidelines, therefore, it was correctly awarded the contract for
the CP I project.

Even if RA 9184 were to be applied retroactively, the terms of the Exchange of Notes dated December 27, 1999 and
Loan Agreement No. PH-P204 would still govern the procurement for the CP I project

For clarity, Section 4 of RA 9184 is quoted anew, thus:

SEC. 4. Scope and Applications. This Act shall apply to the Procurement of Infrastructure Projects, Goods and
Consulting Services, regardless of source of funds, whether local or foreign, by all branches and instrumentalities of
government, its departments, offices and agencies, including government-owned and/or controlled corporations
and local government units, subject to the provisions of Commonwealth Act No. 138. Any treaty or international or
executive agreement affecting the subject matter of this Act to which the Philippine government is a signatory shall
be observed.

The petitioners, in order to place the procurement process undertaken for the CP I project within the ambit of RA
9184, vigorously assert that Loan Agreement No. PH-P204 is neither a treaty, an international agreement nor an
executive agreement. They cite Executive Order No. 459 dated November 25, 1997 where the three agreements
are defined in this wise:

a) International agreement shall refer to a contract or understanding, regardless of nomenclature, entered

into between the Philippines and another government in written form and governed by international law,
whether embodied in a single instrument or in two or more related instruments.

b) Treaties international agreements entered into by the Philippines which require legislative concurrence
after executive ratification. This term may include compacts like conventions, declarations, covenants and
acts.

c) Executive agreements similar to treaties except that they do not require legislative concurrence.64

The petitioners mainly argue that Loan Agreement No. PH-P204 does not fall under any of the three categories
because to be any of the three, an agreement had to be one where the parties are the Philippines as a State and
another State. The JBIC, the petitioners maintain, is a Japanese banking agency, which presumably has a separate
juridical personality from the Japanese Government.

The petitioners arguments fail to persuade. The Court holds that Loan Agreement No. PH-P204 taken in
conjunction with the Exchange of Notes dated December 27, 1999 between the Japanese Government and the
Philippine Government is an executive agreement.

To recall, Loan Agreement No. PH-P204 was executed by and between the JBIC and the Philippine Government
pursuant to the Exchange of Notes executed by and between Mr. Yoshihisa Ara, Ambassador Extraordinary and
Plenipotentiary of Japan to the Philippines, and then Foreign Affairs Secretary Siazon, in behalf of their respective
governments. The Exchange of Notes expressed that the two governments have reached an understanding
concerning Japanese loans to be extended to the Philippines and that these loans were aimed at promoting our
countrys economic stabilization and development efforts.

Loan Agreement No. PH-P204 was subsequently executed and it declared that it was so entered by the parties "[i]n
the light of the contents of the Exchange of Notes between the Government of Japan and the Government of the
Republic of the Philippines dated December 27, 1999, concerning Japanese loans to be extended with a view to
promoting the economic stabilization and development efforts of the Republic of the Philippines."65 Under the
circumstances, the JBIC may well be considered an adjunct of the Japanese Government. Further, Loan Agreement
No. PH-P204 is indubitably an integral part of the Exchange of Notes. It forms part of the Exchange of Notes such
that it cannot be properly taken independent thereof.

In this connection, it is well to understand the definition of an "exchange of notes" under international law. The term
is defined in the United Nations Treaty Collection in this wise:

An "exchange of notes" is a record of a routine agreement that has many similarities with the private law contract.
The agreement consists of the exchange of two documents, each of the parties being in the possession of the one
signed by the representative of the other. Under the usual procedure, the accepting State repeats the text of the
offering State to record its assent. The signatories of the letters may be government Ministers, diplomats or
departmental heads. The technique of exchange of notes is frequently resorted to, either because of its speedy
procedure, or, sometimes, to avoid the process of legislative approval.66

It is stated that "treaties, agreements, conventions, charters, protocols, declarations, memoranda of understanding,
modus vivendi and exchange of notes" all refer to "international instruments binding at international law."67 It is
further explained that-

Although these instruments differ from each other by title, they all have common features and international law has
applied basically the same rules to all these instruments. These rules are the result of long practice among the
States, which have accepted them as binding norms in their mutual relations. Therefore, they are regarded as
international customary law. Since there was a general desire to codify these customary rules, two international
conventions were negotiated. The 1969 Vienna Convention on the Law of Treaties ("1969 Vienna Convention"),
which entered into force on 27 January 1980, contains rules for treaties concluded between States. The 1986
Vienna Convention on the Law of Treaties between States and International Organizations ("1986 Vienna
Convention"), which has still not entered into force, added rules for treaties with international organizations as
parties. Both the 1969 Vienna Convention and the 1986 Vienna Convention do not distinguish between the different
designations of these instruments. Instead, their rules apply to all of those instruments as long as they meet the
common requirements.68
Significantly, an exchange of notes is considered a form of an executive agreement, which becomes binding through
executive action without the need of a vote by the Senate or Congress. The following disquisition by Francis B.
Sayre, former United States High Commissioner to the Philippines, entitled "The Constitutionality of Trade
Agreement Acts," quoted in Commissioner of Customs v. Eastern Sea Trading,69 is apropos:

Agreements concluded by the President which fall short of treaties are commonly referred to as executive
agreements and are no less common in our scheme of government than are the more formal instruments treaties
and conventions. They sometimes take the form of exchange of notes and at other times that of more formal
documents denominated "agreements" or "protocols". The point where ordinary correspondence between this and
other governments ends and agreements whether denominated executive agreements or exchange of notes or
otherwise begin, may sometimes be difficult of ready ascertainment. It would be useless to undertake to discuss
here the large variety of executive agreements as such, concluded from time to time. Hundreds of executive
agreements, other than those entered into under the trade-agreements act, have been negotiated with foreign
governments. x x x70

The Exchange of Notes dated December 27, 1999, stated, inter alia, that the Government of Japan would extend
loans to the Philippines with a view to promoting its economic stabilization and development efforts; Loan I in the
amount of Y79,8651,000,000 would be extended by the JBIC to the Philippine Government to implement the
projects in the List A (including the Arterial Road Links Development Project - Phase IV); and that such loan (Loan I)
would be used to cover payments to be made by the Philippine executing agencies to suppliers, contractors and/or
consultants of eligible source countries under such contracts as may be entered into between them for purchases of
products and/or services required for the implementation of the projects enumerated in the List A.71 With respect to
the procurement of the goods and services for the projects, it bears reiterating that as stipulated:

3. The Government of the Republic of the Philippines will ensure that the products and/or services mentioned in
sub-paragraph (1) of paragraph 3 of Part I and sub-paragraph (1) of paragraph 4 of Part II are procured in
accordance with the guidelines for procurement of the Bank, which set forth, inter alia, the procedures of
international tendering to be followed except where such procedures are inapplicable or inappropriate.72

The JBIC Procurements Guidelines, as quoted earlier, forbids any procedure under which bids above or below a
predetermined bid value assessment are automatically disqualified. Succinctly put, it absolutely prohibits the
imposition of ceilings on bids.

Under the fundamental principle of international law of pacta sunt servanda,73 which is, in fact, embodied in Section
4 of RA 9184 as it provides that "[a]ny treaty or international or executive agreement affecting the subject matter of
this Act to which the Philippine government is a signatory shall be observed," the DPWH, as the executing agency
of the projects financed by Loan Agreement No. PH-P204, rightfully awarded the contract for the implementation of
civil works for the CP I project to private respondent China Road & Bridge Corporation.

WHEREFORE, premises considered, the petition is DISMISSED.

G.R. No. 88291 May 31, 1991

ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President; HON.
VICENTE R. JAYME, in his capacity as Secretary of the Department of Finance; HON. SALVADOR MISON, in
his capacity as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his capacity as Commissioner of
Internal Revenue; NATIONAL POWER CORPORATION; the FISCAL INCENTIVES REVIEW BOARD; Caltex
(Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine National Oil Corporation; and Petrophil
Corporation, respondents.

Villamor & Villamor Law Offices for petitioner.

Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.

GANCAYCO, J.:

This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal Incentives
Review Board FIRB for exempting the National Power Corporation (NPC) from indirect tax and duties.

The relevant facts are not in dispute.

On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the
development of hydraulic power and the production of power from other sources.1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under

Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities.

On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a
national policy the total electrification of the Philippines through the development of power from all sources to meet
the needs of industrial development and rural electrification which should be pursued coordinately and supported by
all instrumentalities and agencies of the government, including its financial institutions.2 The corporate existence of
NPC was extended to carry out this policy, specifically to undertake the development of hydro electric generation of
power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of
electric power on a nationwide basis.3 Being a non-profit corporation, Section 13 of the law provided in detail the
exemption of the NPC from all taxes, duties, fees, imposts and other charges by the government and its
instrumentalities.

On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act No.
6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees, imposts and other charges
imposed "directly or indirectly," on all petroleum products used by NPC in its operation. Presidential Decree No. 938
dated May 27, 1976 further amended the aforesaid provision by integrating the tax exemption in general terms
under one paragraph.

On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their subsidiaries.4 However, said law empowered the
President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally, the
exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty.

Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty
exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued resolution
No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985.

However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives granted
to government and private entities which had been restored under Presidential Decree Nos. 1931 and 1955 but it
gave the authority to FIRB to restore, revise the scope and prescribe the date of effectivity of such tax and/or duty
exemptions.

On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges effective
March 10, 1987. On October 5, 1987, the President, through respondent Executive Secretary Macaraig, Jr.,
confirmed and approved FIRB Resolution No. 17-87.

As alleged in the petition, the following are the background facts:

The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally paid
by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for Customs
duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its crude oil
importation.

Many of the factual statements are reproduced from the Senate Committee on Accountability of Public
Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and approved by the
Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified in quotation marks:

1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was
promulgated abolishing the tax exemptions of all government-owned or-controlled corporations, the oil
firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to the
NPC. This non-payment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7, Annex "A")

During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of
NPC of petroleum products from the oil companies on the erroneous belief that the National Power
Corporation (NPC) was exempt from indirect taxes as reflected in the letter of Deputy Commissioner of
Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to the
NPC to purchase petroleum products from the oil companies without payment of specific tax (copy of this
letter is attached hereto as petitioner's Annex "B").

2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only
after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions granted in favor of
government-owned or-controlled corporations and empowering the FIRB to recommend to the President or
to the Minister of Finance the restoration of the exemptions which were withdrawn. "Specifically, Caltex paid
the total amount of P58,020,110.79 in specific and ad valorem taxes for deliveries of petroleum products to
NPC covering the period from October 31, 1984 to April 27, 1985." (par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion.
Beginning June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions, Caltex's
billings to NPC always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p, 7,
Annex "A")

4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April, 1985,
NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the specific tax component
being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").

5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy of
which is hereto attached as Annex "C", restored the tax exemption privileges of NPC effective retroactively
to June 11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as follows:

1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985.

Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a "refund
of Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79. (par. 26, pp. 8-9,
Annex "A")

6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"), Acting
BIR Commissioner Ruben Ancheta declared:

FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum products
from the oil companies free of specific and ad valorem taxes, during the period in question.

The "period in question" is June 1 1, 1 984 to June 30, 1 985.

7. On June 6, 1985The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of the
FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax exemption privileges of the
National Power Corporation (NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-85. (par. 40, p.
12, Annex "A")

8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed the
ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")

9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co., Ltd.,
a Korean contractor of NPC for its infrastructure projects, certified true copy of which is attached hereto as
petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:

In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by P.D. 938,
this Office is of the opinion, and so holds, that the scope of the tax exemption privilege enjoyed by
NPC under said section covers only taxes for which it is directly liable and not on taxes which are
only shifted to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since contractor's
tax is directly payable by the contractor, not by NPC, your request for exemption, based on the
stipulation in the aforesaid contract that NPC shall assume payment of your contractor's tax liability,
cannot be granted for lack of legal basis." (Annex "H") (emphasis added)

Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is directly
liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR, through Ancheta,
reversed its previous position of May 8, 1985 adopted by Ancheta himself favoring NPC's indirect tax
exemption privilege.

10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex "F"),
the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which PAL is directly liable,
and that the payment of specific and ad valorem taxes on petroleum products is a direct liability of the
manufacturer or producer thereof". (par. 51, p. 15, Annex "A")

11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions retroactively
from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached as petitioner's Annex
"H".

12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79
(corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q") dated July
7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F," which was assigned by
NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987, certified true
copy of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15, Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial
settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the assigned tax credit
against its specific tax payments for two (2) months. (per memorandum dated July 28, 1986 of DCIR Villa,
copy attached as petitioner Annex "G")

13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit assigned
to Caltex, the NPC reiterated its request for the release of the balance of its pending refunds of taxes paid
by respondents Petrophil, Shell and Caltex covering the period from June 11, 1984 to early part of 1986
amounting to P410.58 million. (The claim of the first two (2) oil companies covers the period from June 11,
1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to early 1986). This request was
denied on August 18, 1986, under BIR Ruling 152-86 (certified true copy of which is attached hereto as
petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege to buy petroleum products covered only
the period from June 11, 1984 up to June 30, 1985. It further declared that, despite FIRB No. 1-86, NPC had
already lost its tax and duty exemptions because it only enjoys special privilege for taxes for which it
is directly liable. This ruling, in effect, denied the P410 Million tax refund application of NPC (par. 28, p. 9,
Annex "A")

14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved the
motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p. 15)." (par.
29, p. 9, Annex "A")

15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR Commissioner
Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as petitioner's Annex "J"),
reversed his previous position and states this time that all deliveries of petroleum products to NPC are tax
exempt, regardless of the period of delivery.

16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled
"Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the Powers of the
Fiscal Incentives Review Board and Other Purposes."

17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption privilege
and included in the exemption "those pertaining to its domestic purchases of petroleum and petroleum
products, and the restorations were made to retroact effective March 10, 1987, a certified true copy of which
is hereto attached and made a part hereof as Annex "K".

18. On August 6, 1987, the Hon. Sedfrey A. Ordoez, Secretary of Justice, issued Opinion No. 77, series of
1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section 2a (b), (c) and (d)
of Executive order No. 93 constitute undue delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex "L."

19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the Chairman
of the FIRB a certified true copy of which is hereto attached and made a part hereof as petitioner's Annex
"M," confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987, allegedly pursuant to Sections 1 (f)
and 2 (e) of Executive Order No. 93.

20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by letter
dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the National Power
Corporation is still exempt from taxes, duties . . . on its local purchases of . . . petroleum products . . ."
declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and taxes
imposed on the petroleum products purchased locally and used for the generation of electricity," a certified
true copy of which is attached hereto as petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A")

21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988 but
without the usual official form of "By the Authority of the President," a certified true copy of which is hereto
attached and made a part hereof as Petitioner's Annex "O".

22. The actions of respondents Finance Secretary and the Executive Secretary are based on the
RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC pertaining to
its domestic purchases of petroleum products (petitioner's Annex K supra).

23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported that
the Office of the President and the Department of Finance had ordered the BIR to refund the tax payments
of the NPC amounting to Pl.58 Billion which includes the P410 Million Tax refund already rejected by BIR
Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988 of Undersecretary
Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was ordered released to
NPC (par. 31, p. 1 0, Annex "A")

24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan requesting
them to hold in abeyance the release of the Pl.58 billion and await the outcome of the investigation in regard
to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P" and "P-1 " (par. 32, p. 10, Annex
"A").

Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR dated
August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC until after the
termination of the Blue Ribbon investigation.

25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs
custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil is one of the
petroleum products processed from the crude oil; and same is sold to NPC. After the sale, NPC applies for
tax credit covering the duties and ad valorem exemption under its Charter. Such applications are processed
by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of NPC which, in
turn assigns it to the oil firm that imported the crude oil. These certificates are eventually used by the
assignee-oil firms in payment of their other duty and tax liabilities with the Bureau of Customs. (par. 70, p.
19, Annex "A")

A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought by
respondent NPC for refund from the Bureau of Customs for duties paid by the oil companies on the
importation of crude oil from which the processed products sold locally by them to NPC was derived.
However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which
conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the herein
petitioner was the sponsor, a much bigger figure was actually refunded to NPC representing duties and ad
valorem taxes paid to the Bureau of Customs by the oil companies on the importation of crude oil from 1979
to 1985.

26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled:

Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a Formal
and Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil
Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made
Possible By Their Availing of the Non-Existing Exemption of National Power Corporation (NPC) from
Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the
Department of Finance, Their Refusal to Pay Since 1976 Customs Duties Amounting to Billions of
Pesos on Imported Crude Oil Purportedly for the Use of the National Power Corporation, the Non-
Payment of Surtax on Windfall Profits from Increases in the Price of Oil Products in August 1987
amounting Maybe to as Much as Pl.2 Billion Surtax Paid by Them in 1984 and For Other Purposes.

27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy formal
inquiry on the matter, calling all parties interested to the witness stand including representatives from the
different oil companies, and in due time submitted its Committee Report No. 474 . . . The Blue Ribbon
Committee recommended the following courses of action.

1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation (NPC)
and its approval of Tax Credit memo covering said amount (Annex "P" hereto), dated July 7, 1986,
and cancel its approval of the Deed of Assignment (Annex "Q" hereto) by NPC to Caltex, dated July
28, 1986, and collect from Caltex its tax liabilities which were erroneously treated as paid or settled
with the use of the tax credit certificate that NPC assigned to said firm.:

1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 was
issued. Therefore, the grant of a tax refund to NPC in the amount of P58 million was illegal,
and therefore, null and void. Such refund was a nullity right from the beginning. Hence, it
never transferred any right in favor of NPC.

2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies on the
same ground that the NPC, since May 27, 1976 up to June 17, 1987 was never granted any indirect
tax exemption. So, the P1.58 billion represent taxes legally and properly paid by the oil firms.

3. Start collection actions of specific or excise and ad valorem taxes due on petroleum products sold
to NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of EO 195).

B. For the Bureau of Customs (BOC) to do the following:

1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of petroleum
products by NPC and allegedly granted under the NPC charter covering the years 1978-1988 . . .

28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct the
Bureau of Internal Revenue and of Customs to proceed with the processing of claims for tax credits/refunds
of the NPC, respondent Executive Secretary rendered his ruling, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by proper
authorities, that department and/or its line-tax bureaus may now proceed with the processing of the claims of the
National Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if there be any, in
accordance with the ruling of that Department dated May 20,1988, as confirmed by this Office on June 15, 1988 . . .5

Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction and/or
restraining order, praying among others that:

1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent FIRB
Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other persons acting
for, under, and in their behalf from enforcing their resolution, orders and ruling, to wit:

A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");

B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");

C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");

D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and

E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").

2. Said temporary restraining order should also include respondent Commissioners of Customs Mison and
Internal Revenue Ong restraining them from processing and releasing any pending claim or application by
respondent NPC for tax and duty refunds.

3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against
above-named respondents and all persons acting for and in their behalf.

4. A decision be rendered in favor of the petitioner and against the respondents:

A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up to
the present;

B. Nullifying the setting aside the following:

1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");

2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");

3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");

4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");

5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"

6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for
P58,020,110.79 (petitioner's Annex "F");

7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987
(petitioner's Annex "G");

8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the Bureau of
Internal Revenue and

9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of tax
credit certificates from 1979 up to the present.

C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC with
the Bureau of Customs and the Bureau of Internal Revenue;

D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from

enforcing the abovequestioned resolution, orders and ruling of respondents Executive Secretary, Secretary
of Finance, and FIRB by processing and releasing respondent NPC's tax and duty refunds;

E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending claims for
refund of respondent NPC with the Bureau of Customs covering the period from 1985 to the present; to
 cancel and invalidate the illegal payment made by respondents Caltex, Shell and PNOC by using the tax
credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell and PNOC all the
amounts appearing in said tax credit certificates which were used to settle their duty and tax liabilities with
the Bureau of Customs.

F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending
claims for refund of respondent NPC with the Bureau of Internal Revenue covering the period from June 11,
1984 to June 17, 1987.

PETITIONER prays for such other relief and remedy as may be just and equitable in the premises.6

The issues raised in the petition are the following:

To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this
Honorable Court must resolve the following issues:

Main issue

Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the enactment
of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.

Corollary issues

1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax exemption
privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986
restoring NPC's tax exemption privilege effective July 1, 1985 included the restoration of indirect tax
exemption to NPC and

2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was validly issued,
the nature and extent of the tax exemption privilege restored to NPC.7

In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required respondents to
comment thereon, within ten (10) days from notice. The respondents having submitted their comment, on October
10, 1989 the Court required petitioner to file a consolidated reply to the same. After said reply was filed by petitioner
on November 15, 1989 the Court gave due course to the petition, considering the comments of respondents as their
answer to the petition, and requiring the parties to file simultaneously their respective memoranda within twenty (20)
days from notice. The parties having submitted their respective memoranda, the petition was deemed submitted for
resolution.

First the preliminary issues.

Public respondents allege that petitioner does not have the standing to challenge the questioned orders and
resolution.

In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected
Senator of the Philippines." Public respondent argues that petitioner must show he has sustained direct injury as a
result of the action and that it is not sufficient for him to have a mere general interest common to all members of the
public.8

The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling
in Lozada when it involves illegal expenditure of public money. The petition questions the legality of the tax refund to
NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil companies to pay for
their tax and duty liabilities to the BIR and Bureau of Customs.

Assuming petitioner has the personality to file the petition, public respondents also allege that the proper remedy for
petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125 instead of this petition. However
Section 11 of said law provides

Sec. 11. Who may appeal; effect of appealAny person, association or corporation adversely affected by a
decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs (Commissioner of
Customs) or any provincial or City Board of Assessment Appeals may file an appeal in the Court of Tax
Appeals within thirty days after receipt of such decision or ruling.

From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner of Internal
Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal who may appeal to
the Court of Tax Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal Revenue to
impose a tax assessment not found by him to be proper. It would be tantamount to a usurpation of executive
functions.9

Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with arbitrariness and
grave abuse as to go beyond statutory authority.10

Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an unlawful
exercise of jurisdiction11 or to prevent the oppressive exercise of legal authority.12 Precisely, petitioner questions the
lawfulness of the acts of public respondents in this case.

Now to the main issue.

It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an indirect tax. A
direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are
the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of
crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after converting the
crude oil into petroleum products.

On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else
."13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon
removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the
"cash" and/or "selling price."

The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree No.
938, the exemption of NPC from indirect taxation was revoked and repealed. While petitioner concedes that NPC
enjoyed broad exemption privileges from both direct and indirect taxes on the petroleum products it used, under
Section 13 of Republic Act No, 6395 and more so under Presidential Decree No. 380, however, by the deletion of
the phrases "directly or indirectly" and "on all petroleum products used by the Corporation in the generation,
transmission, utilization and sale of electric power" he contends that the exemption from indirect taxes was
withdrawn by P.D. No. 938.

Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938 regarding
the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax exemption. He cites Philippine
Aceytelene Co. Inc. vs. Commissioner of Internal Revenue.14 Petitioner emphasizes the principle in taxation that the
exception contained in the tax statutes must be strictly construed against the one claiming the exemption, and that
the rule that a tax statute granting exemption must be strictly construed against the one claiming the exemption is
similar to the rule that a statute granting taxing power is to be construed strictly, with doubts resolved against its
existence.15 Petitioner cites rulings of the BIR that the phrase exemption from "all taxes, etc." from "all forms of
taxes" and "in lieu of all taxes" covers only taxes for which the taxpayer is directly liable.16

On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No. 1931,
the relevant provision of which are to wit:

P.D. No. 1931 provides as follows:

Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the
payment of duties, taxes . . . heretofore granted in favor of government-owned or controlled corporations are
hereby withdrawn. (Emphasis supplied.)

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above . . . (Emphasis supplied.)

The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:

Resolution. No. 10-85

BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:

1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation under
C.A. No. 120 as amended are restored up to June 30, 1985.

2. Provided, That to restoration does not apply to the following:

a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
 b. commercially-funded importations; and

c. interest income derived from any investment source.

3. Provided further, That in case of importations funded by international financing agreements, the NPC is hereby
required to furnish the FIRB on a periodic basis the particulars of items received or to be received through such
arrangements, for purposes of tax and duty exemptions privileges.17

Resolution No. 1-86

BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:

1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation (NPC)
under Commonwealth Act No. 120, as amended, are restored: Provided, That importations of fuel oil (crude oil
equivalent), and coal of the herein grantee shall be subject to the basic and additional import duties; Provided,
further, that the following shall remain fully taxable:

a. Commercially-funded importations; and

b. Interest income derived by said grantee from bank deposits and yield or any other monetary
benefits from deposit substitutes, trust funds and other similar arrangements.

2. The NPC as a government corporation is exempt from the real property tax on land and improvements owned by
it provided that the beneficial use of the property is not transferred to another pursuant to the provisions of Sec.
10(a) of the Real Property Tax Code, as amended.18

Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86. Indeed, they
were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the FIRB should make the
recommendation subject to the approval of "the President of the Philippines and/or the Minister of Finance." While
said Resolutions do not appear to have been approved by the President, they were nevertheless approved by the
Minister of Finance who is also duly authorized to approve the same. In fact it was the Minister of Finance who
signed and promulgated said resolutions.19

The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-86 which
were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of Finance Cesar E.A Virata,
as Chairman of FIRB respectively, should be separately approved by said Minister of Finance as required by P.D.
1931 is, a superfluity. An examination of the said resolutions which are reproduced in full in the dissenting opinion
show that the said officials signed said resolutions in the dual capacity of Chairman of FIRB and Minister of Finance.

Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of Albay,20wherein
the Court observed that under P.D. No. 776 the power of the FIRB was only recommendatory and requires the
approval of the President to be valid. Thus, in said case the Court held that FIRB Resolutions Nos. 10-85 and 1-86
not having been approved by the President were not valid and effective while the validity of FIRB 17-87 was upheld
as it was duly approved by the Office of the President on October 5, 1987.

However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended P.D. No.
776, it is clearly provided for that such FIRB resolution, may be approved by the "President of the Philippines and/or
the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly approved by the Minister of
Finance, hence they are valid and effective. To this extent, this decision modifies or supersedes the Court's earlier
decision in Albay afore-referred to.

Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges enjoyed by
the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax exemption privilege;
and that it cannot be interpreted to cover indirect taxes under the principle that tax exemptions are
construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.

Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a tax credit
certificate21 which was assigned to respondent Caltex through a deed of assignment approved by the BIR22 is
patently illegal. He also contends that the pending claim of respondent NPC in the amount of P410.58 million with
respondent BIR for the sale and delivery to it of bunker fuel by respondents Petrophil, Shell and Caltex from July 1,
1985 up to 1986, being illegal, should not be released.

Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24, 1987. It
was issued under authority of Executive Order No. 93 dated December 17, 1986 which grants to the FIRB among
others, the power to recommend the restoration of the tax and duty exemptions/incentives withdrawn thereunder.

Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect that the
powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93 "constitute undue
delegation of legislative power and is, therefore, unconstitutional." Petitioner observes that the FIRB did not merely
recommend but categorically restored the tax and duty exemption of the NPC so that the memorandum of the
respondent Executive Secretary dated October 5, 1987 approving the same is a surplusage.

Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine in Philippine
Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot create new indirect tax
exemption not otherwise granted in the NPC charter as amended by Presidential Decree No. 938.

The petition is devoid of merit.

The NPC is a non-profit public corporation created for the general good and welfare23 wholly owned by the
government of the Republic of the Philippines.24 From the very beginning of its corporate existence, the NPC
enjoyed preferential tax treatment25 to enable the Corporation to pay the indebtedness and obligation and in
furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395"26 which
provides:

Sec. 1. Declaration of PolicyCongress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power generation,
and (2) the total electrification of the Philippines through the development of power from all sources to meet
the need of rural electrification are primary objectives of the nation which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government including its financial institutions.

From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious.

Under Republic Act No. 358, its exemption is provided as follows:

Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities."

Under Republic Act No. 6395:

Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other
Charges by Government and Governmental Instrumentalities. The Corporation shall be non-profit and
shall devote all its returns from its capital investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby
declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines,
its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of electric power.
(Emphasis supplied.)

Under Presidential Decree No. 380:

Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and other
Charges by the Government and Government Instrumentalities. The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its
subsidiaries, is hereby declared, exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other governmental agencies and instrumentalities;
 (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operation and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum produced used by the Corporation in the generation, transmission, utilization, and sale of
electric power. (Emphasis supplied.)

Under Presidential Decree No. 938:

Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and
Other Charges by the Government and Government Instrumentalities.The Corporation shall be non-profit
and shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its
subsidiaries hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as
costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. (Emphasis supplied.)

It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all taxes,
duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395 enumerated the
details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the details of the
exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It
succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings."

The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it
has been enjoying before. The rationale for this exemption is that being non-profit the NPC "shall devote all its
returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay the indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, . . ."27

The preamble of P.D. No. 938 states

WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit character
of the NPC has not been fully utilized because of restrictive interpretations of the taxing agencies of the
government on said provisions. . . . (Emphasis supplied.)

It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall be
construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so as to
enhance the tax exempt status of NPC.

Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes granting tax
exemptions to NPC.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in
favor of a government political subdivision or instrumentality.28

The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes, is
to minimize differential treatment and foster impartiality, fairness, and equality of treatment among tax
payers.

The reason for the rule does not apply in the case of exemptions running to the benefit of the government
itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of
money that has to be handled by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor of non tax liability of such
agencies.29

In the case of property owned by the state or a city or other public corporations, the express exemption should not
be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since
as to such property "exemption is the rule and taxation the exception."30

The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No. 6395 and
P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not well-taken.

Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are presumed to
be passed with deliberation and with knowledge of all existing ones on the subject, it is logical to conclude that in
passing a statute it is not intended to interfere with or abrogate a former law relating to the same subject matter,
unless the repugnancy between the two is not only irreconcilable but also clear and convincing as a result of the
language used, or unless the latter Act fully embraces the subject matter of the earlier.31 The first effort of a court
must always be to reconcile or adjust the provisions of one statute with those of another so as to give sensible effect
to both provisions.32

The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated part
or a particular provision alone.33 When construing a statute, the reason for its enactment should be kept in mind and
the statute should be construed with reference to its intended scope and purpose34 and the evil sought to be
remedied.35

The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric
generation of power and production of electricity from other sources, as well as the transmission of electric power on
a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied in Section E,
Article II of the 1987 Constitution.

It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all
forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380 if it is to attain its
goals.

Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given controlling
weight.36

Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June 26, 1985
confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the letter of the Secretary
of Finance of February 19, 1987, the Memorandum of the Executive Secretary of October 9, 1987, by authority of
the President, confirming and approving FIRB Resolution No. 17-87, the letter of the Secretary of Finance of May
20, 1988 to the Executive Secretary rendering his opinion as requested by the latter, and the latter's reply of June
15, 1988, it was uniformly held that the grant of tax exemption to NPC under C.A. No. 120, as amended, included
exemption from payment of all taxes relative to NPC's petroleum purchases including indirect taxes.37 Thus, then
Secretary of Finance Vicente Jayme in his letter of May 20, 1988 to the Executive Secretary Macaraig aptly stated
the justification for this tax exemption of NPC

The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes
imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested that the change
in language evidenced an intention to exempt NPC only from taxes directly imposed on or payable by it;
since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally are levied on and
paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The principal authority relied on is
the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056.

First of all, tracing the changes made through the years in the Revised Charter, the strengthening of NPC's
preferential tax treatment was clearly the intention. To the extent that the explanatory "whereas clauses"
may disclose the intent of the law-maker, the changes effected by P.D. 938 can only be read as being
expansive rather than restrictive, including its version of Section 13.

Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly. The
textbook distinction between a direct and an indirect tax may be based on the possibility of shifting the
incidence of the tax. A direct tax is one which is demanded from the very person intended to be the payor,
although it may ultimately be shifted to another. An example of a direct tax is the personal income tax. On
the other hand, indirect taxes are those which are demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another. An example of this type of tax is the
sales tax levied on sales of a commodity.

The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no moment.
What is more relevant is that when an "indirect tax" is paid by those upon whom the tax ultimately falls, it is
paid not as a tax but as an additional part of the cost or of the market price of the commodity.

This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he analyzed
the nature of the percentage (sales) tax to determine whether it is a tax on the producer or on the purchaser
of the commodity. Under out Tax Code, the sales tax falls upon the manufacturer or producer. The phrase
"pass on" the tax was criticized as being inaccurate. Justice Castro says that the tax remains on the
manufacturer alone. The purchaser does not pay the tax; he pays an amount added to the price because of
the tax. Therefore, the tax is not "passed on" and does not for that reason become an "indirect tax" on the
purchaser. It is eminently possible that the law maker in enacting P.D. 938 in 1976 may have used lessons
from the analysis of Chief Justice Castro in 1967 Philippine Acetylene case.

When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil
crunch had already drastically pushed up crude oil Prices from about $1.00 per bbl in 1971 to about $10 and
a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was operating the Meralco thermal
plants under a lease agreement. The power generated by the leased plants was sold to Meralco for
distribution to its customers. This lease and sale arrangement was entered into for the benefit of the
consuming public, by reducing the burden on the swiftly rising world crude oil prices. This objective was
achieved by the use of NPC's "tax umbrella under its Revised Charterthe exemption from specific taxes
on locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have withdrawn the exemption
from tax on fuel oil to which NPC was already entitled and which exemption Government in fact was utilizing
to soften the burden of high crude prices.

There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil products
sold to NPC, whether paid to them by NPC or no never entered into the rates charged by NPC to its
customers not even during those periods of uncertainty engendered by the issuance of P.D. 1931 and E. 0.
93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC through its
rates.

There is an import duty on the crude oil imported by the local refineries. After the refining process, specific
and ad valorem taxes are levied on the finished products including fuel oil or residue upon their withdrawal
from the refinery. These taxes are paid by the oil companies as the manufacturer thereof.

In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component. NPC
pays the oil companies' invoices including the duty component but net of the tax component. NPC then
applies for drawback of customs duties paid and for a credit in amount equivalent to the tax paid (by the oil
companies) on the products purchased. The tax credit is assigned to the oil companiesas payment, in
effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied over time
There were instances when NPC paid the tax component that was shifted to it and then applied for tax
credit. There were also side issues raised because of P.D. 1931 and E.O. 93 which withdrew all exemptions
of government corporations. In these latter instances, the resolutions of the Fiscal Incentives Review Board
(FIRB) come into play. These incidents will not be touched upon for purposes of this discussion).

NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without need of
fresh approvals) reflected in the subsequent months billing rates.

This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the tax
and duty component on the oil products, such amount will go into its fuel cost and be passed on to its
customers through corresponding increases in rates. Since 1974, when NPC operated the oil-fired
generating stations leased from Meralco (which plants it bought in 1979), until the present time, no tax on
fuel oil ever went into NPC's electric rates.

That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me by yet
another circumstance. It is conceded that NPC at the very least, is exempt from taxes to which it is directly
liable. NPC therefore could very well have imported its fuel oil or crude residue for burning at its thermal
plants. There would have been no question in such a case as to its exemption from all duties and taxes,
even under the strictest interpretation that can be put forward. However, at the time P.D. 938 was issued in
1976, there were already operating in the Philippines three oil refineries. The establishment of these
refineries in the Philippines involved heavy investments, were economically desirable and enabled the
country to import crude oil and process / refine the same into the various petroleum products at a savings to
the industry and the public. The refining process produced as its largest output, in volume, fuel oil or residue,
whose conventional economic use was for burning in electric or steam generating plants. Had there been no
use locally for the residue, the oil refineries would have become largely unviable.

Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass the
local oil refineries and import its fossil fuel requirements directly in order to avail itself of its exemption from
"direct taxes." The oil refineries had to keep operating both for economic development and national security
reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931 and E.O. 93 expressly
excluded direct fuel oil importations, so as not to prejudice the continued operations of the local oil refineries.

To answer your query therefore, it is the opinion of this Department that NPC under the provisions of its
Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased
locally and used for the generation of electricity.

The Department in issuing this ruling does so pursuant to its power and function to supervise and control the
collection of government revenues by the application and implementation of revenue laws. It is prepared to
take the measures supplemental to this ruling necessary to carry the same into full effect.

As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties paid
on the fuel oil it used. The point is that while these levies were in fact paid to the government, no part thereof
was recovered from the sale of electricity produced. As a consequence, as of our most recent information,
some P1.55 B in claims represent amounts for which the oil suppliers and NPC are "out-of-pocket. There
would have to be specific order to the Bureaus concerned for the resumption of the processing of these
claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the said
opinion ruling of the latter was confirmed and its implementation was directed.39

The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary of
Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was exempted from all forms
of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means exactly what it says, i.e., all forms of
taxes including those that were imposed directly or indirectly on petroleum products used in its operation.

Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC extends
only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these rulings are predicated
on Philippine Acytelene.

The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It involved the
sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC was enjoying tax
exemption from all taxes under Commonwealth Act No. 120, as amended by Republic Act No. 358 issued on June
4, 1949 hereinabove reproduced.

In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff cannot
claim exemptions simply because the NPC, the buyer, was exempt.

However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC whereby
Section 13 thereof was amended by emphasizing its non-profit character and expanding the extent of its tax
exemption.

As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells out clearly
the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380, the exemption of NPC
from indirect taxes was emphasized when it was specified to include those imposed "directly and indirectly."

Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the same in
general terms to cover "all forms of taxes, duties, fees, imposts, etc." which, as hereinabove discussed, logically
includes exemption from indirect taxes on petroleum products used in its operation.

This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the authority of
which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93 was promulgated, by
which FIRB Resolution 17-87 was issued.

Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental circumstances.
As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380 and P.D. No. 838 appear to
have been brought about by the earlier inconsistent rulings of the tax agencies due to the doctrine in Philippine
Acetylene, so as to leave no doubt as to the exemption of the NPC from indirect taxes on petroleum products it uses
in its operation. Effectively, said amendments superseded if not abrogated the ruling in Philippine Acetylene that the
tax exemption of NPC should be limited to direct taxes only.

In the light of the foregoing discussion the first corollary issue must consequently be resolved in the affirmative, that
is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986 which
restored NPC's tax exemption privileges included the restoration of the indirect tax exemption of the NPC on
petroleum products it used.

On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which restored
NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid and effective.

It provides as follows:

BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the
National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating the
National Power Corporation, defining its powers, objectives and functions, and for other purposes), as
amended, are restored effective March 10, 1987, subject to the following conditions:

1. The restoration of the tax and duty exemption privileges does not apply to the following:

1.1. Importation of fuel oil (crude equivalent) and coal;

1.2. Commercially-funded importations (i.e., importations which include but are not limited to those
financed by the NPC's own internal funds, domestic borrowings from any source whatsoever,
borrowing from foreign-based private financial institutions, etc.); and

1.3. Interest income derived from any source.

 2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition of
relieved tax and duty payments for such expansion on an annual basis or as often as the FIRB may require
it to do so. This report shall be in addition to the usual FIRB reporting requirements on incentive availment.40

Executive Order No. 93 provides as follows

Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty
incentives granted " to government and private entities are hereby withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective international agreements to which the Government of the Republic of
the Philippines is a signatory;

c) those enjoyed-by enterprises registered with:

(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as
amended;

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority

pursuant to Presidential Decree No. 538, as amended;

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No.
1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is
hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/of duty exemption that may be restored.

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;

e) formulate and submit to the President for approval, a complete system for the grant of subsidies
to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions
or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries
and the terms and conditions for the grant thereof taking into consideration the international
commitments of the Philippines and the necessary precautions such that the grant of subsidies does
not become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged;

d) in general, the greater national interest to be served.

True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that the powers
conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93 constitute undue delegation of
legislative power and is therefore unconstitutional. However, he was overruled by the respondent Executive
Secretary in a letter to the Secretary of Finance dated March 30, 1989. The Executive Secretary, by authority of the
President, has the power to modify, alter or reverse the construction of a statute given by a department secretary.41

A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The standards of
the delegated power are also clearly provided for.

The required "standard" need not be expressed. In Edu vs. Ericta42 and in De la Llana vs. Alba43 this Court held: "The
standard may be either express or implied. If the former, the non-delegated objection is easily met. The standard
though does not have to be spelled out specifically. It could be implied from the policy and purpose of the act
considered as a whole."

In People vs. Rosenthal44 the broad standard of "public interest" was deemed sufficient. In Calalang vs. Williams,45, it
was "public welfare" and in Cervantes vs. Auditor General,46 it was the purpose of promotion of "simplicity, economy
and efficiency." And, implied from the purpose of the law as a whole, "national security" was considered sufficient
standard47 and so was "protection of fish fry or fish eggs.48

The observation of petitioner that the approval of the President was not even required in said Executive Order of the
tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not well-taken. On the
contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty exemptions extended by the
FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87 was approved by the respondent
Executive Secretary, by authority of the President, on October 15, 1987.49

Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated

The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its
non-delegation the exception. The reason is the increasing complexity of modern life and many technical
fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing
inability of the legislature to cope directly with the many problems demanding its attention. The growth of
society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot
be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many
of the problems attendant upon present day undertakings, the legislature may not have the competence, let
alone the interest and the time, to provide the required direct and efficacious, not to say specific solutions.50

Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated the rationale in favor of delegation of legislative
functions

One thing however, is apparent in the development of the principle of separation of powers and that is that
the maxim of delegatus non potest delegare or delegati potestas non potest delegare, adopted this practice
(Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale University Press, 1922, Vol. 2, p. 167)
but which is also recognized in principle in the Roman Law d. 17.18.3) has been made to adapt itself to the
complexities of modern government, giving rise to the adoption, within certain limits, of the principle of
subordinate legislation, not only in the United States and England but in practically all modern governments.
(People vs. Rosenthal and Osmea, 68 Phil. 318, 1939). Accordingly, with the growing complexities of
modern life, the multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the delegation of greater power by the
legislative, and toward the approval of the practice by the Courts. (Emphasis supplied.)

The legislative authority could not or is not expected to state all the detailed situations wherein the tax exemption
privileges of persons or entities would be restored. The task may be assigned to an administrative body like the
FIRB.

Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such presumption
can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal interpretation in favor of
constitutionality of legislation should be adopted.52

E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as above
discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of June 1987
includes exemption from indirect taxes and duties on petroleum products used in its operation.

Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld in Albay.53

In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President Marcos
in 1984 are invalid as they were presumably promulgated under the infamous Amendment No. 6 and that as they
cover tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same cannot be passed "without
the concurrence of the majority of all the members of the Batasan Pambansa." And, even conceding that the
reservation of legislative power in the President was valid, it is opined that it was not validly exercised as there is no
showing that such presidential encroachment was justified under the conditions then existing. Consequently, it is
concluded that Executive Order No. 93, which was intended to implement said decrees, is also illegal. The authority
of the President to sub-delegate to the FIRB powers delegated to him is also questioned.

In Albay,54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree withdrew tax
exemptions of government-owned or controlled corporations including their subsidiaries but authorized the FIRB to
restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled that the tax exemptions under FIRB
Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions were only recommendatory and were not
duly approved by the President of the Philippines as required by P.D. No. 776.55 The Court also sustained
in Albaythe validity of Executive Order No. 93, and of the tax exemptions restored under FIRB Resolution No. 17-87
which was issued pursuant thereto, as it was duly approved by the President as required by said executive order.

Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided that:

All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive
issuances not inconsistent with this constitution shall remain operative until amended, repealed or revoked.

Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with the
Constitution.1wphi1

Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938 which
amended the NPC charter by granting exemption to NPC from all forms of taxes. As above discussed, this
exemption of NPC covers direct and indirect taxes on petroleum products used in its operation. This is as it should
be, if We are to hold as invalid and inoperative the withdrawal of such tax exemptions under P.D. No. 1931 as well
as under Executive Order No. 93 and the delegation of the power to restore these exemptions to the FIRB.

The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court ruled that
the NPC is liable for real estate taxes as of June 11, 1984 (the date of promulgation of P.D. No. 1931) when NPC
had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-86 were not validly issued.
The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is estimated to amount to P7.49 billion
plus another P4.76 billion in fuel import duties the firm had earlier paid to the government which the NPC now
proposed to pass on to the consumers by another 33-centavo increase per kilowatt hour in power rates on top of the
17-centavo increase per kilowatt hour that took effect just over a week ago.,56 Hence, another case has been filed in
this Court to stop this proposed increase without a hearing.

As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated August 24,
1975 was already amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB resolutions may be approved
not only by the President of the Philippines but also by the Minister of Finance. Such resolutions were promulgated
by the Minister of Finance in his own right and also in his capacity as FIRB Chairman. Thus, a separate approval
thereof by the Minister of Finance or by the President is unnecessary.

As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and
consequently, Albaymust be considered superseded to this extent by this decision. This is because P.D. No. 938
which is the latest amendment to the NPC charter granting the NPC exemption from all forms of taxes certainly
covers real estate taxes which are direct taxes.

This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the country
but more importantly, to assure cheaper rates to be paid by the consumers.

The allegation that this is in effect allowing tax evasion by oil companies is not quite correct. There are various
1a\^/phi 1

arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the custom duties paid
by the oil companies are added to the selling price paid by NPC. As to the specific and ad valorem taxes, they are
added a part of the seller's price, but NPC pays the price net of tax, on condition that NPC would seek a tax refund
to the oil companies. No tax component on fuel had been charged or recovered by NPC from the consumers
through its power rates.58 Thus, this is not a case of tax evasion of the oil companies but of tax relief for the NPC.
The billions of pesos involved in these exemptions will certainly inure to the ultimate good and benefit of the
consumers who are thereby spared the additional burden of increased power rates to cover these taxes paid or to
be paid by the NPC if it is held liable for the same.

The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may claim the
same privilege should be dispelled by the fact that (a) this decision particularly treats of only the exemption of the
NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on the petroleum
products it used or uses for its operation; and (b) Section 13(d) of R.A. No. 6395 and Section 13(d) of P.D. No. 380,
both specifically exempt the NPC from all taxes, duties, fees, imposts and all other charges imposed by the
government on all petroleum products used in its operation only, which is the very exemption which this Court
deems to be carried over by the passage of P.D. No. 938. As a matter of fact in Section 13(d) of P.D. No. 380 it is
specified that the aforesaid exemption from taxes, etc. covers those "directly or indirectly" imposed by the "Republic
of the Philippines, its provincies, cities, municipalities and other government agencies and instrumentalities" on said
petroleum products. The exemption therefore from direct and indirect tax on petroleum products used by NPC
cannot benefit the suppliers, importers and contractors of NPC of other products or services.

The Court realizes the laudable objective of petitioner to improve the revenue of the government. The amount of
revenue received or expected to be received by this tax exemption is, however, not going to any of the oil
companies. There would be no loss to the government. The said amount shall accrue to the benefit of the NPC, a
government corporation, so as to enable it to sustain its tremendous task of providing electricity for the country and
at the least cost to the consumers. Denying this tax exemption would mean hampering if not paralyzing the
operations of the NPC. The resulting increased revenue in the government will also mean increased power rates to
be shouldered by the consumers if the NPC is to survive and continue to provide our power requirements.59 The
greater interest of the people must be paramount.

WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs.

SO ORDERED.

Narvasa, Melencio-Herrera, Feliciano, Bidin, Medialdea and Regalado, JJ., concur.

Fernan C.J., No part.
Paras, J., I dissent, but the NPC should be refunded not by the consuming public but by the oil companies for
ultimately these oil companies get the benefit of the alleged tax exemption.
Padilla, J., took no part.

Separate Opinions

CRUZ, J., Dissenting:

I join Mr. Justice Abraham F. Sarmiento in his excellent dissent and would stress only the following additional
observations.

A tax exemption represents a loss of revenue to the State and must therefore not be lightly granted or inferred.
When claimed, it must be strictly construed against the taxpayer, who must prove that he comes under the
exemption rather than the rule that every one must contribute his just share in the maintenance of the government.

In the case at bar, the ponencia would justify the tax exemption as having been validly granted under P.D. Nos.
1931 and 1955 and Resolutions Nos. 10-85 and 1-86 of the Fiscal Incentives Review Board. It is also asserted that
FIRB Resolution No. 17-87, which restored MPC's tax exemption effective March 10 1987, was lawfully adopted
pursuant to a valid delegation of power made by Executive Order No. 93.

When P.D. Nos. 1931 and 1955 were issued by President Marcos in 1984, the Batasang Pambansa was already in
existence and discharging its legislative powers. Presumably, these decrees were promulgated under the infamous
Amendment No. 6. Assuming that the reservation of legislative power in the President was then valid, I submit that
the power was nevertheless not validly exercised. My reason is that the President could legislate under the said
amendment only if the Batasang Pambansa "failed or was unable to act adequately on any matter that in his
judgment required immediate action" to meet the "exigency." There is no showing that the presidential
encroachment on legislative prerogatives was justified under these conditions. Simply because the rubber-stamp
legislature then meekly submitted did not make the usurpation valid.

By these decrees, President Marcos, exercising legislative power, delegated it to himself as executive and
empowered himself and/or the Minister of Finance to restore the exemptions previously withdrawn.

As the decrees themselves were invalid it should follow that Executive Order No. 93, which was intended only to
implement them, should also be illegal. But even assuming the legality of the said decrees, I would still question the
authority of the President to sub-delegate the powers delegated to her thereunder.

Such sub-delegation was not permissible because potestas delegata non delegari potest Even if we were to
disregard the opinion of Secretary of Justice Sedfrey A. Ordoez that there were no sufficient standards in
Executive Order No. 93 (although he was reversed on this legal questions by the Executive Secretary), the
President's delegated authority could still not be extended to the FIRB which was not a delegate of the legislature.

It is remarkable that the respondents could seriously argue that a mere administrative body like the FIRB can
exercise the legislative power to grant tax exemptions. I am not aware that any other such agency, including the
Bureau of Internal Revenue and the Bureau of Customs, has this authority. An administrative body can apply tax
exemptions under existing law but it cannot itself create such exemptions. This is a prerogative of the Congress that
cannot be usurped by or even delegated to a mere administrative body.
In fact, the decrees clearly provided that it was the President and/or the Minister of Finance who could restore the
exemption, subject only to the recommendation of the FIRB. The FIRB was not empowered to directly restore the
exemption. And even if it be accepted that the FIRB merely recommended the exemption, which was approved by
the Finance Minister, there would still be the curious anomaly of Minister Virata upholding his very own act as
chairman of the FIRB.

This Court called it a "travesty of justice" when in Zambales Chromite vs. Court of Appeals, 94 SCRA 261, the
Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he was the
Director of Mines, and in Anzaldo vs. Clave, 119 SCRA 353, where the respondent, as presidential executive
assistant, affirmed on appeal to Malacaang his own decision as chairman of the Civil Service Commission.

It is important to note that when P.D. Nos. 1931 and 1955 were issued by President Marcos, the rule under the 1973
Constitution was that "no law granting a tax exemption shall be passed without the concurrence of a majority of all
the members of the Batasang Pambansa." (Art. VIII, Sec. 17[4]). Laws are usually passed by only a majority of
those present in the chamber, there being a quorum, but not where it grants a tax exemption. This requires an
absolute majority. Yet, despite this stringent limitation on the national legislature itself, such stricture does not inhibit
the President and the FIRB in the exercise of their delegated power. It would seem that the delegate has more
power than the principal. Significantly, this limitation is maintained in the present Constitution under Article VI,
Section 28(4).

The ponencia holds that the rule of strict construction is not applicable where the grantee is an agency of the
government itself, like the MPC in the case before us. I notice, however, that the ultimate beneficiaries of the
expected tax credit will be the oil companies, which certainly are not part of the Republic of the Philippines. As the
tax refunds will not be enjoyed by the MPC itself, I see no reason why we should be exceptionally lenient in applying
the exception.

The tax credits involved in this petition are tremendousno less than Pl.58 billion. This amount could go a long way
in improving the national economy and the well-being of the Filipino people, who deserve the continuing solicitude of
the government, including this Court. I respectfully submit that it is to them that we owe our foremost loyalty.

Gutierrez, Jr., J., concurs

SARMIENTO, J., dissenting:

I would like to point out specifically two things in connection with the majority's disposition as to: (1) Finance
Incentives Review Board FIRB Resolutions Nos. 10-85 and 186; and (2) the National Power Corporation's tax
exemption vis-a-vis our decision in the case of Philippine Acetylene Co., Inc. vs. Commission of Internal
Revenue,1and in the light of the provisions of its charter, Republic Act No. 6395, and the various amendments
entered into it.

(1)

On pages 20-23 of the Decision, the majority suggests that FIRB Resolutions Nos. 10-85 and 1-86 had validly
restored the National Power Corporation's tax exemption privileges, which Presidential Decree No. 1931 had
meanwhile suspended. I wish to stress that in the case of National Power Corporation vs. Province of Albay,2 the
Court held that the FIRB Resolutions Nos. 10-85 and 1-86 had the bare force of recommendations and did not
operate as a restoration, in the absence of an approval by the President (in then President Marcos' exercise of
legislative powers), of tax exemptions. The Court noted that there is nothing in Presidential Decree No. 776, the
FIRB charter, conferring on it the authority to grant or restore exemptions, other than to make recommendations on
what exemptions to grant or restore. I quote:

xxx xxx xxx

It is to be pointed out that under Presidential Decree No. 776, the power of the FIRB was merely to
"recommend to the President of the Philippines and for reasons of compatibility with the declared economic
policy, the withdrawal, modification, revocation or suspension of the enforceability of any of the abovecited
statutory subsidies or tax exemption grants, except those granted by the Constitution." It has no authority to
impose taxes or revoke existing ones, which, after all, under the Constitution, only the legislature may
accomplish. . . .3

xxx xxx xxx

As the Court held there, it was only on March 10, 1987 that the restoration became effective, not because
Resolutions Nos. 10-85 and 1-86 decreed a restoration, but because of Resolution No. 17-87 which, on the other
hand, carried the approval of the Office of the President .4 (FIRB Resolution No. 17-87 made the National Power
Corporation's exemption effective March 10, 1987.) Hence, the National Power Corporation, so the Court held, was
liable for payment of real property taxes to the Province of Albay between. June 11, 1984, the date Presidential
Decree No. 1931 (withdrawing its tax exemptions) took effect, and March 10, 1987,

As far therefore as the majority in the present case rules that the National Power Corporation is also entitled to a
refund as a result of FIRB Resolutions Nos. 10-15 and 1-86, I respectfully submit that a serious conflict has arisen.

While it is true that FIRB Resolutions Nos. 10-85 and 1-86 were signed by the Finance Minister Cesar Virata,5 I
submit nonetheless, as Albay in fact held, that the signature of the Mr. Virata is not enough to restore an exemption.
The reason is that Mr. Virata signed them (FIRB Resolutions Nos. 10-85 and 1-86) in his capacity as chairman of
the Finance Incentives Review Board FIRB. I find this clear from the very Resolutions in question:

FISCAL INCENTIVES REVIEW BOARD

RESOLUTION NO. 10-85

BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That:

1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation
under C.A. No. 120 as amended are restored up to June 30, 1985.

2. Provided, That this restoration does not apply to the following:

a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;

b. commercially-funded importations; and

c. interest income derived from any investment source.

3. Provided further, That in case of importations funded by international financing agreements, the NPC is
hereby required to furnish the FIRB on a periodic basis the particulars of items received or to be received
through such arrangements, for purposes of tax and duty exemption privileges.

(Sgd.) ALFREDO PIO DE RODA, JR.

Acting Minister of Finance
Acting Chairman, FIRB

FISCAL INCENTIVES REVIEW BOARD

RESOLUTION NO. 1-86

BE IT RESOLVED, AS IT IS HEREBY RESOLVED: That:

1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation
(NPC) under Commonwealth Act No. 120, as amended, are restored; Provided, That importations of fuel oil
(crude oil equivalent) and coal of the herein grantee shall be subject to the basic and additional import
duties; Provided, further, That the following shall remain fully taxable:

a. Commercially-funded importations; and

b. Interest income derived by said grantee from bank deposits and yield or any other monetary
benefits from deposit substitutes, trust fund and other similar arrangements.

2. The NPC as a government corporation is exempt from the real property tax on land and improvements
owned by it provided that the beneficial use of the property is not transferred to another pursuant to the
provisions of Sec. 40(a) of the Real Property Tax Code, as amended.

(Sgd.) CESAR E.A. VIRATA

Minister of Finance
Chairman-FIRB

I respectfully submit that to say that Mr. Virata's signature is sufficient (please note that Resolution No. 10-85 was
not even signed by Mr. Virata, but rather by Mr. Alfredo Pio de Roda, Jr.) is in fact to confer on the Board actual
"restoration" or even exemption powers, because in all cases, FIRB Resolutions are signed by Mr. Virata (or the
acting chairman) in his capacity as Board Chairman. I submit that we can not consider an FIRB Resolution as an act
of Mr. Virata in his capacity as Minister of Finance (and therefore, as a grant or restoration of tax exemption)
although Mr. Virata also happened to be concurrently, Minister of Finance, because to do so would be to blur the
distinction between the capacities in which he, Mr. Virata, actually acted. I submit that he, Mr. Virata, need have
issued separate approvals of the Resolutions in question, in his capacity as Finance Minister.
Parenthetically, on the issue of the constitutional validity of Executive Order No. 93, insofar as it "delegates" the
power to restore exemptions to the FIRB, I hold that in the first place, Executive Order No. 93 makes no delegation
at all. As the majority points out, "[u]nder Section 1 (f) of Executive Order No. 93, aforestated, such tax and duty
exemptions extended by the FIRB must be approved by the President."6 Hence, the FIRB does not exercise any
powerand as I had held, its powers does not merely recommendatoryand it is the President who in fact
exercises it. It is true that Executive Order No. 93 has set out certain standards by which the FIRB as a reviewing
body, may act, but I do not believe that a genuine delegation question has arisen because precisely, the acts of the
Board are subject to approval by the President, in the exercise of her legislative powers under the Freedom
Constitution.7

(2)

According to the Decision, the National Power Corporation, under its charter, is also exempt from indirect taxes, and
that there is nothing irregular about what is apparently standard operating procedure between the Corporation and
the oil firms in which the latter sell to the Corporation of "net of tax" and that thereafter, the Corporation assigns to
them its tax credit.

I gather first, and with all due respect, that there has been a misunderstanding about so-called indirect taxes and the
theory of shifting taxes. In Philippine Acetylene Co., Inc., supra, the Court intimated that there are no such things as
indirect taxes for purposes of exemption, and that the National Power Corporation's exemption from taxes can not
be claimed, as well, by a manufacturer (who sells his products to the Corporation) on the theory that the taxes he
will shift will be shifted to a tax-exempt entity. According to the Court, "the purchaser does not pay the tax . . . [h]e
pays or may pay the seller more for the goods because of the seller's obligation, but that is all and the amount
added because of the tax is paid to get the goods and for nothing else."8

It is true that a tax may be shifted, that is, to enable the payor to escape its effects by adding it to the price, thereby
transferring the burden to the purchaser of whom the incidence of the tax settles (indirect tax). I submit, however,
that it is only for purposes of escape from taxation. As Acetylene has clarified, the tax which the manufacturer is
liable to pay directly under a statute is still a personal tax and in "passing and tax on" to the purchaser, he does not
really make the latter pay the tax, and what the latter pays actually is just the price. Thus, for purposes of exemption,
and so Acetylene tells us, the manufacturer can not claim one because the purchaser happens to be exempted from
taxes. Mutatis mutandis and so I respectfully submit, the purchaser can not be allowed to accept the goods "net of
tax" because it never paid for the tax in the first place, and was never liable therefor in the second place.

According to the majority, Philippine Acetylene has been "abrogated," and the majority points to the various
amendments to the charter of the National Power Corporation as authority for its view.

First, there is nothing in those amendments that would remotely point to this conclusion.

Second, Acetylene's pronouncement is founded on the very science of taxationthat indirect taxes are no taxes for
purposes of exemption, and that consequently, one who did not pay taxes can not claim an exemption although the
price he paid for the goods included taxes. To enable him to claim an exemption, as the majority would now enable
him (Acetylene having been "abrogated"), is, I submit, to defeat the very laws of science.

The theory of "indirect taxes" and that no exemption is possible therefrom, so I reiterate, are well-settled concepts of
taxation, as the law of supply and demand is to the law of economics. A President is said (unfairly) to have
attempted it, but one can not repeal the law on supply and demand.

I do not find the National Power Corporation's alleged exemption from indirect tax evident, as the majority finds it
evident, from the Corporation's charter, Republic Act No. 6395, as amended by Presidential Decrees Nos. 380 and
938. It is true that since Commonwealth Act No. 120 (the Corporation's original charter, which Republic Act No.
6395 repealed), the Corporation has enjoyed a "preferential tax treatment," I seriously doubt, however, whether or
not that preference embraces "indirect taxes" as wellwhich, as I said, are no taxes for purposes of claims for
exemptions by the "indirect payor." And albeit Presidential Decree No. 938 refers to "all forms of taxes," I can not
take that to include, as a matter of logic, "indirect taxes," and as discussed above, that scenario is not possible.

I quite agree that the legislative intent, based on a perusal of Republic Act No. 6395 and subsequent amendatory
statutes was to give the National Power Corporation a broad tax preference on account of the vital functions it
performs, indeed, "to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective
implementation of the policy initiated" by its charter. I submit, however, that that alone can not entitle the
Corporation to claim an exemption for indirect taxes. I also believe that its existing exemption from direct taxes is
sufficient to serve the legislative purpose.

The fact that the National Power Corporation has been tasked with an enormous undertaking "to improve," as the
majority puts it, "the quality of life of the people" pursuant to constitutional mandates is no reason, I believe, to
include indirect taxes within the coverage of its preferential tax treatment. After all, it is exempt from direct taxes,
and the fact that it will be made to shoulder indirect taxes (which are no taxes) will not defeat its exemption or
frustrate the intent of both legislature and Constitution.
I do not think that the majority can point to the various executive constructions as authorities for its own construction.
First and foremost, with respect to then Commissioner Ruben Ancheta's ruling of May 8, 1985 cited on pages 32-33
of the Decision, it is notable that in his BIR Ruling No. 183-85, dated October 22, 1985, he in fact reversed himself, I
quote:

In reply please be informed that after a re-study of Section 13, R.A. 6395 as amended by P.D. No. 938, this
Office is of the opinion, and so holds, that the scope of the tax exemption privilege enjoyed by NPC under
said section covers only taxes for which it is directly liable and not on taxes which are merely shifted to it.
(Phil. Acetylene Co. vs. Comm. of Internal Revenue, 20 SCRA 1056,1967). Since contractor's tax is directly
payable by the contractor, not by NPC, your request for exemption, based on the stipulation in the aforesaid
contract that NPC shall assume payment of your contractor's tax liability, cannot be granted for lack of legal
basis. (emphasis added)9

In yet another ruling, then Commissioner Bienvenido Tan likewise declared, in connection with an apparent claim for
refund by the Philippine Airlines, that "PAL's tax exemption is limited to taxes for which PAL is directly liable, and
that the payment of specific and ad valorem taxes on petroleum products is a direct liability of the manufacturer or
producer thereof . . ."10

Again, under BIR Ruling No. 152-86, the Bureau of Internal Revenue reiterated, as to the National Power
Corporation's claim for a refund I quote:

. . . this Office has maintained the stand that your tax exemption privileges covers only taxes for which you
are directly liable.11

Per BIR Ruling No. 70-043, dated August 27, 1970, the Bureau likewise held that the term "all forms of taxes"
covers only direct taxes,12

In his letter addressed to former BIR Commissioner Tan, Atty. Reynoso Floreza, BIR Assistant Commissioner for
Legal, opposed Caltex Philippines' claim for a P58-million refund, and although the Commissioner at that time
hedged he was later persuaded by Special Assistant Abraham De la Via and in fact, instructed Atty. De la Via to
"prepare [the] corresponding notice to NPC and Caltex"13 to inform them that their claim has been denied. (Although
strangely, he changed his mind later.)

Hence, I do not think that we can judiciously rely on executive construction because executive construction has
been at best, erratic, and at worst, conflicting.

I do not find that majority's historical construction a reliable yardstick in this case, for if the historical development of
the law were any indication, the legislative intent is, on the contrary, to exclude indirect taxes from the coverage of
the National Power Corporation's tax exemption. Thus, under Commonwealth Act No. 120, the Corporation was
made exempt from the payment of all taxes in connection with the issuance of bonds. Under Republic Act No. 358, it
was made exempt from the payment of all taxes, duties, fees, imposts, and charges of the national and local
governments.

Under Republic Act No. 6395, the National Power Corporation was further declared exempt:

(e) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines,
its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation . . .

By virtue of Presidential Decree No. 380, it was made exempt:

(d) from all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum products used by the corporation in the generation, transmission, utilization and sale of
electric power.

By virtue however of Presidential Decree No. 938, reference to "indirect taxes" was omitted thus:

. . .To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section One of this Act, the Corporation, including its
subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well
as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings.

The deletion of "indirect taxes" in the Decree is, so I hold, significant, because if the intent of the law were truly to
exempt the National Power Corporation from so-called indirect taxes as well, the law would have said so
specifically, as it said so specifically in Presidential Decree No. 380.
I likewise do not think that the reference to the whereas clauses of Presidential Decree No. 938 is warranted, in
particular, the following whereas clause:

WHEREAS, in the application of the tax exemption provisions of the Revised Charter, the non-profit
character of NPC has not been fully utilized because of the restrictive interpretations of the taxing agencies
of the government on said provisions;

I am not certain whether it can be basis for a "liberal" construction. I am more inclined to believe that the term
"restrictive interpretations" refers to BIR rulings confining the exemption to the Corporation alone (but not its
subsidiaries), and not, rather, to the scope of its exemption. Indeed, as Presidential Decree No. 938 specifically
declares, "the Corporation, including its subsidiaries, is hereby declared exempt . . . "14

The majority expresses the apprehension that if the National Power Corporation were to be made to assume
"indirect taxes," the latter will be forced to pass them on to the consuming public.

First, and as Acetylene held, we do not even know if the payor will in fact "pass them on." "A decision to absorb the
burden of the tax is largely a matter of economics."15 Furthermore:

In the long run a sales tax is probably shifted to the consumer, but during the period when supply is being
adjusted to changes in demand it must be in part absorbed. In practice the businessman will treat the levy
as an added cost of operation and distribute it over his sales as he would any other cost, increasing by more
than the amount of the tax prices of goods demand for which will be least affected and leaving other prices
unchanged. 47 Harv. Ld. Rev. 860, 869 (1934).16

It therefore appears to me that any talk of the public ultimately absorbing the tax is pure speculation.

Second, it has typically been the bogeyman that business, with due respect, has invoked to avoid the payment of
tax. And to be sure, the populist allure of that argument has appealed to many, yet it has probably also obscured
what is as fundamental as protecting consumerspreserving public revenue, the very lifeblood of the nation. I am
afraid that this is not healthy policy, and what occurs to meand what indeed leaves me very uncomfortableis
that by the stroke of the pen, we should have in fact given away P13,750,214,639.00 (so it is said) of legitimate
government money.

According moreover to Committee Report No. 474 of the Senate, "NPC itself says that it does not use taxes to
increase prices of electricity to consumers because the cost of electric generation and sale already takes into
account the tax component. "17

I can not accept finally, what to me is an unabashed effort by the oil firms to evade taxes, the arrangement (as I
gather from the Decision) between the National Power Corporation and the oil companies in which the former
assigns its tax credit to the latter. I also presume that this is the natural consequence of the "understanding," as I
discussed above, to purchase oil "net of tax" between NAPOCOR and the oil firms, because logically, the latter will
look for other sources from which to recoup the taxes they had failed to shift and recover their losses as a result.
According to the Decision, no tax is left unpaid because they have been pre-paid before the oil is delivered to the
National Power Corporation. But whatever taxes are paid are in fact wiped out because the subsequent credit
transfer will enable the oil companies to recover the taxes pre- paid.

According to the majority, "[t]his is not a case of tax evasion of the oil companies but a tax relief for the NPC."18 The
problem, precisely, is that while it is NPC which is entitled to "tax relief," the arrangement between NPC and the oil
companies has enabled instead the latter to enjoy relief when relief is due to NPC alone. The point still remains
that no tax money actually reaches our coffers because as I said, that arrangement enables them to wipe it out. If
the NPC were the direct importer, I would then have no reason to object, after all, the NPC is exempt from direct
taxation and secondly, the money it is paying to finance its importations belongs to the government. The law,
however, gave the exemption to NPC, not the oil companies.

According to the Decision: "The amount of revenue received or expected to be received by this tax exemption is,
however, not going to any of the oil companies. . . "19 and that "[t]here would be no loss to the government."20

With due respect to the majority, it is erroneous, if not misleading, to say that no money is going to the oil companies
and that the government is not losing anything. Definitely, the tax credit assignment arrangement between the NPC
and the oil firms enables the latter to recover revenue they have paid. And definitely, that means loss for the
government.

The majority is concerned with the high cost of electricity. The increasing cost of electricity is however due to myriad
factors, foremost of which, is the devaluation of the peso21 and as recent events have suggested, "miscalculations"
at the top levels of NPC. I can not however attribute it, as the majority in all earnest attributes it, to the fact, far-
fetched as it is, that the NPC has not been allowed to enjoy exemption from indirect taxes.

Tax exemptions furthermore are a matter of personal privilege of the grantee. It has been held that as such, they
can not be assigned, unless the statute granting them permits an assignment.22
While "shifting the burden of tax" is a permissible method of avoiding a tax, evading it is a totally different matter.
And while I agree with the National Power Corporation should be given the widest financial assistance possible,
assistance should not be an excuse for plain tax evasion, if not tax fraud, by Big Business, in particular, Big Oil.

(3) Postscripts

With all due respect, I do not think that the majority has appreciated enough the serious implications of its
decisionto the contrary, in particular, its shrinking coffers. I do not think that we are, after all, talking here of
"simple" billions, but in fact, billions upon billions in lost revenue looming large.

I am also afraid that the majority is not quite aware that it is setting a precedent not only for the oil companies but in
fact, for the National Power Corporation's suppliers, importers, and contractors. Although I am not, as of this writing,
aware of their exact number or the precise amount the National Power Corporation has spent in payment of supplies
and equipment, I can imagine that the Corporation's assets consisting of those supplies and equipment, machines
and machinery, are worth no fewer than billions.

With this precedent, there is no stopping indeed the NAPOCOR's suppliers, from makers of storage tanks, steel
towers, cables and cable poles, to builders of dikes, to layers of pipelines, and pipes, from claiming the same
privilege.

There is no stopping the NPC's contractors, from suppliers of cement for plant fixtures and lumber for edifices, to the
very engineers and technicians who designed them, from demanding equal rights.

There will be no stopping the Corporation's transporters, from container van and rig owners to suppliers of service
vehicles of NPC executives, from demanding the privilege.

What is to stop, indeed, caterers of food served in board meetings or in NAPOCOR cafeterias from asking for
exemption, since food billed includes sales taxes shifted to a tax-exempt entity and, following the theory of the
majority, taxes that may be refunded?

What is, indeed, to stop all imagined claimants from demanding all imagined claims, since as we are aware, the rule
of taxationand consequently, tax exemptionis uniform and equitable?23

Of course, we have discussed NAPOCOR alone; we have not touched other tax-exempt entities, say, the
Marinduque Mining Corporation and Nonoc Mining Corporation. Per existing records and per reliable information,
Caltex Philippines, between 1979 and 1986, successfully recovered the total sum of P49,835,791.00. In 1985,
Caltex was said to have been refunded the amount of P4,217,423.00 arising from the same tax arrangement with
the Nonoc Mining Corporation.

Again, what is stoppingby virtue of this decision notonly the oil firms but also Marinduque's and Nonoc's
suppliers, importers, and ridiculously, caterers, from claiming a future refund?

The Decision, to be sure, attempts to allay these apprehensions and "dispel[s] [them] by the fact that . . . the
decision particularly treats of only the exemption of the NPC from all taxes, duties, fees, imposts and all other
charges imposed by the government on the petroleum products it need or uses for its operation . . . "24 Firstly, under
Presidential Decree No. 938, the supposed tax exemption of the National Power Corporation covers "all forms of
taxes.25 If therefore "all forms of taxes covers as well indirect taxes because Presidential Decree No. 380 supposedly
extended the Corporation's exemption to indirect taxes (and the majority "deems Presidential Decree No. 380 to
have been carried over to Presidential Decree No. 938"), then the conclusion seems in escapablefollowing the
logic of the majoritythat the Corporation is exempt from all indirect taxes, on petroleum and any and all other
products and services.

The fact of the matter, second of all, is that the Decision is premised on the alleged exemption of the National Power
Corporation from all forms of taxes, meaning, direct and indirect taxes. It is a premise that is allegedly supported by
statutory history, and the legislature's alleged intent to grant the Corporation awesome exemptions. If that were the
case, the Corporation must logically be exempt from all kinds of taxes payable. Logically, the majority can not limit
the sweep of its pronouncement by exempting the National Power Corporation from "indirect taxes on petroleum"
alone. What is sauce for the goose (taxes on petroleum) is also sauce for the gander (all other taxes).

I still would have reason for my fears.

I can not, in all candor, accept the majority's efforts, and going back to the Corporation's charters, to "carry over," in
particular, Section 13(d) of Presidential Decree No. 380, to Presidential Decree No. 938. First of all, if Presidential
Decree No. 938 meant to absorb Presidential Decree No. 380 it would have said so specifically, or at the very least,
left it alone. Obviously, Presidential Decree No. 938 meant otherwise, to begin with, because it is precisely an
amendatory statute. Secondly, a "carry-over" would have allowed this Court to make law, so only it can fit in its
theories.
The country has gone to lengths fashioning an elaborate tax system and an efficient tax collection machinery.
Planners' efforts have seen various shifts in the taxing system, from specific, to ad valorem, to value-added taxation,
purportedly to minimize collection. For this year, the Bureau of Internal Revenue has a collection target of P130
billion, and significantly, it has been unrelenting in its tax and tax-consciousness drive. I am not prepared to cite
numbers but I figure that the money it will lose by virtue of this Decision is a meaningful chunk off its target, and a
significant setback to the government's programs.

I am afraid that by this Decision, the majority has ignored the forest (the welfare of the entire nation) in favor of a
tree (the welfare of a government corporation). The issue, in my opinion, is not the viability of the National Power
Corporationas if the fate of the nation depended alone on itbut the very survival of the Republic. I am not of
course to be mistaken as being less concerned with NAPOCOR's fiscal chart. The picture, as I see it however, is
that we are in fact assisting the oil companies, out of that alleged concern, in evading taxes at the expense,
needless to state, of our coffers. I do not think that that is a question of legal hermeneutics, but rather, of plain love
of country.

FRANCISCO I. CHAVEZ, G.R. No. 164527

Petitioner,
Present:

PUNO, CJ,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
GARCIA,
NATIONAL HOUSING VELASCO,
AUTHORITY, R-II BUILDERS, NACHURA, and
INC., R-II HOLDINGS, INC., REYES, JJ.
HARBOUR CENTRE PORT
TERMINAL, INC., and Promulgated:
MR. REGHIS ROMERO II,
Respondents. August 15, 2007
x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:

In this Petition for Prohibition and Mandamus with Prayer for Temporary Restraining Order and/or Writ of
Preliminary Injunction under Rule 65, petitioner, in his capacity as taxpayer, seeks:

to declare NULL AND VOID the Joint Venture Agreement (JVA) dated March 9, 1993 between the National
Housing Authority and R-II Builders, Inc. and the Smokey Mountain Development and Reclamation Project
embodied therein; the subsequent amendments to the said JVA; and all other agreements signed and
executed in relation thereto including, but not limited to the Smokey Mountain Asset Pool Agreement dated 26
September 1994 and the separate agreements for Phase I and Phase II of the Projectas well as all other
transactions which emanated therefrom, for being UNCONSTITUTIONAL and INVALID;

to enjoin respondentsparticularly respondent NHAfrom further implementing and/or enforcing the said project
and other agreements related thereto, and from further deriving and/or enjoying any rights, privileges and
interest therefrom x x x; and

to compel respondents to disclose all documents and information relating to the projectincluding, but not limited
to, any subsequent agreements with respect to the different phases of the project, the revisions over the
original plan, the additional works incurred thereon, the current financial condition of respondent R-II Builders,
Inc., and the transactions made respecting the project.[1]

The Facts
On March 1, 1988, then President Corazon C. Aquino issued Memorandum Order No. (MO) 161[2] approving
and directing the implementation of the Comprehensive and Integrated Metropolitan Manila Waste
Management Plan (the Plan). The Metro Manila Commission, in coordination with various government
agencies, was tasked as the lead agency to implement the Plan as formulated by the Presidential Task Force
on Waste Management created by Memorandum Circular No. 39. A day after, on March 2, 1988, MO 161-
A[3] was issued, containing the guidelines which prescribed the functions and responsibilities of fifteen (15)
various government departments and offices tasked to implement the Plan, namely: Department of Public
Works and Highway (DPWH), Department of Health (DOH), Department of Environment and Natural
Resources (DENR), Department of Transportation and Communication, Department of Budget and
Management, National Economic and Development Authority (NEDA), Philippine Constabulary Integrated
National Police, Philippine Information Agency and the Local Government Unit (referring to the City of Manila),
Department of Social Welfare and Development, Presidential Commission for Urban Poor, National Housing
Authority (NHA), Department of Labor and Employment, Department of Education, Culture and Sports (now
Department of Education), and Presidential Management Staff.

Specifically, respondent NHA was ordered to conduct feasibility studies and develop low-cost housing projects
at the dumpsite and absorb scavengers in NHA resettlement/low-cost housing projects.[4] On the other hand,
the DENR was tasked to review and evaluate proposed projects under the Plan with regard to their
environmental impact, conduct regular monitoring of activities of the Plan to ensure compliance with
environmental standards and assist DOH in the conduct of the study on hospital waste management.[5]

At the time MO 161-A was issued by President Aquino, Smokey Mountain was a wasteland in Balut,
Tondo, Manila, where numerous Filipinos resided in subhuman conditions, collecting items that may have
some monetary value from the garbage. The Smokey Mountain dumpsite is bounded on the north by the
Estero Marala, on the south by the property of the National Government, on the east by the property of B and I
Realty Co., and on the west by Radial Road 10 (R-10).

Pursuant to MO 161-A, NHA prepared the feasibility studies of the Smokey Mountain low-cost housing project
which resulted in the formulation of the Smokey Mountain Development Plan and Reclamation of the Area
Across R-10 or the Smokey Mountain Development and Reclamation Project (SMDRP; the Project). The
Project aimed to convert the Smokey Mountain dumpsite into a habitable housing project, inclusive of the
reclamation of the area across R-10, adjacent to the Smokey Mountain as the enabling component of the
project.[6] Once finalized, the Plan was submitted to President Aquino for her approval.

On July 9, 1990, the Build-Operate-and-Transfer (BOT) Law (Republic Act No. [RA] 6957) was enacted.[7] Its
declared policy under Section 1 is [t]o recognize the indispensable role of the private sector as the main engine
for national growth and development and provide the most appropriate favorable incentives to mobilize private
resources for the purpose. Sec. 3 authorized and empowered [a]ll government infrastructure agencies,
including government-owned and controlled corporations and local government units x x x to enter into contract
with any duly pre-qualified private contractor for the financing, construction, operation and maintenance of any
financially viable infrastructure facilities through the build-operate-transfer or build and transfer scheme.

RA 6957 defined build-and-transfer scheme as [a] contractual arrangement whereby the contractor undertakes
the construction, including financing, of a given infrastructure facility, and its turnover after the completion to
the government agency or local government unit concerned which shall pay the contractor its total investment
expended on the project, plus reasonable rate of return thereon. The last paragraph of Sec. 6 of the BOT Law
provides that the repayment scheme in the case of land reclamation or the building of industrial estates may
consist of [t]he grant of a portion or percentage of the reclaimed land or industrial estate built, subject to the
constitutional requirements with respect to the ownership of lands.

On February 10, 1992, Joint Resolution No. 03[8] was passed by both houses of Congress. Sec. 1 of this
resolution provided, among other things, that:

Section 1. There is hereby approved the following national infrastructure projects for implementation under the
provisions of Republic Act No. 6957 and its implementing rules and regulations:

xxxx

(d) Port infrastructure like piers, wharves, quays, storage handling, ferry service and related facilities;

xxxx

(k) Land reclamation, dredging and other related development facilities;

(l) Industrial estates, regional industrial centers and export processing zones including steel mills, iron-making
and petrochemical complexes and related infrastructure and utilities;

xxxx
(p) Environmental and solid waste management-related facilities such as collection equipment, composting
plants, incinerators, landfill and tidal barriers, among others; and

(q) Development of new townsites and communities and related facilities.

This resolution complied with and conformed to Sec. 4 of the BOT Law requiring the approval of all national
infrastructure projects by the Congress.

On January 17, 1992, President Aquino proclaimed MO 415[9] approving and directing the implementation of
the SMDRP. Secs. 3 and 4 of the Memorandum Order stated:

Section 3. The National Housing Authority is hereby directed to implement the Smokey Mountain Development
Plan and Reclamation of the Area Across R-10 through a private sector joint venture scheme at the least
cost to the government.

Section 4. The land area covered by the Smokey Mountain dumpsite is hereby conveyed to the National
Housing Authority as well as the area to be reclaimed across R-10. (Emphasis supplied.)

In addition, the Public Estates Authority (PEA) was directed to assist in the evaluation of proposals regarding
the technical feasibility of reclamation, while the DENR was directed to (1) facilitate titling
of Smokey Mountain and of the area to be reclaimed and (2) assist in the technical evaluation of proposals
regarding environmental impact statements.[10]

In the same MO 415, President Aquino created an Executive Committee (EXECOM) to oversee the
implementation of the Plan, chaired by the National Capital Region-Cabinet Officer for Regional Development
(NCR-CORD) with the heads of the NHA, City of Manila, DPWH, PEA, Philippine Ports Authority (PPA),
DENR, and Development Bank of the Philippines (DBP) as members.[11] The NEDA subsequently became a
member of the EXECOM. Notably, in a September 2, 1994 Letter,[12] PEA General Manager Amado Lagdameo
approved the plans for the reclamation project prepared by the NHA.

In conformity with Sec. 5 of MO 415, an inter-agency technical committee (TECHCOM) was created composed
of the technical representatives of the EXECOM [t]o assist the NHA in the evaluation of the project proposals,
assist in the resolution of all issues and problems in the project to ensure that all aspects of the development
from squatter relocation, waste management, reclamation, environmental protection, land and house
construction meet governing regulation of the region and to facilitate the completion of the project. [13]

Subsequently, the TECHCOM put out the Public Notice and Notice to Pre-Qualify and Bid for the right to
become NHAs joint venture partner in the implementation of the SMDRP. The notices were published in
newspapers of general circulation on January 23 and 26 and February 1, 14, 16, and 23, 1992,
respectively. Out of the thirteen (13) contractors who responded, only five (5) contractors fully complied with
the required pre-qualification documents. Based on the evaluation of the pre-qualification documents, the
EXECOM declared the New San Jose Builders, Inc. and R-II Builders, Inc. (RBI) as the top two contractors.[14]

Thereafter, the TECHCOM evaluated the bids (which include the Pre-feasibility Study and Financing Plan) of
the top two (2) contractors in this manner:

(1) The DBP, as financial advisor to the Project, evaluated their Financial Proposals;

(2) The DPWH, PPA, PEA and NHA evaluated the Technical Proposals for the Housing Construction and
Reclamation;

(3) The DENR evaluated Technical Proposals on Waste Management and Disposal by conducting the
Environmental Impact Analysis; and

(4) The NHA and the City of Manila evaluated the socio-economic benefits presented by the proposals.

On June 30, 1992, Fidel V. Ramos assumed the Office of the President (OP) of the Philippines.

On August 31, 1992, the TECHCOM submitted its recommendation to the EXECOM to approve the R-II
Builders, Inc. (RBI) proposal which garnered the highest score of 88.475%.

Subsequently, the EXECOM made a Project briefing to President Ramos. As a result, President Ramos issued
Proclamation No. 39[15] on September 9, 1992, which reads:
WHEREAS, the National Housing Authority has presented a viable conceptual plan to convert the Smokey
Mountain dumpsite into a habitable housing project, inclusive of the reclamation of the area across Road
Radial 10 (R-10) adjacent to the Smokey Mountain as the enabling component of the project;

xxxx
These parcels of land of public domain are hereby placed under the administration and disposition of
the National Housing Authority to develop, subdivide and dispose to qualified beneficiaries, as well as
its development for mix land use (commercial/industrial) to provide employment opportunities to on-
site families and additional areas for port-related activities.

In order to facilitate the early development of the area for disposition, the Department of Environment and
Natural Resources, through the Lands and Management Bureau, is hereby directed to approve the boundary
and subdivision survey and to issue a special patent and title in the name of the National Housing Authority,
subject to final survey and private rights, if any there be.(Emphasis supplied.)

On October 7, 1992, President Ramos authorized NHA to enter into a Joint Venture Agreement with RBI
[s]ubject to final review and approval of the Joint Venture Agreement by the Office of the President.[16]

On March 19, 1993, the NHA and RBI entered into a Joint Venture Agreement[17] (JVA) for the development of
the Smokey Mountain dumpsite and the reclamation of the area across R-10 based on Presidential Decree No.
(PD) 757[18] which mandated NHA [t]o undertake the physical and socio-economic upgrading and development
of lands of the public domain identified for housing, MO 161-A which required NHA to conduct the feasibility
studies and develop a low-cost housing project at the Smokey Mountain, and MO 415 as amended by MO
415-A which approved the Conceptual Plan for Smokey Mountain and creation of the EXECOM and
TECHCOM. Under the JVA, the Project involves the clearing of Smokey Mountain for eventual development
into a low cost medium rise housing complex and industrial/commercial site with the reclamation of the area
directly across [R-10] to act as the enabling component of the Project.[19] The JVA covered a lot in
Tondo, Manila with an area of two hundred twelve thousand two hundred thirty-four (212,234) square meters
and another lot to be reclaimed also in Tondo with an area of four hundred thousand (400,000) square meters.

The Scope of Work of RBI under Article II of the JVA is as follows:

a) To fully finance all aspects of development of Smokey Mountain and reclamation of no more than 40
hectares of Manila Bay area across Radial Road 10.

b) To immediately commence on the preparation of feasibility report and detailed engineering with emphasis to
the expedient acquisition of the Environmental Clearance Certificate (ECC) from the DENR.

c) The construction activities will only commence after the acquisition of the ECC, and

d) Final details of the contract, including construction, duration and delivery timetables, shall be based on the
approved feasibility report and detailed engineering.

Other obligations of RBI are as follows:

2.02 The [RBI] shall develop the PROJECT based on the Final Report and Detailed Engineering as approved
by the Office of the President. All costs and expenses for hiring technical personnel, date gathering, permits,
licenses, appraisals, clearances, testing and similar undertaking shall be for the account of the [RBI].

2.03 The [RBI] shall undertake the construction of 3,500 temporary housing units complete with basic
amenities such as plumbing, electrical and sewerage facilities within the temporary housing project as staging
area to temporarily house the squatter families from the Smokey Mountain while development is being
undertaken. These temporary housing units shall be turned over to the [NHA] for disposition.

2.04 The [RBI] shall construct 3,500 medium rise low cost permanent housing units on the
leveled Smokey Mountain complete with basic utilities and amenities, in accordance with the plans and
specifications set forth in the Final Report approved by the [NHA]. Completed units ready for mortgage take out
shall be turned over by the [RBI] to NHA on agreed schedule.

2.05 The [RBI] shall reclaim forty (40) hectares of Manila Bay area directly across [R-10] as contained in
Proclamation No. 39 as the enabling component of the project and payment to the [RBI] as its asset share.

2.06 The [RBI] shall likewise furnish all labor materials and equipment necessary to complete all herein
development works to be undertaken on a phase to phase basis in accordance with the work program
stipulated therein.
The profit sharing shall be based on the approved pre-feasibility report submitted to the EXECOM, viz:

For the developer (RBI):

1. To own the forty (40) hectares of reclaimed land.

2. To own the commercial area at the Smokey Mountain area composed of 1.3 hectares, and

3. To own all the constructed units of medium rise low cost permanent housing units beyond the 3,500 units
share of the [NHA].

For the NHA:

1. To own the temporary housing consisting of 3,500 units.

2. To own the cleared and fenced incinerator site consisting of 5 hectares situated at
the Smokey Mountain area.

3. To own the 3,500 units of permanent housing to be constructed by [RBI] at the Smokey Mountain area to be
awarded to qualified on site residents.

4. To own the Industrial Area site consisting of 3.2 hectares, and

5. To own the open spaces, roads and facilities within the Smokey Mountain area.

In the event of extraordinary increase in labor, materials, fuel and non-recoverability of total project
expenses,[20] the OP, upon recommendation of the NHA, may approve a corresponding adjustment in the
enabling component.

The functions and responsibilities of RBI and NHA are as follows:

For RBI:

4.01 Immediately commence on the preparation of the FINAL REPORT with emphasis to the expedient
acquisition, with the assistance of the [NHA] of Environmental Compliance Certificate (ECC) from the
Environmental Management Bureau (EMB) of the [DENR]. Construction shall only commence after the
acquisition of the ECC. The Environment Compliance Certificate (ECC) shall form part of the FINAL REPORT.

The FINAL REPORT shall provide the necessary subdivision and housing plans, detailed engineering and
architectural drawings, technical specifications and other related and required documents relative to
the Smokey Mountain area.

With respect to the 40-hectare reclamation area, the [RBI] shall have the discretion to develop the same in a
manner that it deems necessary to recover the [RBIs] investment, subject to environmental and zoning rules.

4.02 Finance the total project cost for land development, housing construction and reclamation of the
PROJECT.

4.03 Warrant that all developments shall be in compliance with the requirements of the FINAL REPORT.

4.04 Provide all administrative resources for the submission of project accomplishment reports to the [NHA] for
proper evaluation and supervision on the actual implementation.

4.05 Negotiate and secure, with the assistance of the [NHA] the grant of rights of way to the PROJECT, from
the owners of the adjacent lots for access road, water, electrical power connections and drainage facilities.

4.06 Provide temporary field office and transportation vehicles (2 units), one (1) complete set of computer and
one (1) unit electric typewriter for the [NHAs] field personnel to be charged to the PROJECT.

For the NHA:

4.07 The [NHA] shall be responsible for the removal and relocation of all squatters within Smokey Mountain to
the Temporary Housing Complex or to other areas prepared as relocation areas with the assistance of the
[RBI]. The [RBI] shall be responsible in releasing the funds allocated and committed for relocation as detailed
in the FINAL REPORT.
4.08 Assist the [RBI] and shall endorse granting of exemption fees in the acquisition of all necessary permits,
licenses, appraisals, clearances and accreditations for the PROJECT subject to existing laws, rules and
regulations.

4.09 The [NHA] shall inspect, evaluate and monitor all works at the Smokey Mountain and Reclamation Area
while the land development and construction of housing units are in progress to determine whether the
development and construction works are undertaken in accordance with the FINAL REPORT. If in its
judgment, the PROJECT is not pursued in accordance with the FINAL REPORT, the [NHA] shall require the
[RBI] to undertake necessary remedial works. All expenses, charges and penalties incurred for such remedial,
if any, shall be for the account of the [RBI].

4.10 The [NHA] shall assist the [RBI] in the complete electrification of the PROJECT. x x x

4.11 Handle the processing and documentation of all sales transactions related to its assets shares from the
venture such as the 3,500 units of permanent housing and the allotted industrial area of 3.2 hectares.

4.12 All advances outside of project costs made by the [RBI] to the [NHA] shall be deducted from the proceeds
due to the [NHA].

4.13 The [NHA] shall be responsible for the acquisition of the Mother Title for the Smokey Mountain and
Reclamation Area within 90 days upon submission of Survey returns to the Land Management Sector. The
land titles to the 40-hectare reclaimed land, the 1.3 hectare commercial area at the Smokey Mountain area and
the constructed units of medium-rise permanent housing units beyond the 3,500 units share of the [NHA] shall
be issued in the name of the [RBI] upon completion of the project. However, the [RBI] shall have the authority
to pre-sell its share as indicated in this agreement.

The final details of the JVA, which will include the construction duration, costs, extent of reclamation, and
delivery timetables, shall be based on the FINAL REPORT which will be contained in a Supplemental
Agreement to be executed later by the parties.

The JVA may be modified or revised by written agreement between the NHA and RBI specifying the clauses to
be revised or modified and the corresponding amendments.

If the Project is revoked or terminated by the Government through no fault of RBI or by mutual agreement, the
Government shall compensate RBI for its actual expenses incurred in the Project plus a reasonable rate of
return not exceeding that stated in the feasibility study and in the contract as of the date of such revocation,
cancellation, or termination on a schedule to be agreed upon by both parties.

As a preliminary step in the project implementation, consultations and dialogues were conducted with the
settlers of the Smokey Mountain Dumpsite Area. At the same time, DENR started processing the application
for the Environmental Clearance Certificate (ECC) of the SMDRP. As a result however of the consultative
dialogues, public hearings, the report on the on-site field conditions, the Environmental Impact Statement (EIS)
published on April 29 and May 12, 1993 as required by the Environmental Management Bureau of DENR, the
evaluation of the DENR, and the recommendations from other government agencies, it was discovered that
design changes and additional work have to be undertaken to successfully implement the Project. [21]

Thus, on February 21, 1994, the parties entered into another agreement denominated as the Amended and
Restated Joint Venture Agreement[22] (ARJVA) which delineated the different phases of the Project. Phase I of
the Project involves the construction of temporary housing units for the current residents of
the Smokey Mountain dumpsite, the clearing and leveling-off of the dumpsite, and the construction of medium-
rise low-cost housing units at the cleared and leveled dumpsite.[23] Phase II of the Project involves the
construction of an incineration area for the on-site disposal of the garbage at the dumpsite.[24] The enabling
component or consideration for Phase I of the Project was increased from 40 hectares of reclaimed lands
across R-10 to 79 hectares.[25] The revision also provided for the enabling component for Phase II of 119
hectares of reclaimed lands contiguous to the 79 hectares of reclaimed lands for Phase I.[26] Furthermore, the
amended contract delineated the scope of works and the terms and conditions of Phases I and II, thus:

The PROJECT shall consist of Phase I and Phase II.

Phase I shall involve the following:

a. the construction of 2,992 units of temporary housing for the affected residents while clearing and
development of Smokey Mountain [are] being undertaken
b. the clearing of Smokey Mountain and the subsequent construction of 3,520 units of medium rise
housing and the development of the industrial/commercial site within the SmokeyMountain area

c. the reclamation and development of a 79 hectare area directly across Radial Road 10 to serve as
the enabling component of Phase I

Phase II shall involve the following:

a. the construction and operation of an incinerator plant that will conform to the emission standards
of the DENR

b. the reclamation and development of 119-hectare area contiguous to that to be reclaimed under Phase I to
serve as the enabling component of Phase II.

Under the ARJVA, RBI shall construct 2,992 temporary housing units, a reduction from 3,500 units under the
JVA.[27] However, it was required to construct 3,520 medium-rise low-cost permanent housing units instead of
3,500 units under the JVA. There was a substantial change in the design of the permanent housing units such
that a loft shall be incorporated in each unit so as to increase the living space from 20 to 32 square meters.
The additions and changes in the Original Project Component are as follows:

ORIGINAL CHANGES/REVISIONS

1. TEMPORARY HOUSING

Wood/Plywood, ga. 31 G.I. Concrete/Steel Frame Structure Sheet usable life of 3 years, gauge 26 G.I. roofing
sheets future 12 SM floor area. use as permanent structures for factory and warehouses mixed 17 sm & 12 sm
floor area.

2. MEDIUM RISE MASS

HOUSING

Box type precast Shelter Conventional and precast component 20 square meter concrete structures, 32 square
floor area with 2.4 meter meter floor area with loft floor height; bare type, 160 units/ (sleeping quarter) 3.6 m.
floor building. height, painted and improved
architectural faade, 80 units/
building.
3. MITIGATING MEASURES

3.1 For reclamation work Use of clean dredgefill material below the MLLW and SM material mixed with
dredgefill above MLLW.

a. 100% use of Smokey

Mountain material as
dredgefill Use of Steel Sheet Piles needed
for longer depth of embedment.
b. Concrete Sheet Piles
short depth of
embedment

c. Silt removal approximately Need to remove more than 3.0

1.0 meter only meters of silt after sub-soil investigation.[28]
These material and substantial modifications served as justifications for the increase in the share of RBI from
40 hectares to 79 hectares of reclaimed land.

Under the JVA, the specific costs of the Project were not stipulated but under the ARJVA, the stipulated cost
for Phase I was pegged at six billion six hundred ninety-three million three hundred eighty-seven thousand
three hundred sixty-four pesos (PhP 6,693,387,364).

In his February 10, 1994 Memorandum, the Chairperson of the SMDRP EXECOM submitted the ARJVA for
approval by the OP. After review of said agreement, the OP directed that certain terms and conditions of the
ARJVA be further clarified or amended preparatory to its approval. Pursuant to the Presidents directive, the
parties reached an agreement on the clarifications and amendments required to be made on the ARJVA.

On August 11, 1994, the NHA and RBI executed an Amendment To the Amended and Restated Joint Venture
Agreement (AARJVA)[29] clarifying certain terms and condition of the ARJVA, which was submitted to President
Ramos for approval, to wit:
Phase II shall involve the following:

a. the construction and operation of an incinerator plant that will conform to the emission standards of the
DENR

b. the reclamation and development of 119-hectare area contiguous to that to be reclaimed under Phase I to
serve as the enabling component of Phase II, the exact size and configuration of which shall be
approved by the SMDRP Committee[30]

Other substantial amendments are the following:

4. Paragraph 2.05 of Article II of the ARJVA is hereby amended to read as follows:

2.05. The DEVELOPER shall reclaim seventy nine (79) hectares of the Manila Bay area directly across Radial
Road 10 (R-10) to serve as payment to the DEVELOPER as its asset share for Phase I and to develop such
land into commercial area with port facilities; provided, that the port plan shall be integrated with the Philippine
Port Authoritys North Harbor plan for the Manila Bay area and provided further, that the final reclamation and
port plan for said reclaimed area shall be submitted for approval by the Public Estates Authority and the
Philippine Ports Authority, respectively: provided finally, that subject to par. 2.02 above, actual reclamation
work may commence upon approval of the final reclamation plan by the Public Estates Authority.

xxxx

9. A new paragraph to be numbered 5.05 shall be added to Article V of the ARJVA, and shall read as follows:

5.05. In the event this Agreement is revoked, cancelled or terminated by the AUTHORITY through no fault of
the DEVELOPER, the AUTHORITY shall compensate the DEVELOPER for the value of the completed
portions of, and actual expenditures on the PROJECT plus a reasonable rate of return thereon, not exceeding
that stated in the Cost Estimates of Items of Work previously approved by the SMDRP Executive Committee
and the AUTHORITY and stated in this Agreement, as of the date of such revocation, cancellation, or
termination, on a schedule to be agreed upon by the parties, provided that said completed portions of Phase I
are in accordance with the approved FINAL REPORT.

Afterwards, President Ramos issued Proclamation No. 465 dated August 31, 1994[31] increasing the proposed
area for reclamation across R-10 from 40 hectares to 79 hectares,[32] to wit:

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines, by virtue of the powers
vested in me by the law, and as recommended by the SMDRP Executive Committee, do hereby authorize the
increase of the area of foreshore or submerged lands of Manila Bay to be reclaimed, as previously authorized
under Proclamation No. 39 (s. 1992) and Memorandum Order No. 415 (s. 1992), from Four Hundred Thousand
(400,000) square meters, more or less, to Seven Hundred Ninety Thousand (790,000) square meters, more or
less.

On September 1, 1994, pursuant to Proclamation No. 39, the DENR issued Special Patent No. 3591 conveying
in favor of NHA an area of 211,975 square meters covering the Smokey Mountain Dumpsite.

In its September 7, 1994 letter to the EXECOM, the OP through then Executive Secretary Teofisto T.
Guingona, Jr., approved the ARJVA as amended by the AARJVA.

On September 8, 1994, the DENR issued Special Patent 3592 pursuant to Proclamation No. 39, conveying in
favor of NHA a 401,485-square meter area.

On September 26, 1994, the NHA, RBI, Home Insurance and Guaranty Corporation (HIGC), now known as the
Home Guaranty Corporation, and the Philippine National Bank (PNB)[33] executed the Smokey Mountain Asset
Pool Formation Trust Agreement (Asset Pool Agreement).[34] Thereafter, a Guaranty Contract was entered into
by NHA, RBI, and HIGC.

On June 23, 1994, the Legislature passed the Clean Air Act.[35] The Act made the establishment of an
incinerator illegal and effectively barred the implementation of the planned incinerator project under Phase
II. Thus, the off-site disposal of the garbage at the Smokey Mountain became necessary.[36]

The land reclamation was completed in August 1996.[37]

Sometime later in 1996, pursuant likewise to Proclamation No. 39, the DENR issued Special Patent No. 3598
conveying in favor of NHA an additional 390,000 square meter area.
During the actual construction and implementation of Phase I of the SMDRP, the Inter-Agency Technical
Committee found and recommended to the EXECOM on December 17, 1997 that additional works were
necessary for the completion and viability of the Project. The EXECOM approved the recommendation and so,
NHA instructed RBI to implement the change orders or necessary works.[38]

Such necessary works comprised more than 25% of the original contract price and as a result, the Asset Pool
incurred direct and indirect costs. Based on C1 12 A of the Implementing Rules and Regulations of PD 1594, a
supplemental agreement is required for all change orders and extra work orders, the total aggregate cost of
which being more than twenty-five (25%) of the escalated original contract price.

The EXECOM requested an opinion from the Department of Justice (DOJ) to determine whether a bidding was
required for the change orders and/or necessary works. The DOJ, through DOJ Opinion Nos. 119 and 155
dated August 26, 1993 and November 12, 1993, opined that a rebidding, pursuant to the aforequoted
provisions of the implementing rules (referring to PD 1594) would not be necessary where the change orders
inseparable from the original scope of the project, in which case, a negotiation with the incumbent contractor
may be allowed.

Thus, on February 19, 1998, the EXECOM issued a resolution directing NHA to enter into a supplemental
agreement covering said necessary works.

On March 20, 1998, the NHA and RBI entered into a Supplemental Agreement covering the aforementioned
necessary works and submitted it to the President on March 24, 1998 for approval.

Outgoing President Ramos decided to endorse the consideration of the Supplemental Agreement to incoming
President Joseph E. Estrada. On June 30, 1998, Estrada became the 13th Philippine President.

However, the approval of the Supplemental Agreement was unacted upon for five months. As a result, the
utilities and the road networks were constructed to cover only the 79-hectare original enabling component
granted under the ARJVA. The 220-hectare extension of the 79-hectare area was no longer technically
feasible. Moreover, the financial crises and unreliable real estate situation made it difficult to sell the remaining
reclaimed lots. The devaluation of the peso and the increase in interest cost led to the substantial increase in
the cost of reclamation.

On August 1, 1998, the NHA granted RBIs request to suspend work on the SMDRP due to the delay in the
approval of the Supplemental Agreement, the consequent absence of an enabling component to cover the cost
of the necessary works for the project, and the resulting inability to replenish the Asset Pool funds partially
used for the completion of the necessary works.[39]

As of August 1, 1998 when the project was suspended, RBI had already accomplished a portion of the
necessary works and change orders which resulted in [RBI] and the Asset Pool incurring advances for direct
and indirect cost which amount can no longer be covered by the 79-hectare enabling component under the
ARJVA.[40]

Repeated demands were made by RBI in its own capacity and on behalf of the asset pool on NHA for payment
for the advances for direct and indirect costs subject to NHA validation.

In November 1998, President Estrada issued Memorandum Order No. 33 reconstituting the SMDRP EXECOM
and further directed it to review the Supplemental Agreement and submit its recommendation on the
completion of the SMDRP.

The reconstituted EXECOM conducted a review of the project and recommended the amendment of the March
20, 1998 Supplemental Agreement to make it more feasible and to identify and provide new sources of funds
for the project and provide for a new enabling component to cover the payment for the necessary works that
cannot be covered by the 79-hectare enabling component under the ARJVA.[41]

The EXECOM passed Resolution Nos. 99-16-01 and 99-16-02[42] which approved the modification of the
Supplemental Agreement, to wit:

a) Approval of 150 hectares additional reclamation in order to make the reclamation feasible as part of the
enabling component.

b) The conveyance of the 15-hectare NHA Vitas property (actually 17 hectares based on surveys) to the
SMDRP Asset Pool.

c) The inclusion in the total development cost of other additional, necessary and indispensable infrastructure
works and the revision of the original cost stated in the Supplemental Agreement dated March 20, 1998 from
PhP 2,953,984,941.40 to PhP 2,969,134,053.13.
d) Revision in the sharing agreement between the parties.

In the March 23, 2000 OP Memorandum, the EXECOM was authorized to proceed and complete the SMDRP
subject to certain guidelines and directives.

After the parties in the case at bar had complied with the March 23, 2000 Memorandum, the NHA November 9,
2000 Resolution No. 4323 approved the conveyance of the 17-hectare Vitas property in favor of the existing or
a newly created Asset Pool of the project to be developed into a mixed commercial-industrial area, subject to
certain conditions.

On January 20, 2001, then President Estrada was considered resigned. On the same day, President Gloria M.
Arroyo took her oath as the 14th President of the Philippines.

As of February 28, 2001, the estimated total project cost of the SMDRP has reached P8.65 billion comprising
of P4.78 billion in direct cost and P3.87 billion in indirect cost,[43] subject to validation by the NHA.

On August 28, 2001, NHA issued Resolution No. 4436 to pay for the various necessary works/change orders
to SMDRP, to effect the corresponding enabling component consisting of the conveyance of the NHAs Vitas
Property and an additional 150-hectare reclamation area and to authorize the release by NHA of PhP 480
million as advance to the project to make the Permanent Housing habitable, subject to reimbursement from the
proceeds of the expanded enabling component.[44]

On November 19, 2001, the Amended Supplemental Agreement (ASA) was signed by the parties, and
on February 28, 2002, the Housing and Urban Development Coordinating Council (HUDCC) submitted the
agreement to the OP for approval.
In the July 20, 2002 Cabinet Meeting, HUDCC was directed to submit the works covered by the PhP 480
million [advance to the Project] and the ASA to public bidding.[45] On August 28, 2002, the HUDCC informed
RBI of the decision of the Cabinet.

In its September 2, 2002 letter to the HUDCC Chairman, RBI lamented the decision of the government to bid
out the remaining works under the ASA thereby unilaterally terminating the Project with RBI and all the
agreements related thereto. RBI demanded the payment of just compensation for all accomplishments and
costs incurred in developing the SMDRP plus a reasonable rate of return thereon pursuant to Section 5.05 of
the ARJVA and Section 6.2 of the ASA.[46]

Consequently, the parties negotiated the terms of the termination of the JVA and other subsequent
agreements.

On August 27, 2003, the NHA and RBI executed a Memorandum of Agreement (MOA) whereby both parties
agreed to terminate the JVA and other subsequent agreements, thus:

1. TERMINATION

1.1 In compliance with the Cabinet directive dated 30 July 2002 to submit the works covered by the P480
Million and the ASA to public bidding, the following agreements executed by and between the NHA and the
DEVELOPER are hereby terminated, to wit:

a. Joint Venture Agreement (JVA) dated 19 March 1993

b. Amended and Restated Joint Venture Agreement (ARJVA) dated 21 February 1994
c. Amendment and Restated Joint Venture Agreement dated 11 August 1994
d. Supplemental Agreement dated 24 March 1998
e. Amended Supplemental Agreement (ASA) dated 19 November 2001.
xxxx

5. SETTLEMENT OF CLAIMS

5.1 Subject to the validation of the DEVELOPERs claims, the NHA hereby agrees to initially compensate the
Developer for the abovementioned costs as follows:

a. Direct payment to DEVELOPER of the amounts herein listed in the following manner:
a.1 P250 Million in cash from the escrow account in accordance with Section 2 herewith;

a.2 Conveyance of a 3 hectare portion of the Vitas Industrial area immediately after joint determination of the
appraised value of the said property in accordance with the procedure herein set forth in the last paragraph of
Section 5.3. For purposes of all payments to be made through conveyance of real properties, the parties shall
secure from the NHA Board of Directors all documents necessary and sufficient to effect the transfer of title
over the properties to be conveyed to RBI, which documents shall be issued within a reasonable period.

5.2 Any unpaid balance of the DEVELOPERS claims determined after the validation process referred to in
Section 4 hereof, may be paid in cash, bonds or through the conveyance of properties or any combination
thereof. The manner, terms and conditions of payment of the balance shall be specified and agreed upon later
within a period of three months from the time a substantial amount representing the unpaid balance has been
validated pursuant hereto including, but not limited to the programming of quarterly cash payments to be
sourced by the NHA from its budget for debt servicing, from its income or from any other sources.

5.3 In any case the unpaid balance is agreed to be paid, either partially or totally through conveyance of
properties, the parties shall agree on which properties shall be subject to conveyance. The NHA and
DEVELOPER hereby agree to determine the valuation of the properties to be conveyed by getting the average
of the appraisals to be made by two (2) mutually acceptable independent appraisers.

Meanwhile, respondent Harbour Centre Port Terminal, Inc. (HCPTI) entered into an agreement with the asset
pool for the development and operations of a port in the Smokey Mountain Area which is a major component of
SMDRP to provide a source of livelihood and employment for Smokey Mountain residents and spur economic
growth. A Subscription Agreement was executed between the Asset Pool and HCPTI whereby the asset pool
subscribed to 607 million common shares and 1,143 million preferred shares of HCPTI. The HCPTI preferred
shares had a premium and penalty interest of 7.5% per annum and a mandatory redemption feature. The asset
pool paid the subscription by conveying to HCPTI a 10-hectare land which it acquired from the NHA being a
portion of the reclaimed land of the SMDRP. Corresponding certificates of titles were issued to HCPTI, namely:
TCT Nos. 251355, 251356, 251357, and 251358.

Due to HCPTIs failure to obtain a license to handle foreign containerized cargo from PPA, it suffered a net
income loss of PhP 132,621,548 in 2002 and a net loss of PhP 15,540,063 in 2003. The Project Governing
Board of the Asset Pool later conveyed by way of dacion en pago a number of HCPTI shares to RBI in lieu of
cash payment for the latters work in SMDRP.

On August 5, 2004, former Solicitor General Francisco I. Chavez, filed the instant petition which impleaded as
respondents the NHA, RBI, R-II Holdings, Inc. (RHI), HCPTI, and Mr. Reghis Romero II, raising constitutional
issues.

The NHA reported that thirty-four (34) temporary housing structures and twenty-one (21) permanent housing
structures had been turned over by respondent RBI. It claimed that 2,510 beneficiary-families belonging to the
poorest of the poor had been transferred to their permanent homes and benefited from the Project.

The Issues

The grounds presented in the instant petition are:

I

NEITHER RESPONDENT NHA NOR RESPONDENT R-II BUILDERS MAY VALIDLY RECLAIM FORESHORE
AND SUBMERGED LAND BECAUSE:

1. RESPONDENT NHA AND R-II BUILDERS WERE NEVER GRANTED ANY POWER AND AUTHORITY TO
RECLAIM LANDS OF THE PUBLIC DOMAIN AS THIS POWER IS VESTED EXCLUSIVELY WITH THE PEA.

2. EVEN ASSUMING THAT RESPONDENTS NHA AND R-II BUILDERS WERE GIVEN THE POWER AND
AUTHORITY TO RECLAIM FORESHORE AND SUBMERGED LAND, THEY WERE NEVER GIVEN THE
AUTHORITY BY THE DENR TO DO SO.

II

RESPONDENT R-II BUILDERS CANNOT ACQUIRE THE RECLAIMED FORESHORE AND SUBMERGED
LAND AREAS BECAUSE:

1. THE RECLAIMED FORESHORE AND SUBMERGED PARCELS OF LAND ARE INALIENABLE PUBLIC
LANDS WHICH ARE BEYOND THE COMMERCE OF MAN.

2. ASSUMING ARGUENDO THAT THE SUBJECT RECLAIMED FORESHORE AND SUBMERGED

PARCELS OF LAND WERE ALREADY DECLARED ALIENABLE LANDS OF THE PUBLIC DOMAIN,
RESPONDENT R-II BUILDERS STILL COULD NOT ACQUIRE THE SAME BECAUSE THERE WAS NEVER
ANY DECLARATION THAT THE SAID LANDS WERE NO LONGER NEEDED FOR PUBLIC USE.
3. EVEN ASSUMING THAT THE SUBJECT RECLAIMED LANDS ARE ALIENABLE AND NO LONGER
NEEDED FOR PUBLIC USE, RESPONDENT R-II BUILDERS STILL CANNOT ACQUIRE THE SAME
BECAUSE THERE WAS NEVER ANY LAW AUTHORIZING THE SALE THEREOF.

4. THERE WAS NEVER ANY PUBLIC BIDDING AWARDING OWNERSHIP OF THE SUBJECT LAND TO
RESPONDENT R-II BUILDERS.

5. ASSUMING THAT ALL THE REQUIREMENTS FOR A VALID TRANSFER OF ALIENABLE PUBLIC HAD
BEEN PERFORMED, RESPONDENT R-II BUILDERS, BEING PRIVATE CORPORATION IS NONETHELESS
EXPRESSLYPROHIBITED BY THE PHILIPPINE CONSTITUTION TO ACQUIRE LANDS OF THE PUBLIC
DOMAIN.

III

RESPONDENT HARBOUR, BEING A PRIVATE CORPORATION WHOSE MAJORITY STOCKS ARE

OWNED AND CONTROLLED BY RESPONDENT ROMEROS CORPORATIONS R-II BUILDERS AND R-II
HOLDINGS IS DISQUALIFIED FROM BEING A TRANSFEREE OF PUBLIC LAND.

IV

RESPONDENTS MUST BE COMPELLED TO DISCLOSE ALL INFORMATION RELATED TO THE SMOKEY

MOUNTAIN DEVELOPMENT AND RECLAMATION PROJECT.

The Courts Ruling

Before we delve into the substantive issues raised in this petition, we will first deal with several procedural
matters raised by respondents.

Whether petitioner has the requisite locus standi to file this case

Respondents argue that petitioner Chavez has no legal standing to file the petition.

Only a person who stands to be benefited or injured by the judgment in the suit or entitled to the avails of the
suit can file a complaint or petition.[47] Respondents claim that petitioner is not a proper party-in-interest as he
was unable to show that he has sustained or is in immediate or imminent danger of sustaining some direct and
personal injury as a result of the execution and enforcement of the assailed contracts or
agreements.[48] Moreover, they assert that not all government contracts can justify a taxpayers suit especially
when no public funds were utilized in contravention of the Constitution or a law.
We explicated in Chavez v. PCGG[49] that in cases where issues of transcendental public importance are
presented, there is no necessity to show that petitioner has experienced or is in actual danger of suffering
direct and personal injury as the requisite injury is assumed. We find our ruling in Chavez v. PEA[50] as
conclusive authority on locus standi in the case at bar since the issues raised in this petition are averred to be
in breach of the fair diffusion of the countrys natural resources and the constitutional right of a citizen to
information which have been declared to be matters of transcendental public importance. Moreover, the
pleadings especially those of respondents readily reveal that public funds have been indirectly utilized in the
Project by means of Smokey Mountain Project Participation Certificates (SMPPCs) bought by some
government agencies.
Hence, petitioner, as a taxpayer, is a proper party to the instant petition before the court.

Whether petitioners direct recourse to this Court was proper

Respondents are one in asserting that petitioner circumvents the principle of hierarchy of courts in his
petition. Judicial hierarchy was made clear in the case of People v. Cuaresma, thus:

There is after all a hierarchy of courts. That hierarchy is determinative of the venue of appeals, and should also
serve as a general determinant of the appropriate forum for petitions for the extraordinary writs. A becoming
regard for that judicial hierarchy most certainly indicates that petitions for the issuance of extraordinary writs
against first level (inferior) courts should be filed with the Regional Trial Court, and those against the latter, with
the Court of Appeals. A direct invocation of the Supreme Courts original jurisdiction to issue these writs should
be allowed only when there are special and important reasons therefor, clearly and specifically set out in the
petition. This is established policy. It is a policy that is necessary to prevent inordinate demands upon the
Courts time and attention which are better devoted to those matters within its exclusive jurisdiction, and to
prevent further over-crowding of the Courts docket.[51] x x x

The OSG claims that the jurisdiction over petitions for prohibition and mandamus is concurrent with other lower
courts like the Regional Trial Courts and the Court of Appeals. Respondent NHA argues that the instant
petition is misfiled because it does not introduce special and important reasons or exceptional and compelling
circumstances to warrant direct recourse to this Court and that the lower courts are more equipped for factual
issues since this Court is not a trier of facts. Respondents RBI and RHI question the filing of the petition as this
Court should not be unduly burdened with repetitions, invocation of jurisdiction over constitutional questions it
had previously resolved and settled.

In the light of existing jurisprudence, we find paucity of merit in respondents postulation.

While direct recourse to this Court is generally frowned upon and discouraged, we have however ruled
in Santiago v. Vasquez that such resort to us may be allowed in certain situations, wherein this Court ruled that
petitions for certiorari, prohibition, or mandamus, though cognizable by other courts, may directly be filed with
us if the redress desired cannot be obtained in the appropriate courts or where exceptional compelling
circumstances justify availment of a remedy within and calling for the exercise of [this Courts] primary
jurisdiction.[52]

The instant petition challenges the constitutionality and legality of the SMDRP involving several hectares of
government land and hundreds of millions of funds of several government agencies. Moreover, serious
constitutional challenges are made on the different aspects of the Project which allegedly affect the right of
Filipinos to the distribution of natural resources in the country and the right to information of a citizenmatters
which have been considered to be of extraordinary significance and grave consequence to the public in
general. These concerns in the instant action compel us to turn a blind eye to the judicial structure meant to
provide an orderly dispensation of justice and consider the instant petition as a justified deviation from an
established precept.

Core factual matters undisputed

Respondents next challenge the projected review by this Court of the alleged factual issues intertwined in the
issues propounded by petitioner. They listed a copious number of questions seemingly factual in nature which
would make this Court a trier of facts.[53]

We find the position of respondents bereft of merit.

For one, we already gave due course to the instant petition in our January 18, 2005 Resolution.[54] In said
issuance, the parties were required to make clear and concise statements of established facts upon which our
decision will be based.

Secondly, we agree with petitioner that there is no necessity for us to make any factual findings since the facts
needed to decide the instant petition are well established from the admissions of the parties in their
pleadings[55] and those derived from the documents appended to said submissions. Indeed, the core facts
which are the subject matter of the numerous issues raised in this petition are undisputed.

Now we will tackle the issues that prop up the instant petition.

Since petitioner has cited our decision in PEA as basis for his postulations in a number of issues, we first
resolve the queryis PEA applicable to the case at bar?

A juxtaposition of the facts in the two cases constrains the Court to rule in the negative.

The Court finds that PEA is not a binding precedent to the instant petition because the facts in said case are
substantially different from the facts and circumstances in the case at bar, thus:

(1) The reclamation project in PEA was undertaken through a JVA entered into between PEA and AMARI. The
reclamation project in the instant NHA case was undertaken by the NHA, a national government agency in
consultation with PEA and with the approval of two Philippine Presidents;

(2) In PEA, AMARI and PEA executed a JVA to develop the Freedom Islands and reclaim submerged areas
without public bidding on April 25, 1995. In the instant NHA case, the NHA and RBI executed a JVA after RBI
was declared the winning bidder on August 31, 1992 as the JVA partner of the NHA in the SMDRP after
compliance with the requisite public bidding.

(3) In PEA, there was no law or presidential proclamation classifying the lands to be reclaimed as alienable
and disposal lands of public domain. In this RBI case, MO 415 of former President Aquino and Proclamation
No. 39 of then President Ramos, coupled with Special Patents Nos. 3591, 3592, and 3598, classified the
reclaimed lands as alienable and disposable;

(4) In PEA, the Chavez petition was filed before the amended JVA was executed by PEA and AMARI. In this
NHA case, the JVA and subsequent amendments were already substantially implemented. Subsequently, the
Project was terminated through a MOA signed on August 27, 2003. Almost one year later on August 5, 2004,
the Chavez petition was filed;
(5) In PEA, AMARI was considered to be in bad faith as it signed the amended JVA after the Chavez petition
was filed with the Court and after Senate Committee Report No. 560 was issued finding that the subject lands
are inalienable lands of public domain. In the instant petition, RBI and other respondents are considered to
have signed the agreements in good faith as the Project was terminated even before the Chavez petition was
filed;

(6) The PEA-AMARI JVA was executed as a result of direct negotiation between the parties and not in
accordance with the BOT Law. The NHA-RBI JVA and subsequent amendments constitute a BOT contract
governed by the BOT Law; and

(7) In PEA, the lands to be reclaimed or already reclaimed were transferred to PEA, a government entity
tasked to dispose of public lands under Executive Order No. (EO) 525.[56] In the NHA case, the reclaimed lands
were transferred to NHA, a government entity NOT tasked to dispose of public land and therefore said
alienable lands were converted to patrimonial lands upon their transfer to NHA.[57]
Thus the PEA Decision[58] cannot be considered an authority or precedent to the instant case. The principle
of stare decisis[59] has no application to the different factual setting of the instant case.

We will now dwell on the substantive issues raised by petitioner. After a perusal of the grounds raised in this
petition, we find that most of these issues are moored on our PEA Decision which, as earlier discussed, has no
application to the instant petition. For this reason alone, the petition can already be rejected. Nevertheless, on
the premise of the applicability of said decision to the case at bar, we will proceed to resolve said issues.

First Issue: Whether respondents NHA and RBI have been granted
the power and authority to reclaim lands of the public domain as
this power is vested exclusively in PEA as claimed by petitioner

Petitioner contends that neither respondent NHA nor respondent RBI may validly reclaim foreshore and
submerged land because they were not given any power and authority to reclaim lands of the public domain as
this power was delegated by law to PEA.

Asserting that existing laws did not empower the NHA and RBI to reclaim lands of public domain, the Public
Estates Authority (PEA), petitioner claims, is the primary authority for the reclamation of all foreshore and
submerged lands of public domain, and relies on PEA where this Court held:

Moreover, Section 1 of Executive Order No. 525 provides that PEA shall be primarily responsible for
integrating, directing, and coordinating all reclamation projects for and on behalf of the National
Government. The same section also states that [A]ll reclamation projects shall be approved by the President
upon recommendation of the PEA, and shall be undertaken by the PEA or through a proper contract executed
by it with any person or entity; x x x. Thus, under EO No. 525, in relation to PD No. 3-A and PD No. 1084, PEA
became the primary implementing agency of the National Government to reclaim foreshore and submerged
lands of the public domain. EO No. 525 recognized PEA as the government entity to undertake the reclamation
of lands and ensure their maximum utilization in promoting public welfare and interests. Since large portions of
these reclaimed lands would obviously be needed for public service, there must be a formal declaration
segregating reclaimed lands no longer needed for public service from those still needed for public service. [60]

In the Smokey Mountain Project, petitioner clarifies that the reclamation was not done by PEA or through a
contract executed by PEA with another person or entity but by the NHA through an agreement with respondent
RBI. Therefore, he concludes that the reclamation is null and void.

Petitioners contention has no merit.

EO 525 reads:

Section 1. The Public Estates Authority (PEA) shall be primarily responsible for integrating, directing, and
coordinating all reclamation projects for and on behalf of the National Government. All reclamation projects
shall be approved by the President upon recommendation of the PEA, and shall be undertaken by the PEA or
through a proper contract executed by it with any person or entity; Provided, that, reclamation projects of any
national government agency or entity authorized under its charter shall be undertaken in consultation
with the PEA upon approval of the President. (Emphasis supplied.)

The aforequoted provision points to three (3) requisites for a legal and valid reclamation project, viz:
(1) approval by the President;
(2) favorable recommendation of PEA; and
(3) undertaken by any of the following:

a. by PEA
b. by any person or entity pursuant to a contract it executed with PEA
c. by the National Government agency or entity authorized under its charter to reclaim lands subject to
consultation with PEA

Without doubt, PEA under EO 525 was designated as the agency primarily responsible for integrating,
directing, and coordinating all reclamation projects. Primarily means mainly, principally, mostly,
generally. Thus, not all reclamation projects fall under PEAs authority of supervision, integration, and
coordination. The very charter of PEA, PD 1084,[61] does not mention that PEA has the exclusive and sole
power and authority to reclaim lands of public domain. EO 525 even reveals the exceptionreclamation projects
by a national government agency or entity authorized by its charter to reclaim land. One example is EO 405
which authorized the Philippine Ports Authority (PPA) to reclaim and develop submerged areas for port related
purposes. Under its charter, PD 857, PPA has the power to reclaim, excavate, enclose or raise any of the
lands vested in it.

Thus, while PEA under PD 1084 has the power to reclaim land and under EO 525 is primarily responsible for
integrating, directing and coordinating reclamation projects, such authority is NOT exclusive and such power to
reclaim may be granted or delegated to another government agency or entity or may even be undertaken by
the National Government itself, PEA being only an agency and a part of the National Government.

Let us apply the legal parameters of Sec. 1, EO 525 to the reclamation phase of SMDRP. After a scrutiny of
the facts culled from the records, we find that the project met all the three (3) requirements, thus:

1. There was ample approval by the President of the Philippines; as a matter of fact, two Philippine Presidents
approved the same, namely: Presidents Aquino and Ramos.President Aquino sanctioned the reclamation of
both the SMDRP housing and commercial-industrial sites through MO 415 (s. 1992) which approved the
SMDRP under Sec. 1 and directed NHA x x x to implement the Smokey Mountain Development Plan
and Reclamation of the Area across R-10 through a private sector joint venture scheme at the least cost to
government under Section 3.

For his part, then President Ramos issued Proclamation No. 39 (s. 1992) which expressly reserved the
Smokey Mountain Area and the Reclamation Area for a housing project and related
commercial/industrial development.

Moreover, President Ramos issued Proclamation No. 465 (s. 1994) which authorized the increase of the
Reclamation Area from 40 hectares of foreshore and submerged land of the Manila Bay to 79 hectares.
It speaks of the reclamation of 400,000 square meters, more or less, of the foreshore and submerged lands
of Manila Bayadjoining R-10 as an enabling component of the SMDRP.

As a result of Proclamations Nos. 39 and 465, Special Patent No. 3591 covering 211,975 square meters
of Smokey Mountain, Special Patent No. 3592 covering 401,485 square meters of reclaimed land, and Special
Patent No. 3598 covering another 390,000 square meters of reclaimed land were issued by the DENR.

Thus, the first requirement of presidential imprimatur on the SMDRP has been satisfied.

2. The requisite favorable endorsement of the reclamation phase was impliedly granted by PEA. President
Aquino saw to it that there was coordination of the project with PEA by designating its general manager as
member of the EXECOM tasked to supervise the project implementation. The assignment was made in Sec. 2
of MO 415 which provides:

Section 2. An Executive Committee is hereby created to oversee the implementation of the Plan, chaired by
the NCR-CORD, with the heads of the following agencies as members: The National Housing Authority, the
City of Manila, the Department of Public Works and Highways, the Public Estates Authority, the Philippine
Ports Authority, the Department of Environment and Natural Resources and the Development Bank of the
Philippines. (Emphasis supplied.)

The favorable recommendation by PEA of the JVA and subsequent amendments were incorporated as part of
the recommendations of the EXECOM created under MO 415. While there was no specific recommendation on
the SMDRP emanating solely from PEA, we find that the approbation of the Project and the land reclamation
as an essential component by the EXECOM of which PEA is a member, and its submission of the SMDRP and
the agreements on the Project to the President for approval amply met the second requirement of EO 525.
3. The third element was also presentthe reclamation was undertaken either by PEA or any person or entity
under contract with PEA or by the National Government agency or entity authorized under its charter to reclaim
lands subject to consultation with PEA. It cannot be disputed that the reclamation phase was not done by PEA
or any person or entity under contract with PEA. However, the reclamation was implemented by the NHA, a
national government agency whose authority to reclaim lands under consultation with PEA is derived from its
charterPD 727 and other pertinent lawsRA 7279[62] and RA 6957 as amended by RA 7718.

While the authority of NHA to reclaim lands is challenged by petitioner, we find that the NHA had more than
enough authority to do so under existing laws. While PD 757, the charter of NHA, does not explicitly mention
reclamation in any of the listed powers of the agency, we rule that the NHA has an implied power to reclaim
land as this is vital or incidental to effectively, logically, and successfully implement an urban land reform and
housing program enunciated in Sec. 9 of Article XIII of the 1987 Constitution.

Basic in administrative law is the doctrine that a government agency or office has express and implied powers
based on its charter and other pertinent statutes. Express powers are those powers granted, allocated, and
delegated to a government agency or office by express provisions of law. On the other hand, implied powers
are those that can be inferred or are implicit in the wordings of the law[63] or conferred by necessary or fair
implication in the enabling act.[64] In Angara v. Electoral Commission, the Court clarified and stressed that when
a general grant of power is conferred or duty enjoined, every particular power necessary for the exercise of the
one or the performance of the other is also conferred by necessary implication.[65] It was also explicated that
when the statute does not specify the particular method to be followed or used by a government agency in the
exercise of the power vested in it by law, said agency has the authority to adopt any reasonable method to
carry out its functions.[66]

The power to reclaim on the part of the NHA is implicit from PD 757, RA 7279, MO 415, RA 6957, and PD 3-
A,[67] viz:

1. NHAs power to reclaim derived from PD 757 provisions:

a. Sec. 3 of PD 757 implies that reclamation may be resorted to in order to attain the goals of NHA:

Section 3. Progress and Objectives. The Authority shall have the following purposes and objectives:

xxxx

b) To undertake housing, development, resettlement or other activities as would enhance the

provision of housing to every Filipino;

c) To harness and promote private participation in housing ventures in terms of capital

expenditures, land, expertise, financing and other facilities for the sustained growth of the housing
industry. (Emphasis supplied.)

Land reclamation is an integral part of the development of resources for some of the housing requirements of
the NHA. Private participation in housing projects may also take the form of land reclamation.

b. Sec. 5 of PD 757 serves as proof that the NHA, as successor of the Tondo Foreshore Development
Authority (TFDA), has the power to reclaim, thus:
Section 5. Dissolution of Existing Housing Agencies. The People's Homesite and Housing Corporation
(PHHC), the Presidential Assistant on Housing Resettlement Agency (PAHRA), the Tondo Foreshore
Development Authority (TFDA), the Central Institute for the Training and Relocation of Urban Squatters
(CITRUS), the Presidential Committee for Housing and Urban Resettlement (PRECHUR), Sapang Palay
Development Committee, Inter-Agency Task Force to Undertake the Relocation of Families in Barrio
Nabacaan, Villanueva, Misamis Oriental and all other existing government housing and resettlement agencies,
task forces and ad-hoc committees, are hereby dissolved. Their powers and functions, balance of
appropriations, records, assets, rights, and choses in action, are transferred to, vested in, and
assumed by the Authority. x x x (Emphasis supplied.)
PD 570 dated October 30, 1974 created the TFDA, which defined its objectives, powers, and functions. Sec. 2
provides:

Section 2. Objectives and Purposes. The Authority shall have the following purposes and objectives:

a) To undertake all manner of activity, business or development projects for the establishment of harmonious,
comprehensive, integrated and healthy living community in the Tondo Foreshoreland and its resettlement
site;
b) To undertake and promote the physical and socio-economic amelioration of the Tondo Foreshore
residents in particular and the nation in general (Emphasis supplied.)

The powers and functions are contained in Sec. 3, to wit:

a) To develop and implement comprehensive and integrated urban renewal programs for the Tondo
Foreshore and Dagat-dagatan lagoon and/or any other additional/alternative resettlement site and to
formulate and enforce general and specific policies for its development which shall ensure reasonable degree
of compliance with environmental standards.

b) To prescribe guidelines and standards for the reservation, conservation and utilization of public lands
covering the Tondo Foreshore land and its resettlement sites;

c) To construct, acquire, own, lease, operate and maintain infrastructure facilities, housing complex, sites and
services;

d) To determine, regulate and supervise the establishment and operation of housing, sites, services and
commercial and industrial complexes and any other enterprises to be constructed or established within
the Tondo Foreshore and its resettlement sites;

e) To undertake and develop, by itself or through joint ventures with other public or private entities, all or any of
the different phases of development of the Tondo Foreshore land and its resettlement sites;

f) To acquire and own property, property-rights and interests, and encumber or otherwise dispose of the same
as it may deem appropriate (Emphasis supplied.)

From the foregoing provisions, it is readily apparent that the TFDA has the explicit power to develop public
lands covering the Tondo foreshore land and any other additional and alternative resettlement sites under
letter b, Sec. 3 of PD 570. Since the additional and/or alternative sites adjacent to Tondo foreshore land cover
foreshore and submerged areas, the reclamation of said areas is necessary in order to convert them into a
comprehensive and integrated resettlement housing project for the slum dwellers and squatters of Tondo.Since
the powers of TFDA were assumed by the NHA, then the NHA has the power to reclaim lands in the Tondo
foreshore area which covers the 79-hectare land subject of Proclamations Nos. 39 and 465 and Special
Patents Nos. 3592 and 3598.

c. Sec. 6 of PD 757 delineates the functions and powers of the NHA which embrace the authority to reclaim
land, thus:

Sec. 6. Powers and functions of the Authority.The Authority shall have the following powers and functions to be
exercised by the Board in accordance with its established national human settlements plan prepared by the
Human Settlements Commission:

(a) Develop and implement the comprehensive and integrated housing program provided for in Section
hereof;

xxxx

(c) Prescribe guidelines and standards for the reservation, conservation and utilization of public
lands identified for housing and resettlement;

xxxx

(e) Develop and undertake housing development and/or resettlement projects through joint ventures or other
arrangements with public and private entities;
xxxx

(k) Enter into contracts whenever necessary under such terms and conditions as it may deem proper and
reasonable;

(l) Acquire property rights and interests and encumber or otherwise dispose the same as it may deem
appropriate;

xxxx

(s) Perform such other acts not inconsistent with this Decree, as may be necessary to effect the
policies and objectives herein declared. (Emphasis supplied.)
The NHAs authority to reclaim land can be inferred from the aforequoted provisions. It can make use of public
lands under letter (c) of Sec. 6 which includes reclaimed land as site for its comprehensive and integrated
housing projects under letter (a) which can be undertaken through joint ventures with private entities under
letter (e). Taken together with letter (s) which authorizes NHA to perform such other activities necessary to
effect the policies and objectives of PD 757, it is safe to conclude that the NHAs power to reclaim lands is a
power that is implied from the exercise of its explicit powers under Sec. 6 in order to effectively accomplish its
policies and objectives under Sec. 3 of its charter. Thus, the reclamation of land is an indispensable
component for the development and construction of the SMDRP housing facilities.

2. NHAs implied power to reclaim land is enhanced by RA 7279.

PD 757 identifies NHAs mandate to [d]evelop and undertake housing development and/or resettlement
projects through joint ventures or other arrangements with public and private entities.

The power of the NHA to undertake reclamation of land can be inferred from Secs. 12 and 29 of RA 7279,
which provide:

Section 12. Disposition of Lands for Socialized Housing.The National Housing Authority, with respect to
lands belonging to the National Government, and the local government units with respect to other lands
within their respective localities, shall coordinate with each other to formulate and make available various
alternative schemes for the disposition of lands to the beneficiaries of the Program. These schemes
shall not be limited to those involving transfer of ownership in fee simple but shall include lease, with option to
purchase, usufruct or such other variations as the local government units or the National Housing Authority
may deem most expedient in carrying out the purposes of this Act.

xxxx

Section 29. Resettlement.With two (2) years from the effectivity of this Act, the local government units, in
coordination with the National Housing Authority, shall implement the relocation and resettlement of persons
living in danger areas such as esteros, railroad tracks, garbage dumps, riverbanks, shorelines, waterways,
and in other public places as sidewalks, roads, parks, and playgrounds. The local government unit, in
coordination with the National Housing Authority, shall provide relocation or resettlement sites with basic
services and facilities and access to employment and livelihood opportunities sufficient to meet the basic
needs of the affected families. (Emphasis supplied.)

Lands belonging to the National Government include foreshore and submerged lands which can be reclaimed
to undertake housing development and resettlement projects.

3. MO 415 explains the undertaking of the NHA in SMDRP:

WHEREAS, Memorandum Order No. 161-A mandated the National Housing Authority to conduct feasibility
studies and develop low-cost housing projects at the dumpsites of Metro Manila;

WHEREAS, the National Housing Authority has presented a viable Conceptual Plan to convert the Smokey
Mountain dumpsite into a habitable housing project inclusive of the reclamation area across R-10 as
enabling component of the Project;

WHEREAS, the said Plan requires the coordinated and synchronized efforts of the City of Manila and other
government agencies and instrumentalities to ensure effective and efficient implementation;

WHEREAS, the government encourages private sector initiative in the implementation of its
projects. (Emphasis supplied.)

Proceeding from these whereas clauses, it is unequivocal that reclamation of land in

the Smokey Mountain area is an essential and vital power of the NHA to effectively implement its avowed goal
of developing low-cost housing units at the Smokey Mountain dumpsites. The interpretation made by no less
than the President of the Philippines as Chief of the Executive Branch, of which the NHA is a part, must
necessarily command respect and much weight and credit.

4. RA 6957 as amended by RA 7718the BOT Lawserves as an exception to PD 1084 and EO 525.

Based on the provisions of the BOT Law and Implementing Rules and Regulations, it is unequivocal that all
government infrastructure agencies like the NHA can undertake infrastructure or development projects using
the contractual arrangements prescribed by the law, and land reclamation is one of the projects that can be
resorted to in the BOT project implementation under the February 10, 1992 Joint Resolution No. 3 of the 8th
Congress.

From the foregoing considerations, we find that the NHA has ample implied authority to undertake reclamation
projects.

Even without an implied power to reclaim lands under NHAs charter, we rule that the authority granted to NHA,
a national government agency, by the President under PD 3-A reinforced by EO 525 is more than sufficient
statutory basis for the reclamation of lands under the SMDRP.

PD 3-A is a law issued by then President Ferdinand E. Marcos under his martial law powers on September 23,
1972. It provided that [t]he provisions of any law to the contrary notwithstanding, the reclamation of areas,
underwater, whether foreshore or inland, shall be limited to the National Government or any person authorized
by it under the proper contract. It repealed, in effect, RA 1899 which previously delegated the right to reclaim
lands to municipalities and chartered cities and revested it to the National Government.[68] Under PD 3-A,
national government can only mean the Executive Branch headed by the President. It cannot refer to Congress
as it was dissolved and abolished at the time of the issuance of PD 3-A on September 23, 1972. Moreover, the
Executive Branch is the only implementing arm in the government with the equipment, manpower, expertise,
and capability by the very nature of its assigned powers and functions to undertake reclamation projects. Thus,
under PD 3-A, the Executive Branch through the President can implement reclamation of lands through any of
its departments, agencies, or offices.

Subsequently, on February 4, 1977, President Marcos issued PD 1084 creating the PEA, which was granted,
among others, the power to reclaim land, including foreshore and submerged areas by dredging, filling or other
means or to acquire reclaimed lands. The PEAs power to reclaim is not however exclusive as can be gleaned
from its charter, as the President retained his power under PD 3-A to designate another agency to reclaim
lands.

On February 14, 1979, EO 525 was issued. It granted PEA primary responsibility for integrating, directing, and
coordinating reclamation projects for and on behalf of the National Government although other national
government agencies can be designated by the President to reclaim lands in coordination with the
PEA. Despite the issuance of EO 525, PD 3-A remained valid and subsisting. Thus, the National Government
through the President still retained the power and control over all reclamation projects in the country.

The power of the National Government through the President over reclamation of areas, that is, underwater
whether foreshore or inland, was made clear in EO 543[69] which took effect on June 24, 2006. Under EO 543,
PEA was renamed the Philippine Reclamation Authority (PRA) and was granted the authority to approve
reclamation projects, a power previously reposed in the President under EO 525. EO 543 reads:

Section 1. The power of the President to approve reclamation projects is hereby delegated to the
Philippine Reclamation Authority [formerly PEA], through its governing board, subject to compliance with
existing laws and rules and subject to the condition that reclamation contracts to be executed with any person
or entity go through public bidding.

Section 2. Nothing in the Order shall be construed as diminishing the Presidents authority to modify,
amend or nullify PRAs action.

Section 3. All executive issuances inconsistent with this Executive Order are hereby repealed or amended
accordingly. (Emphasis supplied.)

Sec. 2 of EO 543 strengthened the power of control and supervision of the President over reclamation of lands
as s/he can modify, amend, or nullify the action of PEA (now PRA).

From the foregoing issuances, we conclude that the Presidents delegation to NHA, a national government
agency, to reclaim lands under the SMDRP, is legal and valid, firmly anchored on PD 3-A buttressed by EO
525 notwithstanding the absence of any specific grant of power under its charter, PD 757.

Second Issue: Whether respondents NHA and RBI were given the
power and authority by DENR to reclaim foreshore and submerged
lands
Petitioner Chavez puts forth the view that even if the NHA and RBI were granted the authority to reclaim, they
were not authorized to do so by the DENR.
Again, reliance is made on our ruling in PEA where it was held that the DENRs authority is necessary in order
for the government to validly reclaim foreshore and submerged lands. In PEA, we expounded in this manner:

As manager, conservator and overseer of the natural resources of the State, DENR exercises supervision and
control over alienable and disposable public lands. DENR also exercises exclusive jurisdiction on the
management and disposition of all lands of the public domain. Thus, DENR decides whether areas under
water, like foreshore or submerged areas of Manila Bay, should be reclaimed or not. This means that PEA
needs authorization from DENR before PEA can undertake reclamation projects in Manila Bay, or in any part
of the country.

DENR also exercises exclusive jurisdiction over the disposition of all lands of the public domain. Hence, DENR
decides whether reclaimed lands of PEA should be classified as alienable under Sections 6 and 7 of CA No.
141. Once DENR decides that the reclaimed lands should be so classified, it then recommends to the
President the issuance of a proclamation classifying the lands as alienable or disposable lands of the public
domain open to disposition. We note that then DENR Secretary Fulgencio S. Factoran, Jr. countersigned
Special Patent No. 3517 in compliance with the Revised Administrative Code and Sections 6 and 7 of CA No.
141.

In short, DENR is vested with the power to authorize the reclamation of areas under water, while PEA is vested
with the power to undertake the physical reclamation of areas under water, whether directly or through private
contractors. DENR is also empowered to classify lands of the public domain into alienable or disposable lands
subject to the approval of the President. On the other hand, PEA is tasked to develop, sell or lease the
reclaimed alienable lands of the public domain.[70]

Despite our finding that PEA is not a precedent to the case at bar, we find after all that under existing laws, the
NHA is still required to procure DENRs authorization before a reclamation project in Manila Bay or in any part
of the Philippines can be undertaken. The requirement applies to PEA, NHA, or any other government agency
or office granted with such power under the law.

Notwithstanding the need for DENR permission, we nevertheless find petitioners position bereft of merit.

The DENR is deemed to have granted the authority to reclaim in the Smokey Mountain Project for the following
reasons:

1. Sec. 17, Art. VII of the Constitution provides that the President shall have control of all executive
departments, bureaus and offices. The President is assigned the task of seeing to it that all laws are faithfully
executed. Control, in administrative law, means the power of an officer to alter, modify, nullify or set aside what
a subordinate officer has done in the performance of his duties and to substitute the judgment of the former for
that of the latter.[71]

As such, the President can exercise executive power motu proprio and can supplant the act or decision of a
subordinate with the Presidents own. The DENR is a department in the executive branch under the President,
and it is only an alter ego of the latter. Ordinarily the proposed action and the staff work are initially done by a
department like the DENR and then submitted to the President for approval. However, there is nothing infirm or
unconstitutional if the President decides on the implementation of a certain project or activity and requires said
department to implement it. Such is a presidential prerogative as long as it involves the department or office
authorized by law to supervise or execute the Project. Thus, as in this case, when the President approved and
ordered the development of a housing project with the corresponding reclamation work, making DENR a
member of the committee tasked to implement the project, the required authorization from the DENR to reclaim
land can be deemed satisfied. It cannot be disputed that the ultimate power over alienable and disposable
public lands is reposed in the President of the Philippines and not the DENR Secretary. To still require a DENR
authorization on the Smokey Mountain when the President has already authorized and ordered the
implementation of the Project would be a derogation of the powers of the President as the head of the
executive branch. Otherwise, any department head can defy or oppose the implementation of a project
approved by the head of the executive branch, which is patently illegal and unconstitutional.

In Chavez v. Romulo, we stated that when a statute imposes a specific duty on the executive department, the
President may act directly or order the said department to undertake an activity, thus:

[A]t the apex of the entire executive officialdom is the President. Section 17, Article VII of the Constitution
specifies [her] power as Chief executive departments, bureaus and offices. [She] shall ensure that the laws be
faithfully executed. As Chief Executive, President Arroyo holds the steering wheel that controls the course of
her government. She lays down policies in the execution of her plans and programs. Whatever policy she
chooses, she has her subordinates to implement them. In short, she has the power of control. Whenever a
specific function is entrusted by law or regulation to her subordinate, she may act directly or merely
direct the performance of a duty x x x. Such act is well within the prerogative of her office (emphasis
supplied).[72]

Moreover, the power to order the reclamation of lands of public domain is reposed first in the Philippine
President. The Revised Administrative Code of 1987 grants authority to the President to reserve lands of public
domain for settlement for any specific purpose, thus:

Section 14. Power to Reserve Lands of the Public and Private Domain of the Government.(1) The President
shall have the power to reserve for settlement or public use, and for specific public purposes, any of the
lands of the public domain, the use of which is not otherwise directed by law. The reserved land shall
thereafter remain subject to the specific public purpose indicated until otherwise provided by law or
proclamation. (Emphasis supplied.)

President Aquino reserved the area of the Smokey Mountain dumpsite for settlement and issued MO 415
authorizing the implementation of the Smokey Mountain Development Project plus the reclamation of the area
across R-10. Then President Ramos issued Proclamation No. 39 covering the 21-hectare dumpsite and the
40-hectare commercial/industrial area, and Proclamation No. 465 and MO 415 increasing the area of foreshore
and submerged lands of Manila Bay to be reclaimed from 40 to 79 hectares.Having supervision and control
over the DENR, both Presidents directly assumed and exercised the power granted by the Revised
Administrative Code to the DENR Secretary to authorize the NHA to reclaim said lands. What can be done
indirectly by the DENR can be done directly by the President. It would be absurd if the power of the President
cannot be exercised simply because the head of a department in the executive branch has not acted favorably
on a project already approved by the President. If such arrangement is allowed then the department head will
become more powerful than the President.

2. Under Sec. 2 of MO 415, the DENR is one of the members of the EXECOM chaired by the NCR-CORD to
oversee the implementation of the Project. The EXECOM was the one which recommended approval of the
project plan and the joint venture agreements. Clearly, the DENR retained its power of supervision and control
over the laws affected by the Project since it was tasked to facilitate the titling of the Smokey Mountain and of
the area to be reclaimed, which shows that it had tacitly given its authority to the NHA to undertake the
reclamation.

3. Former DENR Secretary Angel C. Alcala issued Special Patents Nos. 3591 and 3592 while then Secretary
Victor O. Ramos issued Special Patent No. 3598 that embraced the areas covered by the reclamation. These
patents conveyed the lands to be reclaimed to the NHA and granted to said agency the administration and
disposition of said lands for subdivision and disposition to qualified beneficiaries and for development for mix
land use (commercial/industrial) to provide employment opportunities to on-site families and additional areas
for port related activities. Such grant of authority to administer and dispose of lands of public domain under the
SMDRP is of course subject to the powers of the EXECOM of SMDRP, of which the DENR is a member.

4. The issuance of ECCs by the DENR for SMDRP is but an exercise of its power of supervision and control
over the lands of public domain covered by the Project.

Based on these reasons, it is clear that the DENR, through its acts and issuances, has ratified and confirmed
the reclamation of the subject lands for the purposes laid down in Proclamations Nos. 39 and 465.

Third Issue: Whether respondent RBI can acquire reclaimed

foreshore and submerged lands considered as inalienable and
outside the commerce of man

Petitioner postulates that respondent RBI cannot acquire the reclaimed foreshore and submerged areas as
these are inalienable public lands beyond the commerce of man based on Art. 1409 of the Civil Code which
provides:

Article 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;

xxxx

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Secs. 2 and 3, Art. XII of the Constitution declare that all natural resources are owned by the State and they
cannot be alienated except for alienable agricultural lands of the public domain. One of the States natural
resources are lands of public domain which include reclaimed lands.
Petitioner contends that for these reclaimed lands to be alienable, there must be a law or presidential
proclamation officially classifying these reclaimed lands as alienable and disposable and open to disposition or
concession. Absent such law or proclamation, the reclaimed lands cannot be the enabling component or
consideration to be paid to RBI as these are beyond the commerce of man.

We are not convinced of petitioners postulation.

The reclaimed lands across R-10 were classified alienable and disposable lands of public domain of the State
for the following reasons, viz:

First, there were three (3) presidential proclamations classifying the reclaimed lands across R-10 as alienable
or disposable hence open to disposition or concession, to wit:

(1) MO 415 issued by President Aquino, of which Sec. 4 states that [t]he land covered by the Smokey
Mountain Dumpsite is hereby conveyed to the National Housing Authority as well as the area to be reclaimed
across R-10.

The directive to transfer the lands once reclaimed to the NHA implicitly carries with it the declaration that said
lands are alienable and disposable. Otherwise, the NHA cannot effectively use them in its housing and
resettlement project.
(2) Proclamation No. 39 issued by then President Ramos by which the reclaimed lands were conveyed to NHA
for subdivision and disposition to qualified beneficiaries and for development into a mixed land use
(commercial/industrial) to provide employment opportunities to on-site families and additional areas for port-
related activities. Said directive carries with it the pronouncement that said lands have been transformed to
alienable and disposable lands. Otherwise, there is no legal way to convey it to the beneficiaries.

(3) Proclamation No. 465 likewise issued by President Ramos enlarged the reclaimed area to 79 hectares to
be developed and disposed of in the implementation of the SMDRP.The authority put into the hands of the
NHA to dispose of the reclaimed lands tacitly sustains the conversion to alienable and disposable lands.
Secondly, Special Patents Nos. 3591, 3592, and 3598 issued by the DENR anchored on Proclamations Nos.
39 and 465 issued by President Ramos, without doubt, classified the reclaimed areas as alienable and
disposable.

Admittedly, it cannot be said that MO 415, Proclamations Nos. 39 and 465 are explicit declarations that the
lands to be reclaimed are classified as alienable and disposable. We find however that such conclusion is
derived and implicit from the authority given to the NHA to transfer the reclaimed lands to qualified
beneficiaries.

The query is, when did the declaration take effect? It did so only after the special patents covering the
reclaimed areas were issued. It is only on such date that the reclaimed lands became alienable and disposable
lands of the public domain. This is in line with the ruling in PEA where said issue was clarified and stressed:

PD No. 1085, coupled with President Aquinos actual issuance of a special patent covering the Freedom
Islands, is equivalent to an official proclamation classifying the FreedomIslands as alienable or
disposable lands of the public domain. PD No. 1085 and President Aquinos issuance of a land patent also
constitute a declaration that the Freedom Islands are no longer needed for public
service. The Freedom Islands are thus alienable or disposable lands of the public domain, open to disposition
or concession to qualified parties.[73] (Emphasis supplied.)

Thus, MO 415 and Proclamations Nos. 39 and 465 cumulatively and jointly taken together with Special Patent
Nos. 3591, 3592, and 3598 more than satisfy the requirement in PEA that [t]here must be a law
or presidential proclamation officially classifying these reclaimed lands as alienable or disposable and open
to disposition or concession (emphasis supplied).[74]
Apropos the requisite law categorizing reclaimed land as alienable or disposable, we find that RA 6957 as
amended by RA 7718 provides ample authority for the classification of reclaimed land in the SMDRP for the
repayment scheme of the BOT project as alienable and disposable lands of public domain. Sec. 6 of RA 6957
as amended by RA 7718 provides:

For the financing, construction, operation and maintenance of any infrastructure projects undertaken through
the build-operate-and transfer arrangement or any of its variations pursuant to the provisions of this Act, the
project proponent x x x may likewise be repaid in the form of a share in the revenue of the project or other non-
monetary payments, such as, but not limited to, the grant of a portion or percentage of the reclaimed land,
subject to the constitutional requirements with respect to the ownership of the land. (Emphasis supplied.)

While RA 6957 as modified by RA 7718 does not expressly declare that the reclaimed lands that shall serve as
payment to the project proponent have become alienable and disposable lands and opened for disposition;
nonetheless, this conclusion is necessarily implied, for how else can the land be used as the enabling
component for the Project if such classification is not deemed made?

It may be argued that the grant of authority to sell public lands, pursuant to PEA, does not convert alienable
lands of public domain into private or patrimonial lands. We ruled in PEA that alienable lands of public
domain must be transferred to qualified private parties, or to government entities not tasked to dispose
of public lands, before these lands can become private or patrimonial lands (emphasis supplied).[75] To
lands reclaimed by PEA or through a contract with a private person or entity, such reclaimed lands still remain
alienable lands of public domain which can be transferred only to Filipino citizens but not to a private
corporation. This is because PEA under PD 1084 and EO 525 is tasked to hold and dispose of alienable lands
of public domain and it is only when it is transferred to Filipino citizens that it becomes patrimonial property. On
the other hand, the NHA is a government agency not tasked to dispose of public lands under its charterThe
Revised Administrative Code of 1987. The NHA is an end-user agency authorized by law to administer and
dispose of reclaimed lands. The moment titles over reclaimed lands based on the special patents are
transferred to the NHA by the Register of Deeds, they are automatically converted to patrimonial properties of
the State which can be sold to Filipino citizens and private corporations, 60% of which are owned by
Filipinos. The reason is obvious: if the reclaimed land is not converted to patrimonial land once transferred to
NHA, then it would be useless to transfer it to the NHA since it cannot legally transfer or alienate lands of
public domain. More importantly, it cannot attain its avowed purposes and goals since it can only transfer
patrimonial lands to qualified beneficiaries and prospective buyers to raise funds for the SMDRP.

From the foregoing considerations, we find that the 79-hectare reclaimed land has been declared alienable and
disposable land of the public domain; and in the hands of NHA, it has been reclassified as patrimonial property.

Petitioner, however, contends that the reclaimed lands were inexistent prior to the three (3) Presidential Acts
(MO 415 and Proclamations Nos. 39 and 465) and hence, the declaration that such areas are alienable and
disposable land of the public domain, citing PEA, has no legal basis.

Petitioners contention is not well-taken.

Petitioners sole reliance on Proclamations Nos. 39 and 465 without taking into consideration the special
patents issued by the DENR demonstrates the inherent weakness of his proposition. As was ruled in PEA cited
by petitioner himself, PD No. 1085, coupled with President Aquinos actual issuance of a special patent
covering the Freedom Islands is equivalent to an official proclamation classifying the Freedom islands as
alienable or disposable lands of public domain. In a similar vein, the combined and collective effect of
Proclamations Nos. 39 and 465 with Special Patents Nos. 3592 and 3598 is tantamount to and can be
considered to be an official declaration that the reclaimed lots are alienable or disposable lands of the public
domain.

The reclaimed lands covered by Special Patents Nos. 3591, 3592, and 3598, which evidence transfer of
ownership of reclaimed lands to the NHA, are official acts of the DENR Secretary in the exercise of his power
of supervision and control over alienable and disposable public lands and his exclusive jurisdiction over the
management and disposition of all lands of public domain under the Revised Administrative Code of
1987. Special Patent No. 3592 speaks of the transfer of Lots 1 and 2, and RI-003901-000012-D with an area of
401,485 square meters based on the survey and technical description approved by the Bureau of
Lands. Lastly, Special Patent No. 3598 was issued in favor of the NHA transferring to said agency a tract of
land described in Plan RL-00-000013 with an area of 390,000 square meters based on the survey and
technical descriptions approved by the Bureau of Lands.

The conduct of the survey, the preparation of the survey plan, the computation of the technical description, and
the processing and preparation of the special patent are matters within the technical area of expertise of
administrative agencies like the DENR and the Land Management Bureau and are generally accorded not only
respect but at times even finality.[76] Preparation of special patents calls for technical examination and a
specialized review of calculations and specific details which the courts are ill-equipped to undertake; hence,
the latter defer to the administrative agency which is trained and knowledgeable on such matters.[77]

Subsequently, the special patents in the name of the NHA were submitted to the Register of Deeds of the City
of Manila for registration, and corresponding certificates of titles over the reclaimed lots were issued based on
said special patents. The issuance of certificates of titles in NHAs name automatically converts the reclaimed
lands to patrimonial properties of the NHA. Otherwise, the lots would not be of use to the NHAs housing
projects or as payment to the BOT contractor as the enabling component of the BOT contract. The laws of the
land have to be applied and interpreted depending on the changing conditions and times. Tempora mutantur et
legis mutantur in illis (time changes and laws change with it). One such law that should be treated differently is
the BOT Law (RA 6957) which brought about a novel way of implementing government contracts by allowing
reclaimed land as part or full payment to the contractor of a government project to satisfy the huge financial
requirements of the undertaking. The NHA holds the lands covered by Special Patents Nos. 3592 and 3598
solely for the purpose of the SMDRP undertaken by authority of the BOT Law and for disposition in accordance
with said special law. The lands become alienable and disposable lands of public domain upon issuance of the
special patents and become patrimonial properties of the Government from the time the titles are issued to the
NHA.
As early as 1999, this Court in Baguio v. Republic laid down the jurisprudence that:

It is true that, once a patent is registered and the corresponding certificate of title is issued, the land covered by
them ceases to be part of the public domain and becomes private property, and the Torrens Title issued
pursuant to the patent becomes indefeasible upon the expiration of one year from the date of issuance of such
patent.[78]

The doctrine was reiterated in Republic v. Heirs of Felipe Alijaga, Sr.,[79] Heirs of Carlos Alcaraz v.
Republic,[80] and the more recent case of Doris Chiongbian-Oliva v. Republic of the Philippines.[81] Thus, the
79-hectare reclaimed land became patrimonial property after the issuance of certificates of titles to the NHA
based on Special Patents Nos. 3592 and 3598.

One last point. The ruling in PEA cannot even be applied retroactively to the lots covered by Special Patents
Nos. 3592 (40 hectare reclaimed land) and 3598 (39-hectare reclaimed land). The reclamation of the land
under SMDRP was completed in August 1996 while the PEA decision was rendered on July 9, 2002. In the
meantime, subdivided lots forming parts of the reclaimed land were already sold to private corporations for
value and separate titles issued to the buyers. The Project was terminated through a Memorandum of
Agreement signed on August 27, 2003. The PEA decision became final through the November 11,
2003 Resolution. It is a settled precept that decisions of the Supreme Court can only be applied prospectively
as they may prejudice vested rights if applied retroactively.

In Benzonan v. Court of Appeals, the Court trenchantly elucidated the prospective application of its decisions
based on considerations of equity and fair play, thus:
At that time, the prevailing jurisprudence interpreting section 119 of R.A. 141 as amended was that enunciated
in Monge and Tupas cited above. The petitioners Benzonan and respondent Pe and the DBP are bound by
these decisions for pursuant to Article 8 of the Civil Code judicial decisions applying or interpreting the laws of
the Constitution shall form a part of the legal system of the Philippines. But while our decisions form part of the
law of the land, they are also subject to Article 4 of the Civil Code which provides that laws shall have no
retroactive effect unless the contrary is provided. This is expressed in the familiar legal maxim lex prospicit,
non respicit, the law looks forward not backward. The rationale against retroactivity is easy to perceive. The
retroactive application of a law usually divests rights that have already become vested or impairs the
obligations of contract and hence, is unconstitutional.

The same consideration underlies our rulings giving only prospective effect to decisions enunciating new
doctrines. Thus, we emphasized in People v. Jabinal, 55 SCRA 607 [1974] x x x when a doctrine of this Court
is overruled and a different view is adopted, the new doctrine should be applied prospectively and should not
apply to parties who had relied on the old doctrine and acted on the faith thereof.[82]

Fourth Issue: Whether respondent RBI can acquire reclaimed

lands when there was no declaration that said lands are no
longer needed for public use

Petitioner Chavez avers that despite the declaration that the reclaimed areas are alienable lands of the public
domain, still, the reclamation is flawed for there was never any declaration that said lands are no longer
needed for public use.

We are not moved by petitioners submission.

Even if it is conceded that there was no explicit declaration that the lands are no longer needed for public use
or public service, there was however an implicit executive declaration that the reclaimed areas R-10 are not
necessary anymore for public use or public service when President Aquino through MO 415 conveyed the
same to the NHA partly for housing project and related commercial/industrial development intended for
disposition to and enjoyment of certain beneficiaries and not the public in general and partly as enabling
component to finance the project.

President Ramos, in issuing Proclamation No. 39, declared, though indirectly, that the reclaimed lands of the
Smokey Mountain project are no longer required for public use or service, thus:
These parcels of land of public domain are hereby placed under the administration and disposition of the
National Housing Authority to develop, subdivide and dispose to qualified beneficiaries, as well as its
development for mix land use (commercial/industrial) to provide employment opportunities to on-site families
and additional areas for port related activities.(Emphasis supplied.)

While numerical count of the persons to be benefited is not the determinant whether the property is to be
devoted to public use, the declaration in Proclamation No. 39 undeniably identifies only particular individuals as
beneficiaries to whom the reclaimed lands can be sold, namelythe Smokey Mountain dwellers. The rest of the
Filipinos are not qualified; hence, said lands are no longer essential for the use of the public in general.

In addition, President Ramos issued on August 31, 1994 Proclamation No. 465 increasing the area to be
reclaimed from forty (40) hectares to seventy-nine (79) hectares, elucidating that said lands are undoubtedly
set aside for the beneficiaries of SMDRP and not the publicdeclaring the power of NHA to dispose of land to be
reclaimed, thus: The authority to administer, develop, or dispose lands identified and reserved by this
Proclamation and Proclamation No. 39 (s.1992), in accordance with the SMDRP, as enhance, is vested with
the NHA, subject to the provisions of existing laws. (Emphasis supplied.)

MO 415 and Proclamations Nos. 39 and 465 are declarations that proclaimed the non-use of the reclaimed
areas for public use or service as the Project cannot be successfully implemented without the withdrawal of
said lands from public use or service. Certainly, the devotion of the reclaimed land to public use or service
conflicts with the intended use of the Smokey Mountain areas for housing and employment of the Smokey
Mountain scavengers and for financing the Project because the latter cannot be accomplished without
abandoning the public use of the subject land. Without doubt, the presidential proclamations on SMDRP
together with the issuance of the special patents had effectively removed the reclaimed lands from public use.

More decisive and not in so many words is the ruling in PEA which we earlier cited, that PD No. 1085 and
President Aquinos issuance of a land patent also constitute a declaration that the Freedom Islands are no
longer needed for public service. Consequently, we ruled in that case that the reclaimed lands are open to
disposition or concession to qualified parties.[83]

In a similar vein, presidential Proclamations Nos. 39 and 465 jointly with the special patents have classified the
reclaimed lands as alienable and disposable and open to disposition or concession as they would be devoted
to units for Smokey Mountain beneficiaries. Hence, said lands are no longer intended for public use or service
and shall form part of the patrimonial properties of the State under Art. 422 of the Civil Code.[84] As
discussed a priori, the lands were classified as patrimonial properties of the NHA ready for disposition when
the titles were registered in its name by the Register of Deeds.

Moreover, reclaimed lands that are made the enabling components of a BOT infrastructure project
are necessarily reclassified as alienable and disposable lands under the BOT Law; otherwise, absurd and
illogical consequences would naturally result. Undoubtedly, the BOT contract will not be accepted by the BOT
contractor since there will be no consideration for its contractual obligations. Since reclaimed land will be
conveyed to the contractor pursuant to the BOT Law, then there is an implied declaration that such land is no
longer intended for public use or public service and, hence, considered patrimonial property of the State.

Fifth Issue: Whether there is a law authorizing sale of

reclaimed lands

Petitioner next claims that RBI cannot acquire the reclaimed lands because there was no law authorizing their
sale. He argues that unlike PEA, no legislative authority was granted to the NHA to sell reclaimed land.

This position is misplaced.

Petitioner relies on Sec. 60 of Commonwealth Act (CA) 141 to support his view that the NHA is not empowered
by any law to sell reclaimed land, thus:

Section 60. Any tract of land comprised under this title may be leased or sold, as the case may be, to any
person, corporation or association authorized to purchase or lease public lands for agricultural purposes. The
area of the land so leased or sold shall be such as shall, in the judgment of the Secretary of Agriculture and
Natural Resources, be reasonably necessary for the purposes for which such sale or lease if requested and
shall in no case exceed one hundred and forty-four hectares: Provided, however, That this limitation shall not
apply to grants, donations, transfers, made to a province, municipality or branch or subdivision of the
Government for the purposes deemed by said entities conducive to the public interest; but the land so
granted donated or transferred to a province, municipality, or branch or subdivision of the Government
shall not be alienated, encumbered, or otherwise disposed of in a manner affecting its title, except
when authorized by Congress; Provided, further, That any person, corporation, association or partnership
disqualified from purchasing public land for agricultural purposes under the provisions of this Act, may lease
land included under this title suitable for industrial or residential purposes, but the lease granted shall only be
valid while such land is used for the purposes referred to. (Emphasis supplied.)

Reliance on said provision is incorrect as the same applies only to a province, municipality or branch or
subdivision of the Government. The NHA is not a government unit but a government corporation performing
governmental and proprietary functions.

In addition, PD 757 is clear that the NHA is empowered by law to transfer properties acquired by it under the
law to other parties, thus:

Section 6. Powers and functions of the Authority. The Authority shall have the following powers and functions
to be exercised by the Boards in accordance with the established national human settlements plan prepared by
the Human Settlements Commission:

xxxx

(k) Enter into contracts whenever necessary under such terms and conditions as it may deem proper and
reasonable;

(l) Acquire property rights and interests, and encumber or otherwise dispose the same as it may deem
appropriate (Emphasis supplied.)

Letter (l) is emphatic that the NHA can acquire property rights and interests and encumber or otherwise
dispose of them as it may deem appropriate. The transfer of the reclaimed lands by the National Government
to the NHA for housing, commercial, and industrial purposes transformed them into patrimonial lands which are
of course owned by the State in its private or proprietary capacity. Perforce, the NHA can sell the reclaimed
lands to any Filipino citizen or qualified corporation.

Sixth Issue: Whether the transfer of reclaimed lands to RBI

was done by public bidding

Petitioner also contends that there was no public bidding but an awarding of ownership of said reclaimed lands
to RBI. Public bidding, he says, is required under Secs. 63 and 67 of CA 141 which read:
Section 63. Whenever it is decided that lands covered by this chapter are not needed for public purposes, the
Director of Lands shall ask the Secretary of Agriculture and Commerce for authority to dispose of the
same. Upon receipt of such authority, the Director of Lands shall give notice by public advertisement in the
same manner as in the case of leases or sales of agricultural public land, that the Government will lease or
sell, as the case may be, the lots or blocks specified in the advertisement, for the purpose stated in the notice
and subject to the conditions specified in this chapter.

xxxx

Section 67. The lease or sale shall be made through oral bidding; and adjudication shall be made to the
highest bidder. However, where an applicant has made improvements on the land by virtue of a permit issued
to him by competent authority, the sale or lease shall be made by sealed bidding as prescribed in section
twenty-six of this Act, the provisions of which shall be applied whenever applicable. If all or part of the lots
remain unleased or unsold, the Director of Lands shall from time to time announce in the Official Gazette or in
any other newspapers of general circulation, the lease of sale of those lots, if necessary.

He finds that the NHA and RBI violated Secs. 63 and 67 of CA 141, as the reclaimed lands were conveyed to
RBI by negotiated contract and not by public bidding as required by law.

This stand is devoid of merit.

There is no doubt that respondent NHA conducted a public bidding of the right to become its joint venture
partner in the Smokey Mountain Project. Notices or Invitations to Bid were published in the national dailies on
January 23 and 26, 1992 and February 1, 14, 16, and 23, 1992. The bidding proper was done by the Bids and
Awards Committee (BAC) on May 18, 1992. On August 31, 1992, the Inter-Agency Techcom made up of the
NHA, PEA, DPWH, PPA, DBP, and DENR opened the bids and evaluated them, resulting in the award of the
contract to respondent RBI on October 7, 1992.

On March 19, 1993, respondents NHA and RBI signed the JVA. On February 23, 1994, said JVA was
amended and restated into the ARJVA. On August 11, 1994, the ARJVA was again amended. On September
7, 1994, the OP approved the ARJVA and the amendments to the ARJVA. From these factual settings, it
cannot be gainsaid that there was full compliance with the laws and regulations governing public biddings
involving a right, concession, or property of the government.

Petitioner concedes that he does not question the public bidding on the right to be a joint venture partner of the
NHA, but the absence of bidding in the sale of alienable and disposable lands of public domain pursuant to CA
141 as amended.

Petitioners theory is incorrect.

Secs. 63 and 67 of CA 141, as amended, are in point as they refer to government sale by the Director of Lands
of alienable and disposable lands of public domain. This is not present in the case at bar. The lands
reclaimed by and conveyed to the NHA are no longer lands of public domain. These lands became proprietary
lands or patrimonial properties of the State upon transfer of the titles over the reclaimed lands to the NHA and
hence outside the ambit of CA 141. The NHA can therefore legally transfer patrimonial land to RBI or to any
other interested qualified buyer without any bidding conducted by the Director of Lands because the NHA,
unlike PEA, is a government agency not tasked to sell lands of public domain. Hence, it can only hold
patrimonial lands and can dispose of such lands by sale without need of public bidding.
Petitioner likewise relies on Sec. 79 of PD 1445 which requires public bidding when government property has
become unserviceable for any cause or is no longer needed.It appears from the Handbook on Property and
Supply Management System, Chapter 6, that reclaimed lands which have become patrimonial properties of the
State, whose titles are conveyed to government agencies like the NHA, which it will use for its projects or
programs, are not within the ambit of Sec. 79. We quote the determining factors in the Disposal of
Unserviceable Property, thus:

Determining Factors in the Disposal of Unserviceable Property

Property, which can no longer be repaired or reconditioned;

Property whose maintenance costs of repair more than outweigh the benefits and services that will be
derived from its continued use;

Property that has become obsolete or outmoded because of changes in technology;

Serviceable property that has been rendered unnecessary due to change in the agencys function or
mandate;

Unused supplies, materials and spare parts that were procured in excess of requirements; and

Unused supplies and materials that [have] become dangerous to use because of long storage or use of
which is determined to be hazardous.[85]

Reclaimed lands cannot be considered unserviceable properties. The reclaimed lands in question are very
much needed by the NHA for the Smokey Mountain Project because without it, then the projects will not be
successfully implemented. Since the reclaimed lands are not unserviceable properties and are very much
needed by NHA, then Sec. 79 of PD 1445 does not apply.

More importantly, Sec. 79 of PD 1445 cannot be applied to patrimonial properties like reclaimed lands
transferred to a government agency like the NHA which has entered into a BOT contract with a private
firm. The reason is obvious. If the patrimonial property will be subject to public bidding as the only way of
disposing of said property, then Sec. 6 of RA 6957 on the repayment scheme is almost impossible or
extremely difficult to implement considering the uncertainty of a winning bid during public auction. Moreover,
the repayment scheme of a BOT contract may be in the form of non-monetary payment like the grant of a
portion or percentage of reclaimed land. Even if the BOT partner participates in the public bidding, there is no
assurance that he will win the bid and therefore the payment in kind as agreed to by the parties cannot be
performed or the winning bid prize might be below the estimated valuation of the land. The only way to
harmonize Sec. 79 of PD 1445 with Sec. 6 of RA 6957 is to consider Sec. 79 of PD 1445 as inapplicable to
BOT contracts involving patrimonial lands. The law does not intend anything impossible (lex non intendit
aliquid impossibile).

Seventh Issue: Whether RBI, being a private corporation,

is barred by the Constitution to acquire lands of public domain

Petitioner maintains that RBI, being a private corporation, is expressly prohibited by the 1987 Constitution from
acquiring lands of public domain.

Petitioners proposition has no legal mooring for the following reasons:

1. RA 6957 as amended by RA 7718 explicitly states that a contractor can be paid a portion as percentage of
the reclaimed land subject to the constitutional requirement that only Filipino citizens or corporations with at
least 60% Filipino equity can acquire the same. It cannot be denied that RBI is a private corporation, where
Filipino citizens own at least 60% of the stocks. Thus, the transfer to RBI is valid and constitutional.
2. When Proclamations Nos. 39 and 465 were issued, inalienable lands covered by said proclamations were
converted to alienable and disposable lands of public domain.When the titles to the reclaimed lands were
transferred to the NHA, said alienable and disposable lands of public domain were automatically classified as
lands of the private domain or patrimonial properties of the State because the NHA is an agency NOT tasked
to dispose of alienable or disposable lands of public domain. The only way it can transfer the reclaimed land in
conjunction with its projects and to attain its goals is when it is automatically converted to patrimonial
properties of the State. Being patrimonial or private properties of the State, then it has the power to sell the
same to any qualified personunder the Constitution, Filipino citizens as private corporations, 60% of which is
owned by Filipino citizens like RBI.

3. The NHA is an end-user entity such that when alienable lands of public domain are transferred to said
agency, they are automatically classified as patrimonial properties. The NHA is similarly situated as BCDA
which was granted the authority to dispose of patrimonial lands of the government under RA 7227. The nature
of the property holdings conveyed to BCDA is elucidated and stressed in the May 6, 2003 Resolution
in Chavez v. PEA, thus:

BCDA is an entirely different government entity. BCDA is authorized by law to

sell specific government lands that have long been declared by presidential proclamations as military
reservations for use by the different services of the armed forces under the Department of National
Defense. BCDAs mandate is specific and limited in area, while PEAs mandate is general and
national. BCDA holds government lands that have been granted to end-user government entitiesthe
military services of the armed forces. In contrast, under Executive Order No. 525, PEA holds the
reclaimed public lands, not as an end-user entity, but as the government agency primarily responsible
for integrating, directing, and coordinating all reclamation projects for and on behalf of the National
Government.

x x x Well-settled is the doctrine that public land granted to an end-user government agency for a specific
public use may subsequently be withdrawn by Congress from public use and declared patrimonial property to
be sold to private parties. R.A. No. 7227 creating the BCDA is a law that declares specific military
reservations no longer needed for defense or military purposes and reclassifies such lands as
patrimonial property for sale to private parties.

Government owned lands, as long as they are patrimonial property, can be sold to private parties,
whether Filipino citizens or qualified private corporations. Thus, the so-called Friar Lands acquired by the
government under Act No. 1120 are patrimonial property which even private corporations can acquire by
purchase. Likewise, reclaimed alienable lands of the public domain if sold or transferred to a public or
municipal corporation for a monetary consideration become patrimonial property in the hands of the public or
municipal corporation. Once converted to patrimonial property, the land may be sold by the public or municipal
corporation to private parties, whether Filipino citizens or qualified private corporations.[86] (Emphasis supplied.)

The foregoing Resolution makes it clear that the SMDRP was a program adopted by the Government under
Republic Act No. 6957 (An Act Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and For Other Purposes), as amended by RA 7718, which is a
special law similar to RA 7227. Moreover, since the implementation was assigned to the NHA, an end-user
agency under PD 757 and RA 7279, the reclaimed lands registered under the NHA are automatically classified
as patrimonial lands ready for disposition to qualified beneficiaries.

The foregoing reasons likewise apply to the contention of petitioner that HCPTI, being a private corporation, is
disqualified from being a transferee of public land. What was transferred to HCPTI is a 10-hectare lot which is
already classified as patrimonial property in the hands of the NHA. HCPTI, being a qualified corporation under
the 1987 Constitution, the transfer of the subject lot to it is valid and constitutional.

Eighth Issue: Whether respondents can be compelled to disclose

all information related to the SMDRP
Petitioner asserts his right to information on all documents such as contracts, reports, memoranda, and the like
relative to SMDRP.

Petitioner asserts that matters relative to the SMDRP have not been disclosed to the public like the current
stage of the Project, the present financial capacity of RBI, the complete list of investors in the asset pool, the
exact amount of investments in the asset pool and other similar important information regarding the Project.

He prays that respondents be compelled to disclose all information regarding the SMDRP and furnish him with
originals or at least certified true copies of all relevant documents relating to the said project including, but not
limited to, the original JVA, ARJVA, AARJVA, and the Asset Pool Agreement.

This relief must be granted.

The right of the Filipino people to information on matters of public concern is enshrined in the 1987
Constitution, thus:

ARTICLE II

xxxx

SEC. 28. Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full
public disclosure of all its transactions involving public interest.

ARTICLE III

SEC. 7. The right of the people to information on matters of public concern shall be recognized. Access to
official records, and to documents, and papers pertaining to official acts, transactions, or decisions, as well as
to government research data used as basis for policy development, shall be afforded the citizen, subject to
such limitations as may be provided by law.

In Valmonte v. Belmonte, Jr., this Court explicated this way:

[A]n essential element of these freedoms is to keep open a continuing dialogue or process of communication
between the government and the people. It is in the interest of the State that the channels for free political
discussion be maintained to the end that the government may perceive and be responsive to the peoples
will. Yet, this open dialogue can be effective only to the extent that the citizenry is informed and thus able to
formulate its will intelligently. Only when the participants in the discussion are aware of the issues and have
access to information relating thereto can such bear fruit.[87]

In PEA, this Court elucidated the rationale behind the right to information:

These twin provisions of the Constitution seek to promote transparency in policy-making and in the operations
of the government, as well as provide the people sufficient information to exercise effectively other
constitutional rights. These twin provisions are essential to the exercise of freedom of expression. If the
government does not disclose its official acts, transactions and decisions to citizens, whatever citizens say,
even if expressed without any restraint, will be speculative and amount to nothing. These twin provisions are
also essential to hold public officials at all times x x x accountable to the people, for unless citizens have the
proper information, they cannot hold public officials accountable for anything. Armed with the right information,
citizens can participate in public discussions leading to the formulation of government policies and their
effective implementation. An informed citizenry is essential to the existence and proper functioning of any
democracy.[88]

Sec. 28, Art. II compels the State and its agencies to fully disclose all of its transactions involving public
interest. Thus, the government agencies, without need of demand from anyone, must bring into public view all
the steps and negotiations leading to the consummation of the transaction and the contents of the perfected
contract.[89] Such information must pertain to definite propositions of the government, meaning official
recommendations or final positions reached on the different matters subject of negotiation.The government
agency, however, need not disclose intra-agency or inter-agency recommendations or communications during
the stage when common assertions are still in the process of being formulated or are in the exploratory
stage. The limitation also covers privileged communication like information on military and diplomatic secrets;
information affecting national security; information on investigations of crimes by law enforcement agencies
before the prosecution of the accused; information on foreign relations, intelligence, and other classified
information.

It is unfortunate, however, that after almost twenty (20) years from birth of the 1987 Constitution, there is still
no enabling law that provides the mechanics for the compulsory duty of government agencies to disclose
information on government transactions. Hopefully, the desired enabling law will finally see the light of day if
and when Congress decides to approve the proposed Freedom of Access to Information Act. In the meantime,
it would suffice that government agencies post on their bulletin boards the documents incorporating the
information on the steps and negotiations that produced the agreements and the agreements themselves, and
if finances permit, to upload said information on their respective websites for easy access by interested
parties. Without any law or regulation governing the right to disclose information, the NHA or any of the
respondents cannot be faulted if they were not able to disclose information relative to the SMDRP to the public
in general.

The other aspect of the peoples right to know apart from the duty to disclose is the duty to allow access to
information on matters of public concern under Sec. 7, Art. III of the Constitution. The gateway to information
opens to the public the following: (1) official records; (2) documents and papers pertaining to official acts,
transactions, or decisions; and (3) government research data used as a basis for policy development.

Thus, the duty to disclose information should be differentiated from the duty to permit access to
information. There is no need to demand from the government agency disclosure of information as this is
mandatory under the Constitution; failing that, legal remedies are available. On the other hand, the interested
party must first request or even demand that he be allowed access to documents and papers in the particular
agency. A request or demand is required; otherwise, the government office or agency will not know of the
desire of the interested party to gain access to such papers and what papers are needed. The duty to disclose
covers only transactions involving public interest, while the duty to allow access has a broader scope of
information which embraces not only transactions involving public interest, but any matter contained in official
communications and public documents of the government agency.

We find that although petitioner did not make any demand on the NHA to allow access to information, we treat
the petition as a written request or demand. We order the NHA to allow petitioner access to its official records,
documents, and papers relating to official acts, transactions, and decisions that are relevant to the said JVA
and subsequent agreements relative to the SMDRP.

Ninth Issue: Whether the operative fact doctrine applies to the

instant petition

Petitioner postulates that the operative fact doctrine is inapplicable to the present case because it is an
equitable doctrine which could not be used to countenance an inequitable result that is contrary to its proper
office.

On the other hand, the petitioner Solicitor General argues that the existence of the various agreements
implementing the SMDRP is an operative fact that can no longer be disturbed or simply ignored, citing Rieta v.
People of the Philippines.[90]

The argument of the Solicitor General is meritorious.

The operative fact doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is stated that a
legislative or executive act, prior to its being declared as unconstitutional by the courts, is valid and must be
complied with, thus:

As the new Civil Code puts it: When the courts declare a law to be inconsistent with the Constitution, the
former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall
be valid only when they are not contrary to the laws of the Constitution. It is understandable why it should be
so, the Constitution being supreme and paramount. Any legislative or executive act contrary to its terms cannot
survive.

Such a view has support in logic and possesses the merit of simplicity. It may not however be sufficiently
realistic. It does not admit of doubt that prior to the declaration of nullity such challenged legislative or
executive act must have been in force and had to be complied with. This is so as until after the judiciary,
in an appropriate case, declares its invalidity, it is entitled to obedience and respect. Parties may have acted
under it and may have changed their positions. What could be more fitting than that in a subsequent litigation
regard be had to what has been done while such legislative or executive act was in operation and presumed to
be valid in all respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact
must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is the
governmental organ which has the final say on whether or not a legislative or executive measure is valid, a
period of time may have elapsed before it can exercise the power of judicial review that may lead to a
declaration of nullity. It would be to deprive the law of its quality of fairness and justice then, if there be no
recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: The actual existence of a statute, prior to such a
determination [of unconstitutionality], is an operative fact and may have consequences which cannot
justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular
relations, individual and corporate, and particular conduct, private and official. This language has been quoted
with approval in a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even
more recent instance is the opinion of Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and
Co.[91] (Emphasis supplied.)

This doctrine was reiterated in the more recent case of City of Makati v. Civil Service Commission, wherein we
ruled that:

Moreover, we certainly cannot nullify the City Governments order of suspension, as we have no reason to do
so, much less retroactively apply such nullification to deprive private respondent of a compelling and valid
reason for not filing the leave application. For as we have held, a void act though in law a mere scrap of
paper nonetheless confers legitimacy upon past acts or omissions done in reliance
thereof. Consequently, the existence of a statute or executive order prior to its being adjudged void is
an operative fact to which legal consequences are attached. It would indeed be ghastly unfair to prevent
private respondent from relying upon the order of suspension in lieu of a formal leave application.[92] (Emphasis
supplied.)

The principle was further explicated in the case of Rieta v. People of the Philippines, thus:

In similar situations in the past this Court had taken the pragmatic and realistic course set forth in Chicot
County Drainage District vs. Baxter Bank to wit:

The courts below have proceeded on the theory that the Act of Congress, having been found to be
unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence
affording no basis for the challenged decree. x x x It is quite clear, however, that such broad statements as to
the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a
statute, prior to [the determination of its invalidity], is an operative fact and may have consequences which
cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in various aspects with respect to particular
conduct, private and official. Questions of rights claimed to have become vested, of status, of prior
determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature
both of the statute and of its previous application, demand examination. These questions are among the most
difficult of those which have engaged the attention of courts, state and federal, and it is manifest from
numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be
justified.

In the May 6, 2003 Resolution in Chavez v. PEA,[93] we ruled that De Agbayani[94] is not applicable to the case
considering that the prevailing law did not authorize private corporations from owning land. The prevailing law
at the time was the 1935 Constitution as no statute dealt with the same issue.

In the instant case, RA 6957 was the prevailing law at the time that the joint venture agreement was
signed. RA 6957, entitled An Act Authorizing The Financing, Construction, Operation And Maintenance Of
Infrastructure Projects By The Private Sector And For Other Purposes, which was passed by Congress on July
24, 1989, allows repayment to the private contractor of reclaimed lands.[95] Such law was relied upon by
respondents, along with the above-mentioned executive issuances in pushing through with the Project. The
existence of such law and issuances is an operative fact to which legal consequences have attached. This
Court is constrained to give legal effect to the acts done in consonance with such executive and legislative
acts; to do otherwise would work patent injustice on respondents.

Further, in the May 6, 2003 Resolution in Chavez v. PEA, we ruled that in certain cases, the transfer of land,
although illegal or unconstitutional, will not be invalidated on considerations of equity and social
justice. However, in that case, we did not apply the same considering that PEA, respondent in said case, was
not entitled to equity principles there being bad faith on its part, thus:

There are, moreover, special circumstances that disqualify Amari from invoking equity principles. Amari
cannot claim good faith because even before Amari signed the Amended JVA on March 30, 1999, petitioner
had already filed the instant case on April 27, 1998 questioning precisely the qualification of Amari to acquire
the Freedom Islands. Even before the filing of this petition, two Senate Committees had already approved
on September 16, 1997 Senate Committee Report No. 560. This Report concluded, after a well-publicized
investigation into PEAs sale of the Freedom Islands to Amari, that the Freedom Islands are inalienable lands of
the public domain. Thus, Amari signed the Amended JVA knowing and assuming all the attendant risks,
including the annulment of the Amended JVA.[96]

Such indicia of bad faith are not present in the instant case. When the ruling in PEA was rendered by this Court
on July 9, 2002, the JVAs were all executed. Furthermore, when petitioner filed the instant case against
respondents on August 5, 2004, the JVAs were already terminated by virtue of the MOA between the NHA and
RBI. The respondents had no reason to think that their agreements were unconstitutional or even
questionable, as in fact, the concurrent acts of the executive department lent validity to the implementation of
the Project. The SMDRP agreements have produced vested rights in favor of the slum dwellers, the buyers of
reclaimed land who were issued titles over said land, and the agencies and investors who made investments in
the project or who bought SMPPCs. These properties and rights cannot be disturbed or questioned after the
passage of around ten (10) years from the start of the SMDRP implementation. Evidently, the operative fact
principle has set in. The titles to the lands in the hands of the buyers can no longer be invalidated.
The Courts Dispositions

Based on the issues raised in this petition, we find that the March 19, 1993 JVA between NHA and RBI and the
SMDRP embodied in the JVA, the subsequent amendments to the JVA and all other agreements signed and
executed in relation to it, including, but not limited to, the September 26, 1994 Smokey Mountain Asset Pool
Agreement and the agreement on Phase I of the Project as well as all other transactions which emanated from
the Project, have been shown to be valid, legal, and constitutional. Phase II has been struck down by the
Clean Air Act.

With regard to the prayer for prohibition, enjoining respondents particularly respondent NHA from further
implementing and/or enforcing the said Project and other agreements related to it, and from further deriving
and/or enjoying any rights, privileges and interest from the Project, we find the same prayer meritless.

Sec. 2 of Rule 65 of the 1997 Rules of Civil Procedure provides:

Sec. 2. Petition for prohibition.When the proceedings of any tribunal, corporation, board, officer or person,
whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal
or any other plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be
rendered commanding the respondent to desist from further proceedings in the action or matter specified
therein, or otherwise granting such incidental reliefs as law and justice may require.

It has not been shown that the NHA exercised judicial or quasi-judicial functions in relation to the SMDRP and
the agreements relative to it. Likewise, it has not been shown what ministerial functions the NHA has with
regard to the SMDRP.
A ministerial duty is one which is so clear and specific as to leave no room for the exercise of discretion in its
performance. It is a duty which an officer performs in a given state of facts in a prescribed manner in
obedience to the mandate of legal authority, without regard to the exercise of his/her own judgment upon the
propriety of the act done.[97]
Whatever is left to be done in relation to the August 27, 2003 MOA, terminating the JVA and other related
agreements, certainly does not involve ministerial functions of the NHA but instead requires exercise of
judgment. In fact, Item No. 4 of the MOA terminating the JVAs provides for validation of the developers (RBIs)
claims arising from the termination of the SMDRP through the various government agencies.[98] Such validation
requires the exercise of discretion.

In addition, prohibition does not lie against the NHA in view of petitioners failure to avail and exhaust all
administrative remedies. Clear is the rule that prohibition is only available when there is no adequate remedy in
the ordinary course of law.

More importantly, prohibition does not lie to restrain an act which is already a fait accompli. The operative fact
doctrine protecting vested rights bars the grant of the writ of prohibition to the case at bar. It should be
remembered that petitioner was the Solicitor General at the time SMDRP was formulated and implemented. He
had the opportunity to question the SMDRP and the agreements on it, but he did not. The moment to challenge
the Project had passed.

On the prayer for a writ of mandamus, petitioner asks the Court to compel respondents to disclose all
documents and information relating to the project, including, but not limited to, any subsequent agreements
with respect to the different phases of the Project, the revisions of the original plan, the additional works
incurred on the Project, the current financial condition of respondent RBI, and the transactions made with
respect to the project. We earlier ruled that petitioner will be allowed access to official records relative to the
SMDRP. That would be adequate relief to satisfy petitioners right to the information gateway.

WHEREFORE, the petition is PARTIALLY GRANTED.

The prayer for a writ of prohibition is DENIED for lack of merit.

The prayer for a writ of mandamus is GRANTED. Respondent NHA is ordered to allow access to petitioner to
all public documents and official records relative to the SMDRPincluding, but not limited to, the March 19,
1993 JVA between the NHA and RBI and subsequent agreements related to the JVA, the revisions over the
original plan, and the additional works incurred on and the transactions made with respect to the Project.

No costs.

SO ORDERED.

VIVENCIO V. JUMAMIL, G.R. No. 144570

Petitioner,
Present:

PANGANIBAN, J., Chairman,

- versus - SANDOVAL-GUTIERREZ,
CORONA,
CARPIO MORALES, and
GARCIA, JJ.

JOSE J. CAFE, GLICERIO L. ALERIA, RUDY G. ADLAON, DAMASCENO AGUIRRE, RAMON PARING,
MARIO ARGUELLES, ROLANDO STA. ANA, NELLIE UGDANG, PEDRO ATUEL, RUBY BONSOBRE,
RUTH FORNILLOS, DANIEL GATCHALIAN, RUBEN GUTIERREZ, JULIET GATCHALIAN, ZENAIDA
POBLETE, ARTHUR LOUDY, LILIAN LU, ISABEL MEJIA, EDUARDO ARGUELLES, LAO SUI KIEN,
SAMUEL CONSOLACION, DR. ARTURO MONTERO,DRA. LILIOSA MONTERO, PEDRO LACIA, CIRILA
LACIA, EVELYN SANGALANG, DAVID CASTILLO, ARSENIO SARMIENTO, ELIZABETH SY, METODIO
NAVASCA, HELEN VIRTUDAZO, IRENE LIMBAGA, SYLVIA BUSTAMANTE, JUANA DACALUS, NELLIE
RICAMORA, JUDITH ESPINOSA, PAZ KUDERA, EVELYN PANES, AGATON BULICATIN, PRESCILLA
GARCIA, ROSALIA OLITAO, LUZVIMINDA AVILA, GLORIA OLAIR, LORITA MENCIAS, RENATOARIETA,
EDITHA ACUZAR, LEONARDA VILLACAMPA, ELIAS JARDINICO, BOBINO NAMUAG, FELIMON
NAMUAG, EDGAR CABUNOC, HELEN ARGUELLES, HELEN ANG, FELECIDAD PRIETO, LUISITO
GRECIA, LILIBETH PARING, RUBEN CAMACHO, ROSALINDA LALUNA, LUZ YAP, ROGELIO
LAPUT, ROSEMARIE WEE, TACOTCHE RANAIN,AVELINO DELOS REYES and ROGASIANO OROPEZA,
Respondents. Promulgated:

September 21, 2005

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

DECISION

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Vivencio V. Jumamil
seeks to reverse the decision of the Court of Appeals dated July 24, 2000[1] in CA-G.R. CV No. 35082, the
dispositive portion of which read:

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao dated 26
November 1990 in Sp. Civil Action No. 89-1 is hereby AFFIRMED.[2]

The Regional Trial Court dismissed petitioners petition for declaratory relief with prayer for preliminary
injunction and writ of restraining order, and ordered the petitioner to pay attorneys fees in the amount
of P1,000 to each of the 57 private respondents.[3]

The factual antecedents follow.

In 1989, petitioner Jumamil[4] filed before the Regional Trial Court (RTC) of Panabo, Davao del Norte a petition
for declaratory relief with prayer for preliminary injunction and writ of restraining order against public
respondents Mayor Jose J. Cafe and the members of the Sangguniang Bayan of Panabo, Davao del Norte. He
questioned the constitutionality of Municipal Resolution No. 7, Series of 1989 (Resolution No. 7).
Resolution No. 7, enacting Appropriation Ordinance No. 111, provided for an initial appropriation of P765,000
for the construction of stalls around a proposed terminal fronting the Panabo Public Market[5] which was
destroyed by fire.

Subsequently, the petition was amended due to the passage of Resolution No. 49, series of 1989 (Resolution
No. 49), denominated as Ordinance No. 10, appropriating a further amount of P1,515,000 for the construction
of additional stalls in the same public market.[6]

Prior to the passage of these resolutions, respondent Mayor Cafe had already entered into contracts with those
who advanced and deposited (with the municipal treasurer) from their personal funds the sum of P40,000
each. Some of the parties were close friends and/or relatives of the public respondents.[7] The construction of
the stalls which petitioner sought to stop through the preliminary injunction in the RTC was nevertheless
finished, rendering the prayer therefor moot and academic. The leases of the stalls were then awarded by
public raffle which, however, was limited to those who had deposited P40,000 each.[8] Thus, the petition was
amended anew to include the 57 awardees of the stalls as private respondents.[9]

Petitioner alleges that Resolution Nos. 7 and 49 were unconstitutional because they were:

passed for the business, occupation, enjoyment and benefit of private respondents who deposited the amount
of P40,000.00 for each stall, and with whom also the mayor had a prior contract to award the would be
constructed stalls to all private respondents. As admitted by public respondents some of the private
respondents are close friends and/or relatives of some of the public respondents which makes the questioned
acts discriminatory. The questioned resolutions and ordinances did not provide for any notice of publication
that the special privilege and unwarranted benefits conferred on the private respondents maybe (sic) availed of
by anybody who can deposit the amount of P40,000.00.[10]

Neither was there any prior notice or publication pertaining to contracts entered into by public and private
respondents for the construction of stalls to be awarded to private respondents that the same can be availed of
by anybody willing to deposit P40,000.00.[11]

In this petition, petitioner prays for the reversal of the decision of the Court of Appeals (CA) and a declaration
of the unconstitutionality, illegality and nullity of the questioned resolutions/ordinances and lease contracts
entered into by the public and private respondents; for the declaration of the illegality of the award of the stalls
during the pendency of this action and for the re-raffling and award of the stalls in a manner that is fair and just
to all interested applicants;[12] for the issuance of an order to the local government to admit any and all
interested persons who can deposit the amount of P40,000 for a stall and to order a re-raffling for the award of
the stalls to the winners of the re-raffle; for the nullification of the award of attorneys fees to private
respondents on the ground that it was erroneous and unmeritorious; and for the award of damages in favor of
petitioner in the form of attorneys fees.[13]

At the outset, we must point out that the issue of the constitutionality of the questioned resolutions was never
ruled upon by both the RTC and the CA.

It appears that on May 21, 1990, both parties agreed[14] to await the decision in CA G.R. SP No.
20424,[15] which involved similar facts, issues and parties. The RTC, consequently, deferred the resolution of
the pending petition. The appellate court eventually rendered its decision in that case finding that the
petitioners were not entitled to the declaratory relief prayed for as they had no legal interest in the controversy.
Upon elevation to the Supreme Court as UDK Case No. 9948, the petition for review on certiorari was denied
for being insufficient in form and substance. [16]

The RTC, after receipt of the entry of the SC judgment,[17] dismissed the pending petition on November 26,
1990. It adopted the ruling in CA G.R. SP No. 20424:
xxxxxxxxx

We find petitioners aforesaid submission utterly devoid of merit. It is, to say the least, questionable whether or
not a special civil action for declaratory relief can be filed in relation to a contract by persons who are not
parties thereto. Under Sec. 1 of Rule 64 of the Rules of Court, any person interested under a deed, will,
contract, or other written instruments may bring an action to determine any question of the contract, or validly
arising under the instrument for a declaratory (sic) of his rights or duties thereunder. Since contracts take effect
only between the parties (Art. 1311) it is quite plain that one who is not a party to a contract can not have the
interest in it that the rule requires as a basis for declaratory reliefs (PLUM vs. Santos, 45 SCRA 147).

Following this ruling, the petitioners were not parties in the agreement for the award of the market stalls by the
public respondents, in the public market of Panabo, Davao, and since the petitioners were not parties to the
award of the market stalls and whose rights are never affected by merely stating that they are taxpayers, they
have no legal interest in the controversy and they are not, therefore, entitled to bring an action for declaratory
relief.[18]
WHEREFORE, the petition of the petitioners as taxpayers being without merit and not in consonance with law,
is hereby ordered DISMISSED.

As to the counterclaim for damages, the same not having been actually and fully proven, the Court gives no
award as to the same. It is not amiss to state here that the petitioners agreed to be bound by the outcome of
Special Civil Case No. 89-10.

However, for unnecessarily dragging into Court the fifty-seven (57) private respondents who are bonafide
businessmen and stall holders in the public market of Panabo, it is fitting and proper for the petitioners to be
ordered payment of attorneys fees.

Accordingly, the herein petitioners are ordered to pay ONE THOUSAND (P1,000.00) PESOS EACH to the 57
private respondents, as attorneys fees, jointly and severally, and for them to pay the costs of this suit.

SO ORDERED.[19]
From this adverse decision, petitioner again appealed to the Court of Appeals in CA-G.R. CV No. 35082 which
is now before us for review.

The appellate court, yet again, affirmed the RTC decision and held that:
Res judicata does not set in a case dismissed for lack of capacity to sue, because there has been no
determination on the merits. Neither does the law of the case apply. However, the court a quo took judicial
notice of the fact that petitioners agreed to be bound by the outcome of Special Civil Case No. 89-10. Allegans
contraria non est audiendus. (He is not to be heard who alleges things contradictory to each other.) It must be
here observed that petitioners-appellants were the ones who manifested that it would be practical to await the
decision of the Supreme Court in their petition for certiorari, for after all the facts, circumstances and issues in
that case, are exactly the same as in the case that is here appealed. Granting that they may evade such
assumption, a careful evaluation of the case would lead Us to the same conclusion: that the case for
declaratory relief is dismissible. As enumerated by Justice Regalado in his Remedial Law Compendium, the
requisites of an action for declaratory relief are:

(a) The subject matter of the controversy must be a deed, will, contract or other written instrument, statute,
executive order or regulation, or ordinance;

(b) The terms of said documents and the validity thereof are doubtful and require judicial construction;

(c) There must have been no breach of the documents in question;

(d) There must be an actual justiciable controversy or the ripening seeds of one between persons whose
interests are adverse;

(e) The issue must be ripe for judicial determination; and

(f) Adequate relief is not available through other means or other forms of action or proceeding.

In Tolentino vs. Board of Accountancy, et al, 90 Phil. 83, 88, the Supreme Court ratiocinated the requisites of
justiciability of an action for declaratory relief by saying that the court must be satisfied that an actual
controversy, or the ripening seeds of one, exists between parties, all of whom are sui juris and before the court,
and that the declaration sought will be a practical help in ending the controversy.

The petition must show an active antagonistic assertion of a legal right on one side and a denial thereof on the
other concerning a real, and not a mere theoretical question or issue. The question is whether the facts alleged
a substantial controversy between parties having adverse legal interests, of sufficient immediacy and reality to
warrant the issuance of a declaratory relief. In GSISEA and GSISSU vs. Hon. Alvendia etc. and GSIS, 108
Phil. 505, the Supreme Court ruled a declaratory relief improper or unnecessary when it appears to be a moot
case, since it seeks to get a judgment on a pretended controversy, when in reality there is none. In Kawasaki
Port Service Corporation vs. Amores, 199 SCRA 230, citing Dy Poco vs. Commissioner of Immigration, et al.,
16 SCRA 618, the rule was stated: where a declaratory judgment as to a disputed fact would be determinative
of issues rather than a construction of definite stated rights, statuses and other relations, commonly expressed
in a written instrument, the case is not one for declaratory judgment.

Indeed, in its true light, the present petition for declaratory relief seems to be no more than a request for an
advisory opinion to which courts in this and other jurisdiction have cast a definite aversion. The ordinances
being assailed are appropriation ordinances. The passage of the ordinances were pursuant to the public
purpose of constructing market stalls. For the exercise of judicial review, the governmental act being
challenged must have had an adverse effect on the person challenging it, and the person challenging the act,
must have standing to challenge, i.e., in the categorical and succinct language of Justice Laurel, he must have
a personal and substantial interest in the case such that he has sustained, or will sustain, direct injury as a
result of its enforcement. Standing is a special concern in constitutional law because in some cases suits are
brought not by parties who have been personally injured by the operation of a law or by official action taken,
but by concerned citizens, taxpayers or voters who actually sue in the public interest. Hence the question in
standing is whether such parties have alleged such a personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of issues upon which the court largely
depends for illumination of difficult constitutional questions.

A careful analysis of the records of the case at bar would disclose that petitioners-appellants have suffered no
wrong under the terms of the ordinances being assailed and, naturally need no relief in the form they now seek
to obtain. Judicial exercise cannot be exercised in vacuo. The policy of the courts is to avoid ruling on a
constitutional question and to presume that the acts of the political departments are valid in the absence of a
clear and unmistakable showing to the contrary. To doubt is to sustain. The issue is not the ordinances
themselves, but the award of the market stalls to the private respondents on the strength of the contracts
individually executed by them with Mayor Cafe. To reiterate, a person who is not a party to a contract cannot
file a petition for declaratory relief and seek judicial interpretation of such contract (Atlas Consolidated Mining
Corp. vs. Court of Appeals, 182 SCRA 166). Not having established their locus standi, we see no error
committed by the court a quo warranting reversal of the appealed decision.

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao dated 26
November 1990 in Sp. Civil Action No. 89-1 is hereby AFFIRMED.

SO ORDERED.[20]

Thus, both the RTC and the CA dismissed the case on the ground of petitioners lack of legal standing and the
parties agreement to be bound by the decision in CA G.R. SP. No. 20424.
The issues to be resolved are the following:
(1) whether the parties were bound by the outcome in CA G.R. SP. No. 20424;
(2) whether petitioner had the legal standing to bring the petition for declaratory relief;
(3) whether Resolution Nos. 7 and 49 were unconstitutional; and
(4) whether petitioner should be held liable for damages.

Locus Standi and the

Constitutionality Issue
We will first consider the second issue. The petition for declaratory relief challenged the constitutionality of the
subject resolutions. There is an unbending rule that courts will not assume jurisdiction over a constitutional
question unless the following requisites are satisfied: (1) there must be an actual case calling for the exercise
of judicial review; (2) the question before the Court must be ripe for adjudication; (3) the person challenging the
validity of the act must have standing to do so; (4) the question of constitutionality must have been raised at
the earliest opportunity, and (5) the issue of constitutionality must be the very lis mota of the case.[21]
Legal standing or locus standi is a partys personal and substantial interest in a case such that he has
sustained or will sustain direct injury as a result of the governmental act being challenged. It calls for more than
just a generalized grievance. The term interest means a material interest, an interest in issue affected by the
decree, as distinguished from mere interest in the question involved, or a mere incidental interest. [22]Unless a
persons constitutional rights are adversely affected by the statute or ordinance, he has no legal standing.

The CA held that petitioner had no standing to challenge the two resolutions/ordinances because he suffered
no wrong under their terms. It also concluded that the issue (was) not the ordinances themselves but the
award of the market stalls to the private respondents on the strength of the contracts individually executed by
them with Mayor Cafe. Consequently, it ruled that petitioner, who was not a party to the lease contracts, had
no standing to file the petition for declaratory relief and seek judicial interpretation of the agreements.

We do not agree. Petitioner brought the petition in his capacity as taxpayer of the Municipality of Panabo,
Davao del Norte[23] and not in his personal capacity. He was questioning the official acts of the public
respondents in passing the ordinances and entering into the lease contracts with private respondents. A
taxpayer need not be a party to the contract to challenge its validity.[24] Atlas Consolidated Mining &
Development Corporation v. Court of Appeals[25] cited by the CA does not apply because it involved contracts
between two private parties.
Parties suing as taxpayers must specifically prove sufficient interest in preventing the illegal expenditure of
money raised by taxation.[26] The expenditure of public funds by an officer of the State for the purpose of
executing an unconstitutional act constitutes a misapplication of such

funds.[27] The resolutions being assailed were appropriations ordinances. Petitioner alleged that these
ordinances were passed for the business, occupation, enjoyment and benefit of private respondents[28] (that is,
allegedly for the private benefit of respondents) because even before they were passed, respondent Mayor
Cafe and private respondents had already entered into lease contracts for the construction and award of the
market stalls.[29] Private respondents admitted they deposited P40,000 each with the municipal treasurer, which
amounts were made available to the municipality during the construction of the stalls. The deposits, however,
were needed to ensure the speedy completion of the stalls after the public market was gutted by a series of
fires.[30] Thus, the award of the stalls was necessarily limited only to those who advanced their personal funds
for their construction.[31]

Petitioner did not seasonably allege his interest in preventing the illegal expenditure of public funds or the
specific injury to him as a result of the enforcement of the questioned resolutions and contracts. It was only in
the Remark to Comment he filed in this Court did he first assert that he (was) willing to engage in business and
(was) interested to occupy a market stall.[32] Such claim was obviously an afterthought.

Be that as it may, we have on several occasions relaxed the application of these rules on legal standing:

In not a few cases, the Court has liberalized the locus standi requirement when a petition raises an issue of
transcendental significance or paramount importance to the people. Recently, after holding that the IBP had no
locus standi to bring the suit, the Court in IBP v. Zamora nevertheless entertained the Petition therein. It noted
that "the IBP has advanced constitutional issues which deserve the attention of this Court in view of their
seriousness, novelty and weight as precedents."[33]

oOo

Objections to a taxpayer's suit for lack of sufficient personality, standing or interest are procedural matters.
Considering the importance to the public of a suit assailing the constitutionality of a tax law, and in keeping with
the Court's duty, specially explicated in the 1987 Constitution, to determine whether or not the other branches
of the Government have kept themselves within the limits of the Constitution and the laws and that they have
not abused the discretion given to them, the Supreme Court may brush aside technicalities of procedure and
take cognizance of the suit.[34]
oOo

There being no doctrinal definition of transcendental importance, the following determinants formulated by
former Supreme Court Justice Florentino P. Feliciano are instructive: (1) the character of the funds or other
assets involved in the case; (2) the presence of a clear case of disregard of a constitutional or statutory
prohibition by the public respondent agency or instrumentality of the government; and (3) the lack of any other
party with a more direct and specific interest in raising the questions being raised.[35]

But, even if we disregard petitioners lack of legal standing, this petition must still fail. The subject
resolutions/ordinances appropriated a total of P2,280,000 for the construction of the public market stalls.
Petitioner alleges that these ordinances were discriminatory because, even prior to their enactment, a decision
had already been made to award the market stalls to the private respondents who deposited P40,000 each
and who were either friends or relatives of the public respondents. Petitioner asserts that there (was) no
publication or invitation to the public that this contract (was) available to all who (were) interested to own a stall
and (were) willing to deposit P40,000.[36] Respondents, however, counter that the public respondents act of
entering into this agreement was authorized by the Sangguniang Bayan of Panabo per Resolution No. 180
dated October 10, 1988[37] and that all the people interested were invited to participate in investing their
savings.[38]

We note that the foregoing was a disputed fact which the courts below did not resolve because the case was
dismissed on the basis of petitioners lack of legal standing. Nevertheless, petitioner failed to prove the subject
ordinances and agreements to be discriminatory. Considering that he was asking this Court to nullify the acts
of the local political department of Panabo, Davao del Norte, he should have clearly established that such
ordinances operated unfairly against those who were not notified and who were thus not given the opportunity
to make their deposits. His unsubstantiated allegation that the public was not notified did not suffice.
Furthermore, there was the time-honored presumption of regularity of official duty, absent any showing to the
contrary.[39] And this is not to mention that:

The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid, absent a clear and unmistakable showing to the contrary. To doubt is to
sustain. This presumption is based on the doctrine of separation of powers. This means that the measure had
first been carefully studied by the legislative and executive departments and found to be in accord with the
Constitution before it was finally enacted and approved.[40]

Therefore, since petitioner had no locus standi to

question the ordinances, there is no need for us to discuss the constitutionality of said enactments.

Were the Parties Bound by the

Outcome in CA G.R. SP. No. 20424?
Adverting to the first issue, we observe that petitioner was the one who wanted the parties to await the decision
of the Supreme Court in UDK Case No. 9948 since the facts and issues in that case were similar to this.
Petitioner, having expressly agreed to be bound by our decision in the aforementioned case, should be reined
in by the dismissal order we issued, now final and executory. In addition to the fact that nothing prohibits
parties from committing to be bound by the results of another case, courts may take judicial notice of a
judgment in another case as long as the parties give

their consent or do not object.[41] As opined by Justice Edgardo L. Paras:

A court will take judicial notice of its own acts and records in the same case, of facts established in prior
proceedings in the same case, of the authenticity of its own records of another case between the same parties,
of the files of related cases in the same court, and of public records on file in the same court. In addition,
judicial notice will be taken of the record, pleadings or judgment of a case in another court between the same
parties or involving one of the same parties, as well as of the record of another case between different parties
in the same court.[42]
Damages
Finally, on the issue of damages, petitioner asserts that he impleaded the 57 respondents in good faith since
the award of the stalls to them was made during the pendency of the action.[43] Private respondents refute this
assertion and argue that petitioner filed this action in bad faith and with the intention of harassing them
inasmuch as he had already filed CA G.R. SP. No. 20424 even before then.[44] The RTC, affirmed by the CA,
held that petitioner should pay attorneys fees for unnecessarily dragging into Court the 57 private respondents
who (were) bonafide businessmen and stall holders in the public market of Panabo.[45]

We do not agree that petitioner should be held liable for damages. It is not sound public policy to put a
premium on the right to litigate where such right is exercised in good faith, albeit erroneously. [46] The alleged
bad faith of petitioner was never established. The special circumstances in Article 2208 of the Civil Code
justifying the award of attorneys fees are not present in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 35082 is hereby AFFIRMED with
the MODIFICATION that the award of attorney's fees to private respondents is deleted.

Costs against petitioner.

SO ORDERED.

G.R. No. 113375 May 5, 1994

KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.

CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE,
CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN,
QUINTIN S. DOROMAL, SEN. FREDDIE WEBB, SEN. WIGBERTO TAADA, and REP. JOKER P.
ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary, Office of the President; RENATO
CORONA, in his capacity as Assistant Executive Secretary and Chairman of the Presidential review
Committee on the Lotto, Office of the President; PHILIPPINE CHARITY SWEEPSTAKES OFFICE; and
PHILIPPINE GAMING MANAGEMENT CORPORATION, respondents.

Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L. Gozon for petitioners.

Renato L. Cayetano and Eleazar B. Reyes for PGMC.

Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.

DAVIDE, JR., J.:

This is a special civil action for prohibition and injunction, with a prayer for a temporary restraining order and
preliminary injunction, which seeks to prohibit and restrain the implementation of the "Contract of Lease" executed
by the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Gaming Management Corporation (PGMC)
in connection with the on- line lottery system, also known as "lotto."

Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock domestic corporation composed of
civic-spirited citizens, pastors, priests, nuns, and lay leaders who are committed to the cause of truth, justice, and
national renewal. The rest of the petitioners, except Senators Freddie Webb and Wigberto Taada and
Representative Joker P. Arroyo, are suing in their capacities as members of the Board of Trustees of KILOSBAYAN
and as taxpayers and concerned citizens. Senators Webb and Taada and Representative Arroyo are suing in their
capacities as members of Congress and as taxpayers and concerned citizens of the Philippines.

The pleadings of the parties disclose the factual antecedents which triggered off the filing of this petition.

Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P. Blg. 42) which grants it the
authority to hold and conduct "charity sweepstakes races, lotteries and other similar activities," the PCSO decided to
establish an on- line lottery system for the purpose of increasing its revenue base and diversifying its sources of
funds. Sometime before March 1993, after learning that the PCSO was interested in operating an on-line lottery
system, the Berjaya Group Berhad, "a multinational company and one of the ten largest public companies in
Malaysia," long "engaged in, among others, successful lottery operations in Asia, running both Lotto and Digit
games, thru its subsidiary, Sports Toto Malaysia," with its "affiliate, the International Totalizator Systems, Inc., . . . an
American public company engaged in the international sale or provision of computer systems, softwares, terminals,
training and other technical services to the gaming industry," "became interested to offer its services and resources
to PCSO." As an initial step, Berjaya Group Berhad (through its individual nominees) organized with some Filipino
investors in March 1993 a Philippine corporation known as the Philippine Gaming Management Corporation
(PGMC), which "was intended to be the medium through which the technical and management services required for
the project would be offered and delivered to PCSO." 1

Before August 1993, the PCSO formally issued a Request for Proposal (RFP) for the Lease Contract of an on-line
lottery system for the PCSO. 2 Relevant provisions of the RFP are the following:

1. EXECUTIVE SUMMARY

xxx xxx xxx

1.2. PCSO is seeking a suitable contractor which shall build, at its own expense, all the facilities
('Facilities') needed to operate and maintain a nationwide on-line lottery system. PCSO shall lease
the Facilities for a fixed percentage ofquarterly gross receipts. All receipts from ticket sales shall be
turned over directly to PCSO. All capital, operating expenses and expansion expenses and risks
shall be for the exclusive account of the Lessor.

xxx xxx xxx

1.4. The lease shall be for a period not exceeding fifteen (15) years.

1.5. The Lessor is expected to submit a comprehensive nationwide lottery development plan
("Development Plan") which will include the game, the marketing of the games, and the logistics to
introduce the games to all the cities and municipalities of the country within five (5) years.

xxx xxx xxx

1.7. The Lessor shall be selected based on its technical expertise, hardware and software capability,
maintenance support, and financial resources. The Development Plan shall have a substantial
bearing on the choice of the Lessor. The Lessor shall be a domestic corporation, with at least sixty
percent (60%) of its shares owned by Filipino shareholders.

xxx xxx xxx

The Office of the President, the National Disaster Control Coordinating Council, the Philippine
National Police, and the National Bureau of Investigation shall be authorized to use the nationwide
telecommunications system of the Facilities Free of Charge.

1.8. Upon expiration of the lease, the Facilities shall be owned by PCSO without any additional
consideration. 3

xxx xxx xxx

2.2. OBJECTIVES

The objectives of PCSO in leasing the Facilities from a private entity are as follows:

xxx xxx xxx

2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no expense or risk to the
government.
 xxx xxx xxx

2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR

xxx xxx xxx

2.4.2. THE LESSOR

The Proponent is expected to furnish and maintain the Facilities, including the personnel needed to
operate the computers, the communications network and sales offices under a build-lease basis.
The printing of tickets shall be undertaken under the supervision and control of PCSO. The Facilities
shall enable PCSO to computerize the entire gaming system.

The Proponent is expected to formulate and design consumer-oriented Master Games Plan suited to
the marketplace, especially geared to Filipino gaming habits and preferences. In addition, the Master
Games Plan is expected to include a Product Plan for each game and explain how each will be
introduced into the market. This will be an integral part of the Development Plan which PCSO will
require from the Proponent.

xxx xxx xxx

The Proponent is expected to provide upgrades to modernize the entire gaming system over the life
ofthe lease contract.

The Proponent is expected to provide technology transfer to PCSO technical personnel. 4

7. GENERAL GUIDELINES FOR PROPONENTS

xxx xxx xxx

Finally, the Proponent must be able to stand the acid test of proving that it is an entity able to take on
the role of responsible maintainer of the on-line lottery system, and able to achieve PSCO's goal of
formalizing an on-line lottery system to achieve its mandated objective. 5

xxx xxx xxx

16. DEFINITION OF TERMS

Facilities: All capital equipment, computers, terminals, software, nationwide telecommunication

network, ticket sales offices, furnishings, and fixtures; printing costs; cost of salaries and wages;
advertising and promotion expenses; maintenance costs; expansion and replacement costs; security
and insurance, and all other related expenses needed to operate nationwide on-line lottery system.6

Considering the above citizenship requirement, the PGMC claims that the Berjaya Group "undertook to reduce its
equity stakes in PGMC to 40%," by selling 35% out of the original 75% foreign stockholdings to local investors.

On 15 August 1993, PGMC submitted its bid to the PCSO.7

The bids were evaluated by the Special Pre-Qualification Bids and Awards Committee (SPBAC) for the on-line
lottery and its Bid Report was thereafter submitted to the Office of the President. 8 The submission was preceded by
complaints by the Committee's Chairperson, Dr. Mita Pardo de Tavera. 9

On 21 October 1993, the Office of the President announced that it had given the respondent PGMC the go-signal to
operate the country's on-line lottery system and that the corresponding implementing contract would be submitted
not later than 8 November 1993 "for final clearance and approval by the Chief Executive." 10 This announcement was
published in the Manila Standard, Philippine Daily Inquirer, and the Manila Times on 29 October 1993. 11

On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel V. Ramos strongly opposing the
setting up to the on-line lottery system on the basis of serious moral and ethical considerations. 12

At the meeting of the Committee on Games and Amusements of the Senate on 12 November 1993, KILOSBAYAN
reiterated its vigorous opposition to the on-line lottery on account of its immorality and illegality. 13

On 19 November 1993, the media reported that despite the opposition, "Malacaang will push through with the
operation of an on-line lottery system nationwide" and that it is actually the respondent PCSO which will operate the
lottery while the winning corporate bidders are merely "lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all documents pertaining to the lottery award from
Executive Secretary Teofisto Guingona, Jr. In his answer of 17 December 1993, the Executive Secretary informed
KILOSBAYAN that the requested documents would be duly transmitted before the end of the month. 15. However, on
that same date, an agreement denominated as "Contract of Lease" was finally executed by respondent PCSO and
respondent PGMC. 16 The President, per the press statement issued by the Office of the President, approved it on
20 December 1993.17

In view of their materiality and relevance, we quote the following salient provisions of the Contract of Lease:

1. DEFINITIONS

The following words and terms shall have the following respective meanings:

1.1 Rental Fee Amount to be paid by PCSO to the LESSOR as compensation for the fulfillment of
the obligations of the LESSOR under this Contract, including, but not limited to the lease of the
Facilities.

xxx xxx xxx

1.3 Facilities All capital equipment, computers, terminals, software (including source codes for the
On-Line Lottery application software for the terminals, telecommunications and central systems),
technology, intellectual property rights, telecommunications network, and furnishings and fixtures.

1.4 Maintenance and Other Costs All costs and expenses relating to printing, manpower, salaries
and wages, advertising and promotion, maintenance, expansion and replacement, security and
insurance, and all other related expenses needed to operate an On-Line Lottery System, which shall
be for the account of the LESSOR. All expenses relating to the setting-up, operation and
maintenance of ticket sales offices of dealers and retailers shall be borne by PCSO's dealers and
retailers.

1.5 Development Plan The detailed plan of all games, the marketing thereof, number of players,
value of winnings and the logistics required to introduce the games, including the Master Games
Plan as approved by PCSO, attached hereto as Annex "A", modified as necessary by the provisions
of this Contract.

xxx xxx xxx

1.8 Escrow Deposit The proposal deposit in the sum of Three Hundred Million Pesos
(P300,000,000.00) submitted by the LESSOR to PCSO pursuant to the requirements of the Request
for Proposals.

2. SUBJECT MATTER OF THE LEASE

The LESSOR shall build, furnish and maintain at its own expense and risk the Facilities for the On-
Line Lottery System of PCSO in the Territory on an exclusive basis. The LESSOR shall bear all
Maintenance and Other Costs as defined herein.

xxx xxx xxx

3. RENTAL FEE

For and in consideration of the performance by the LESSOR of its obligations herein, PCSO shall
pay LESSOR a fixed Rental Fee equal to four point nine percent (4.9%) of gross receipts from ticket
sales, payable net of taxes required by law to be withheld, on a semi-monthly basis. Goodwill,
franchise and similar fees shall belong to PCSO.

4. LEASE PERIOD

The period of the lease shall commence ninety (90) days from the date of effectivity of this Contract
and shall run for a period of eight (8) years thereafter, unless sooner terminated in accordance with
this Contract.

5. RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-LINE LOTTERY SYSTEM

PCSO shall be the sole and individual operator of the On-Line Lottery System. Consequently:

5.1 PCSO shall have sole responsibility to decide whether to implement, fully or partially, the Master
Games Plan of the LESSOR. PCSO shall have the sole responsibility to determine the time for
introducing new games to the market. The Master Games Plan included in Annex "A" hereof is
hereby approved by PCSO.

5.2 PCSO shall have control over revenues and receipts of whatever nature from the On-Line
Lottery System. After paying the Rental Fee to the LESSOR, PCSO shall have exclusive
responsibility to determine the Revenue Allocation Plan; Provided, that the same shall be consistent
with the requirement of R.A. No. 1169, as amended, which fixes a prize fund of fifty five percent
(55%) on the average.

5.3 PCSO shall have exclusive control over the printing of tickets, including but not limited to the
design, text, and contents thereof.

5.4 PCSO shall have sole responsibility over the appointment of dealers or retailers throughout the
country. PCSO shall appoint the dealers and retailers in a timely manner with due regard to the
implementation timetable of the On-Line Lottery System. Nothing herein shall preclude the LESSOR
from recommending dealers or retailers for appointment by PCSO, which shall act on said
recommendation within forty-eight (48) hours.

5.5 PCSO shall designate the necessary personnel to monitor and audit the daily performance of the
On-Line Lottery System. For this purpose, PCSO designees shall be given, free of charge, suitable
and adequate space, furniture and fixtures, in all offices of the LESSOR, including but not limited to
its headquarters, alternate site, regional and area offices.

5.6 PCSO shall have the responsibility to resolve, and exclusive jurisdiction over, all matters
involving the operation of the On-Line Lottery System not otherwise provided in this Contract.

5.7 PCSO shall promulgate procedural and coordinating rules governing all activities relating to the
On-Line Lottery System.

5.8 PCSO will be responsible for the payment of prize monies, commissions to agents and dealers,
and taxes and levies (if any) chargeable to the operator of the On-Line Lottery System. The
LESSOR will bear all other Maintenance and Other Costs, except as provided in Section 1.4.

5.9 PCSO shall assist the LESSOR in the following:

5.9.1 Work permits for the LESSOR's staff;

5.9.2 Approvals for importation of the Facilities;

5.9.3 Approvals and consents for the On-Line Lottery System; and

5.9.4 Business and premises licenses for all offices of the LESSOR and licenses for
the telecommunications network.

5.10 In the event that PCSO shall pre-terminate this Contract or suspend the operation of the On-
Line Lottery System, in breach of this Contract and through no fault of the LESSOR, PCSO shall
promptly, and in any event not later than sixty (60) days, reimburse the LESSOR the amount of its
total investment cost associated with the On-Line Lottery System, including but not limited to the
cost of the Facilities, and further compensate the LESSOR for loss of expected net profit after tax,
computed over the unexpired term of the lease.

6. DUTIES AND RESPONSIBILITIES OF THE LESSOR

The LESSOR is one of not more than three (3) lessors of similar facilities for the nationwide On-Line
Lottery System of PCSO. It is understood that the rights of the LESSOR are primarily those of a
lessor of the Facilities, and consequently, all rights involving the business aspects of the use of the
Facilities are within the jurisdiction of PCSO. During the term of the lease, the LESSOR shall.

6.1 Maintain and preserve its corporate existence, rights and privileges, and conduct its business in
an orderly, efficient, and customary manner.

6.2 Maintain insurance coverage with insurers acceptable to PCSO on all Facilities.

6.3 Comply with all laws, statues, rules and regulations, orders and directives, obligations and duties
by which it is legally bound.

6.4 Duly pay and discharge all taxes, assessments and government charges now and hereafter
imposed of whatever nature that may be legally levied upon it.
6.5 Keep all the Facilities in fail safe condition and, if necessary, upgrade, replace and improve the
Facilities from time to time as new technology develops, in order to make the On-Line Lottery
System more cost-effective and/or competitive, and as may be required by PCSO shall not impose
such requirements unreasonably nor arbitrarily.

6.6 Provide PCSO with management terminals which will allow real-time monitoring of the On-Line
Lottery System.

6.7 Upon effectivity of this Contract, commence the training of PCSO and other local personnel and
the transfer of technology and expertise, such that at the end of the term of this Contract, PCSO will
be able to effectively take-over the Facilities and efficiently operate the On-Line Lottery System.

6.8 Undertake a positive advertising and promotions campaign for both institutional and product lines
without engaging in negative advertising against other lessors.

6.9 Bear all expenses and risks relating to the Facilities including, but not limited to, Maintenance
and Other Costs and:

xxx xxx xxx

6.10 Bear all risks if the revenues from ticket sales, on an annualized basis, are insufficient to pay
the entire prize money.

6.11 Be, and is hereby, authorized to collect and retain for its own account, a security deposit from
dealers and retailers, in an amount determined with the approval of PCSO, in respect of equipment
supplied by the LESSOR. PCSO's approval shall not be unreasonably withheld.

xxx xxx xxx

6.12 Comply with procedural and coordinating rules issued by PCSO.

7. REPRESENTATIONS AND WARRANTIES

The LESSOR represents and warrants that:

7.1 The LESSOR is corporation duly organized and existing under the laws of the Republic of the
Philippines, at least sixty percent (60%) of the outstanding capital stock of which is owned by Filipino
shareholders. The minimum required Filipino equity participation shall not be impaired through
voluntary or involuntary transfer, disposition, or sale of shares of stock by the present stockholders.

7.2 The LESSOR and its Affiliates have the full corporate and legal power and authority to own and
operate their properties and to carry on their business in the place where such properties are now or
may be conducted. . . .

7.3 The LESSOR has or has access to all the financing and funding requirements to promptly and
effectively carry out the terms of this Contract. . . .

7.4 The LESSOR has or has access to all the managerial and technical expertise to promptly and
effectively carry out the terms of this Contract. . . .

xxx xxx xxx

10. TELECOMMUNICATIONS NETWORK

The LESSOR shall establish a telecommunications network that will connect all municipalities and
cities in the Territory in accordance with, at the LESSOR's option, either of the LESSOR's proposals
(or a combinations of both such proposals) attached hereto as Annex "B," and under the following
PCSO schedule:

xxx xxx xxx

PCSO may, at its option, require the LESSOR to establish the telecommunications network in
accordance with the above Timetable in provinces where the LESSOR has not yet installed
terminals. Provided, that such provinces have existing nodes. Once a municipality or city is serviced
by land lines of a licensed public telephone company, and such lines are connected to Metro Manila,
then the obligation of the LESSOR to connect such municipality or city through a
telecommunications network shall cease with respect to such municipality or city. The voice facility
will cover the four offices of the Office of the President, National Disaster Control Coordinating
Council, Philippine National Police and the National Bureau of Investigation, and each city and
municipality in the Territory except Metro Manila, and those cities and municipalities which have
easy telephone access from these four offices. Voice calls from the four offices shall be transmitted
via radio or VSAT to the remote municipalities which will be connected to this voice facility through
wired network or by radio. The facility shall be designed to handle four private conversations at any
one time.

xxx xxx xxx

13. STOCK DISPERSAL PLAN

Within two (2) years from the effectivity of this Contract, the LESSOR shall cause itself to be listed in
the local stock exchange and offer at least twenty five percent (25%) of its equity to the public.

14. NON-COMPETITION

The LESSOR shall not, directly or indirectly, undertake any activity or business in competition with or
adverse to the On-Line Lottery System of PCSO unless it obtains the latter's prior written consent
thereto.

15. HOLD HARMLESS CLAUSE

15.1 The LESSOR shall at all times protect and defend, at its cost and expense, PCSO from and
against any and all liabilities and claims for damages and/or suits for or by reason of any deaths of,
or any injury or injuries to any person or persons, or damages to property of any kind whatsoever,
caused by the LESSOR, its subcontractors, its authorized agents or employees, from any cause or
causes whatsoever.

15.2 The LESSOR hereby covenants and agrees to indemnify and hold PCSO harmless from all
liabilities, charges, expenses (including reasonable counsel fees) and costs on account of or by
reason of any such death or deaths, injury or injuries, liabilities, claims, suits or losses caused by the
LESSOR's fault or negligence.

15.3 The LESSOR shall at all times protect and defend, at its own cost and expense, its title to the
facilities and PCSO's interest therein from and against any and all claims for the duration of the
Contract until transfer to PCSO of ownership of the serviceable Facilities.

16. SECURITY

16.1 To ensure faithful compliance by the LESSOR with the terms of the Contract, the LESSOR
shall secure a Performance Bond from a reputable insurance company or companies acceptable to
PCSO.

16.2 The Performance Bond shall be in the initial amount of Three Hundred Million Pesos
(P300,000,000.00), to its U.S. dollar equivalent, and shall be renewed to cover the duration of the
Contract. However, the Performance Bond shall be reduced proportionately to the percentage of
unencumbered terminals installed; Provided, that the Performance Bond shall in no case be less
than One Hundred Fifty Million Pesos (P150,000,000.00).

16.3 The LESSOR may at its option maintain its Escrow Deposit as the Performance Bond. . . .

17. PENALTIES

17.1 Except as may be provided in Section 17.2, should the LESSOR fail to take remedial measures
within seven (7) days, and rectify the breach within thirty (30) days, from written notice by PCSO of
any wilfull or grossly negligent violation of the material terms and conditions of this Contract, all
unencumbered Facilities shall automatically become the property of PCSO without consideration
and without need for further notice or demand by PCSO. The Performance Bond shall likewise be
forfeited in favor of PCSO.

17.2 Should the LESSOR fail to comply with the terms of the Timetables provided in Section 9 and
10, it shall be subject to an initial Penalty of Twenty Thousand Pesos (P20,000.00), per city or
municipality per every month of delay; Provided, that the Penalty shall increase, every ninety (90)
days, by the amount of Twenty Thousand Pesos (P20,000.00) per city or municipality per month,
whilst shall failure to comply persists. The penalty shall be deducted by PCSO from the rental fee.

xxx xxx xxx

 20. OWNERSHIP OF THE FACILITIES

After expiration of the term of the lease as provided in Section 4, the Facilities directly required for
the On-Line Lottery System mentioned in Section 1.3 shall automatically belong in full ownership to
PCSO without any further consideration other than the Rental Fees already paid during the
effectivity of the lease.

21. TERMINATION OF THE LEASE

PCSO may terminate this Contract for any breach of the material provisions of this Contract,
including the following:

21.1 The LESSOR is insolvent or bankrupt or unable to pay its debts, stops or suspends or
threatens to stop or suspend payment of all or a material part of its debts, or proposes or makes a
general assignment or an arrangement or compositions with or for the benefit of its creditors; or

21.2 An order is made or an effective resolution passed for the winding up or dissolution of the
LESSOR or when it ceases or threatens to cease to carry on all or a material part of its operations or
business; or

21.3 Any material statement, representation or warranty made or furnished by the LESSOR proved
to be materially false or misleading;

said termination to take effect upon receipt of written notice of termination by the
LESSOR and failure to take remedial action within seven (7) days and cure or
remedy the same within thirty (30) days from notice.

Any suspension, cancellation or termination of this Contract shall not relieve the
LESSOR of any liability that may have already accrued hereunder.

xxx xxx xxx

Considering the denial by the Office of the President of its protest and the statement of Assistant Executive
Secretary Renato Corona that "only a court injunction can stop Malacaang," and the imminent implementation of
the Contract of Lease in February 1994, KILOSBAYAN, with its co-petitioners, filed on 28 January 1994 this petition.

In support of the petition, the petitioners claim that:

. . . X X THE OFFICE OF THE PRESIDENT, ACTING THROUGH RESPONDENTS

EXECUTIVE SECRETARY AND/OR ASSISTANT EXECUTIVE SECRETARY FOR
LEGAL AFFAIRS, AND THE PCSO GRAVELY ABUSE[D] THEIR DISCRETION
AND/OR FUNCTIONS TANTAMOUNT TO LACK OF JURISDICTION AND/OR
AUTHORITY IN RESPECTIVELY: (A) APPROVING THE AWARD OF THE
CONTRACT TO, AND (B) ENTERING INTO THE SO-CALLED "CONTRACT OF
LEASE" WITH, RESPONDENT PGMC FOR THE INSTALLATION,
ESTABLISHMENT AND OPERATION OF THE ON-LINE LOTTERY AND
TELECOMMUNICATION SYSTEMS REQUIRED AND/OR AUTHORIZED UNDER
THE SAID CONTRACT, CONSIDERING THAT:

a) Under Section 1 of the Charter of the PCSO, the PCSO is prohibited from holding and conducting
lotteries "in collaboration, association or joint venture with any person, association, company or
entity";

b) Under Act No. 3846 and established jurisprudence, a Congressional franchise is required before
any person may be allowed to establish and operate said telecommunications system;

c) Under Section 11, Article XII of the Constitution, a less than 60% Filipino-owned and/or controlled
corporation, like the PGMC, is disqualified from operating a public service, like the said
telecommunications system; and

d) Respondent PGMC is not authorized by its charter and under the Foreign Investment Act (R.A.
No. 7042) to install, establish and operate the on-line lotto and telecommunications systems.18

Petitioners submit that the PCSO cannot validly enter into the assailed Contract of Lease with the PGMC because it
is an arrangement wherein the PCSO would hold and conduct the on-line lottery system in "collaboration" or
"association" with the PGMC, in violation of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, which
prohibits the PCSO from holding and conducting charity sweepstakes races, lotteries, and other similar activities "in
collaboration, association or joint venture with any person, association, company or entity, foreign or domestic."
Even granting arguendo that a lease of facilities is not within the contemplation of "collaboration" or "association," an
analysis, however, of the Contract of Lease clearly shows that there is a "collaboration, association, or joint venture
between respondents PCSO and PGMC in the holding of the On-Line Lottery System," and that there are terms and
conditions of the Contract "showing that respondent PGMC is the actual lotto operator and not respondent PCSO."19

The petitioners also point out that paragraph 10 of the Contract of Lease requires or authorizes PGMC to establish a
telecommunications network that will connect all the municipalities and cities in the territory. However, PGMC
cannot do that because it has no franchise from Congress to construct, install, establish, or operate the network
pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75% foreign-owned or controlled
corporation and cannot, therefore, be granted a franchise for that purpose because of Section 11, Article XII of the
1987 Constitution. Furthermore, since "the subscribed foreign capital" of the PGMC "comes to about 75%, as shown
by paragraph EIGHT of its Articles of Incorporation," it cannot lawfully enter into the contract in question because all
forms of gambling and lottery is one of them are included in the so-called foreign investments negative list
under the Foreign Investments Act (R.A. No. 7042) where only up to 40% foreign capital is allowed. 20

Finally, the petitioners insist that the Articles of Incorporation of PGMC do not authorize it to establish and operate
an on-line lottery and telecommunications systems.21

Accordingly, the petitioners pray that we issue a temporary restraining order and a writ of preliminary injunction
commanding the respondents or any person acting in their places or upon their instructions to cease and desist from
implementing the challenged Contract of Lease and, after hearing the merits of the petition, that we render judgment
declaring the Contract of Lease void and without effect and making the injunction permanent. 22

We required the respondents to comment on the petition.

In its Comment filed on 1 March 1994, private respondent PGMC asserts that "(1) [it] is merely an independent
contractor for a piece of work, (i.e., the building and maintenance of a lottery system to be used by PCSO in the
operation of its lottery franchise); and (2) as such independent contractor, PGMC is not a co-operator of the lottery
franchise with PCSO, nor is PCSO sharing its franchise, 'in collaboration, association or joint venture' with PGMC
as such statutory limitation is viewed from the context, intent, and spirit of Republic Act 1169, as amended by Batas
Pambansa 42." It further claims that as an independent contractor for a piece of work, it is neither engaged in
"gambling" nor in "public service" relative to the telecommunications network, which the petitioners even consider as
an "indispensable requirement" of an on-line lottery system. Finally, it states that the execution and implementation
of the contract does not violate the Constitution and the laws; that the issue on the "morality" of the lottery franchise
granted to the PCSO is political and not judicial or legal, which should be ventilated in another forum; and that the
"petitioners do not appear to have the legal standing or real interest in the subject contract and in obtaining the
reliefs sought." 23

In their Comment filed by the Office of the Solicitor General, public respondents Executive Secretary Teofisto
Guingona, Jr., Assistant Executive Secretary Renato Corona, and the PCSO maintain that the contract of lease in
question does not violate Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and that the petitioner's
interpretation of the phrase "in collaboration, association or joint venture" in Section 1 is "much too narrow, strained
and utterly devoid of logic" for it "ignores the reality that PCSO, as a corporate entity, is vested with the basic and
essential prerogative to enter into all kinds of transactions or contracts as may be necessary for the attainment of its
purposes and objectives." What the PCSO charter "seeks to prohibit is that arrangement akin to a "joint venture" or
partnership where there is "community of interest in the business, sharing of profits and losses, and a mutual right of
control," a characteristic which does not obtain in a contract of lease." With respect to the challenged Contract of
Lease, the "role of PGMC is limited to that of a lessor of the facilities" for the on-line lottery system; in "strict
technical and legal sense," said contract "can be categorized as a contract for a piece of work as defined in Articles
1467, 1713 and 1644 of the Civil Code."

They further claim that the establishment of the telecommunications system stipulated in the Contract of Lease does
not require a congressional franchise because PGMC will not operate a public utility; moreover, PGMC's
"establishment of a telecommunications system is not intended to establish a telecommunications business," and it
has been held that where the facilities are operated "not for business purposes but for its own use," a legislative
franchise is not required before a certificate of public convenience can be granted. 24 Even granting arguendo that
PGMC is a public utility, pursuant to Albano S.
Reyes, 25 "it can establish a telecommunications system even without a legislative franchise because not every
public utility is required to secure a legislative franchise before it could establish, maintain, and operate the service";
and, in any case, "PGMC's establishment of the telecommunications system stipulated in its contract of lease with
PCSO falls within the exceptions under Section 1 of Act No. 3846 where a legislative franchise is not necessary for
the establishment of radio stations."

They also argue that the contract does not violate the Foreign Investment Act of 1991; that the Articles of
Incorporation of PGMC authorize it to enter into the Contract of Lease; and that the issues of "wisdom, morality and
propriety of acts of the executive department are beyond the ambit of judicial review."

Finally, the public respondents allege that the petitioners have no standing to maintain the instant suit, citing our
resolution in Valmonte vs. Philippine Charity Sweepstakes Office. 26
Several parties filed motions to intervene as petitioners in this case, 27 but only the motion of Senators Alberto
Romulo, Arturo Tolentino, Francisco Tatad, Gloria Macapagal-Arroyo, Vicente Sotto III, John Osmea, Ramon
Revilla, and Jose Lina 28 was granted, and the respondents were required to comment on their petition in
intervention, which the public respondents and PGMC did.

In the meantime, the petitioners filed with the Securities and Exchange Commission on 29 March 1994 a petition
against PGMC for the nullification of the latter's General Information Sheets. That case, however, has no bearing in
this petition.

On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to consider the matter submitted
for resolution and pending resolution of the major issues in this case, to issue a temporary restraining order
commanding the respondents or any person acting in their place or upon their instructions to cease and desist from
implementing the challenged Contract of Lease.

In the deliberation on this case on 26 April 1994, we resolved to consider only these issues: (a) the locus standi of
the petitioners, and (b) the legality and validity of the Contract of Lease in the light of Section 1 of R.A. No. 1169, as
amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting lotteries "in collaboration,
association or joint venture with any person, association, company or entity, whether domestic or foreign." On the
first issue, seven Justices voted to sustain the locus standi of the petitioners, while six voted not to. On the second
issue, the seven Justices were of the opinion that the Contract of Lease violates the exception to Section 1(B) of
R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid and contrary to law. The six Justices stated
that they wished to express no opinion thereon in view of their stand on the first issue. The Chief Justice took no
part because one of the Directors of the PCSO is his brother-in-law.

This case was then assigned to this ponente for the writing of the opinion of the Court.

The preliminary issue on the locus standi of the petitioners should, indeed, be resolved in their favor. A party's
standing before this Court is a procedural technicality which it may, in the exercise of its discretion, set aside in view
of the importance of the issues raised. In the landmark Emergency Powers Cases, 29 this Court brushed aside this
technicality because "the transcendental importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure. (Avelino vs. Cuenco, G.R. No. L-
2821)." Insofar as taxpayers' suits are concerned, this Court had declared that it "is not devoid of discretion as to
whether or not it should be entertained," 30 or that it "enjoys an open discretion to entertain the same or not." 31 In De
La Llana vs. Alba, 32 this Court declared:

1. The argument as to the lack of standing of petitioners is easily resolved. As far as Judge de la
Llana is concerned, he certainly falls within the principle set forth in Justice Laurel's opinion
in People vs. Vera [65 Phil. 56 (1937)]. Thus: "The unchallenged rule is that the person who impugns
the validity of a statute must have a personal and substantial interest in the case such that he has
sustained, or will sustain, direct injury as a result of its enforcement [Ibid, 89]. The other petitioners
as members of the bar and officers of the court cannot be considered as devoid of "any personal and
substantial interest" on the matter. There is relevance to this excerpt from a separate opinion
in Aquino, Jr. v. Commission on Elections [L-40004, January 31, 1975, 62 SCRA 275]: "Then there
is the attack on the standing of petitioners, as vindicating at most what they consider a public right
and not protecting their rights as individuals. This is to conjure the specter of the public right dogma
as an inhibition to parties intent on keeping public officials staying on the path of constitutionalism.
As was so well put by Jaffe; "The protection of private rights is an essential constituent of public
interest and, conversely, without a well-ordered state there could be no enforcement of private
rights. Private and public interests are, both in a substantive and procedural sense, aspects of the
totality of the legal order." Moreover, petitioners have convincingly shown that in their capacity as
taxpayers, their standing to sue has been amply demonstrated. There would be a retreat from the
liberal approach followed in Pascual v. Secretary of Public Works, foreshadowed by the very
decision of People v. Vera where the doctrine was first fully discussed, if we act differently now. I do
not think we are prepared to take that step. Respondents, however, would hard back to the
American Supreme Court doctrine in Mellon v. Frothingham, with their claim that what petitioners
possess "is an interest which is shared in common by other people and is comparatively so minute
and indeterminate as to afford any basis and assurance that the judicial process can act on it." That
is to speak in the language of a bygone era, even in the United States. For as Chief Justice Warren
clearly pointed out in the later case of Flast v. Cohen, the barrier thus set up if not breached has
definitely been lowered.

In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan,33 reiterated in Basco vs. Philippine
Amusements and Gaming Corporation,34 this Court stated:

Objections to taxpayers' suits for lack of sufficient personality standing or interest are, however, in
the main procedural matters. Considering the importance to the public of the cases at bar, and in
keeping with the Court's duty, under the 1987 Constitution, to determine whether or not the other
branches of government have kept themselves within the limits of the Constitution and the laws and
that they have not abused the discretion given to them, this Court has brushed aside technicalities of
procedure and has taken cognizance of these petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary of Agrarian Reform,35 it declared:

With particular regard to the requirement of proper party as applied in the cases before us, we hold
that the same is satisfied by the petitioners and intervenors because each of them has sustained or
is in danger of sustaining an immediate injury as a result of the acts or measures complained of. [Ex
ParteLevitt, 303 US 633]. And even if, strictly speaking, they are not covered by the definition, it is
still within the wide discretion of the Court to waive the requirement and so remove the impediment
to its addressing and resolving the serious constitutional questions raised.

In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed to question the
constitutionality of several executive orders issued by President Quirino although they were invoking
only an indirect and general interest shared in common with the public. The Court dismissed the
objective that they were not proper parties and ruled that the transcendental importance to the public
of these cases demands that they be settled promptly and definitely, brushing aside, if we must,
technicalities of procedure. We have since then applied this exception in many other cases.
(Emphasis supplied)

In Daza vs. Singson, 36 this Court once more said:

. . . For another, we have early as in the Emergency Powers Cases that where serious constitutional
questions are involved, "the transcendental importance to the public of these cases demands that
they be settled promptly and definitely, brushing aside, if we must, technicalities of procedure." The
same policy has since then been consistently followed by the Court, as in Gonzales vs. Commission
on Elections [21 SCRA 774] . . .

The Federal Supreme Court of the United States of America has also expressed its discretionary power to liberalize
the rule on locus standi. In United States vs. Federal Power Commission and Virginia Rea Association vs. Federal
Power Commission,37 it held:

We hold that petitioners have standing. Differences of view, however, preclude a single opinion of
the Court as to both petitioners. It would not further clarification of this complicated specialty of
federal jurisdiction, the solution of whose problems is in any event more or less determined by the
specific circumstances of individual situations, to set out the divergent grounds in support of standing
in these cases.

In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of Congress, and even
association of planters, and non-profit civic organizations were allowed to initiate and prosecute actions before this
Court to question the constitutionality or validity of laws, acts, decisions, rulings, or orders of various government
agencies or instrumentalities. Among such cases were those assailing the constitutionality of (a) R.A. No. 3836
insofar as it allows retirement gratuity and commutation of vacation and sick leave to Senators and Representatives
and to elective officials of both Houses of Congress;38 (b) Executive Order No. 284, issued by President Corazon C.
Aquino on 25 July 1987, which allowed members of the cabinet, their undersecretaries, and assistant secretaries to
hold other government offices or positions; 39 (c) the automatic appropriation for debt service in the General
Appropriations Act; 40 (d) R.A. No. 7056 on the holding of desynchronized elections; 41 (d) R.A. No. 1869 (the charter
of the Philippine Amusement and Gaming Corporation) on the ground that it is contrary to morals, public policy, and
order; 42 and (f) R.A. No. 6975, establishing the Philippine National
Police. 43

Other cases where we have followed a liberal policy regarding locus standi include those attacking the validity or
legality of (a) an order allowing the importation of rice in the light of the prohibition imposed by R.A. No. 3452; 44 (b)
P.D. Nos. 991 and 1033 insofar as they proposed amendments to the Constitution and P.D. No. 1031 insofar as it
directed the COMELEC to supervise, control, hold, and conduct the referendum-plebiscite on 16 October 1976; 45(c)
the bidding for the sale of the 3,179 square meters of land at Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the approval
without hearing by the Board of Investments of the amended application of the Bataan Petrochemical Corporation to
transfer the site of its plant from Bataan to Batangas and the validity of such transfer and the shift of feedstock from
naphtha only to naphtha and/or liquefied petroleum gas; 47 (e) the decisions, orders, rulings, and resolutions of the
Executive Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs, and the
Fiscal Incentives Review Board exempting the National Power Corporation from indirect tax and duties; 48 (f) the
orders of the Energy Regulatory Board of 5 and 6 December 1990 on the ground that the hearings conducted on the
second provisional increase in oil prices did not allow the petitioner substantial cross-examination; 49 (g) Executive
Order No. 478 which levied a special duty of P0.95 per liter or P151.05 per barrel of imported crude oil and P1.00
per liter of imported oil products; 50 (h) resolutions of the Commission on Elections concerning the apportionment, by
district, of the number of elective members of Sanggunians; 51 and (i) memorandum orders issued by a Mayor
affecting the Chief of Police of Pasay City.52

In the 1975 case of Aquino vs. Commission on Elections, 53 this Court, despite its unequivocal ruling that the
petitioners therein had no personality to file the petition, resolved nevertheless to pass upon the issues raised
because of the far-reaching implications of the petition. We did no less in De Guia vs. COMELEC 54 where, although
we declared that De Guia "does not appear to have locus standi, a standing in law, a personal or substantial
interest," we brushed aside the procedural infirmity "considering the importance of the issue involved, concerning as
it does the political exercise of qualified voters affected by the apportionment, and petitioner alleging abuse of
discretion and violation of the Constitution by respondent."

We find the instant petition to be of transcendental importance to the public. The issues it raised are of paramount
public interest and of a category even higher than those involved in many of the aforecited cases. The ramifications
of such issues immeasurably affect the social, economic, and moral well-being of the people even in the remotest
barangays of the country and the counter-productive and retrogressive effects of the envisioned on-line lottery
system are as staggering as the billions in pesos it is expected to raise. The legal standing then of the petitioners
deserves recognition and, in the exercise of its sound discretion, this Court hereby brushes aside the procedural
barrier which the respondents tried to take advantage of.

And now on the substantive issue.

Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from holding and conducting lotteries
"in collaboration, association or joint venture with any person, association, company or entity, whether domestic or
foreign." Section 1 provides:

Sec. 1. The Philippine Charity Sweepstakes Office. The Philippine Charity Sweepstakes Office,
hereinafter designated the Office, shall be the principal government agency for raising and providing
for funds for health programs, medical assistance and services and charities of national character,
and as such shall have the general powers conferred in section thirteen of Act Numbered One
thousand four hundred fifty-nine, as amended, and shall have the authority:

A. To hold and conduct charity sweepstakes races, lotteries and other similar
activities, in such frequency and manner, as shall be determined, and subject to such
rules and regulations as shall be promulgated by the Board of Directors.

B. Subject to the approval of the Minister of Human Settlements, to engage in health

and welfare-related investments, programs, projects and activities which may be
profit-oriented, by itself or in collaboration, association or joint venture with any
person, association, company or entity, whether domestic or foreign, except for the
activities mentioned in the preceding paragraph (A), for the purpose of providing for
permanent and continuing sources of funds for health programs, including the
expansion of existing ones, medical assistance and services, and/or charitable
grants: Provided, That such investment will not compete with the private sector in
areas where investments are adequate as may be determined by the National
Economic and Development Authority. (emphasis supplied)

The language of the section is indisputably clear that with respect to its franchise or privilege "to hold and conduct
charity sweepstakes races, lotteries and other similar activities," the PCSO cannot exercise it "in collaboration,
association or joint venture" with any other party. This is the unequivocal meaning and import of the phrase "except
for the activities mentioned in the preceding paragraph (A)," namely, "charity sweepstakes races, lotteries and other
similar activities."

B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered by Committee Report No. 103 as
reported out by the Committee on Socio-Economic Planning and Development of the Interim Batasang Pambansa.
The original text of paragraph B, Section 1 of Parliamentary Bill No. 622 reads as follows:

To engage in any and all investments and related profit-oriented projects or programs and activities
by itself or in collaboration, association or joint venture with any person, association, company or
entity, whether domestic or foreign, for the main purpose of raising funds for health and medical
assistance and services and charitable grants. 55

During the period of committee amendments, the Committee on Socio-Economic Planning and Development,
through Assemblyman Ronaldo B. Zamora, introduced an amendment by substitution to the said paragraph B such
that, as amended, it should read as follows:

Subject to the approval of the Minister of Human Settlements, to engage in health-oriented

investments, programs, projects and activities which may be profit- oriented, by itself or in
collaboration, association, or joint venture with any person, association, company or entity, whether
domestic or foreign, for the purpose of providing for permanent and continuing sources of funds for
health programs, including the expansion of existing ones, medical assistance and services and/or
charitable grants. 56

Before the motion of Assemblyman Zamora for the approval of the amendment could be acted upon, Assemblyman
Davide introduced an amendment to the amendment:

MR. DAVIDE.
 Mr. Speaker.

THE SPEAKER.

The gentleman from Cebu is recognized.

MR. DAVIDE.

May I introduce an amendment to the committee amendment? The

amendment would be to insert after "foreign" in the amendment just
read the following: EXCEPT FOR THE ACTIVITY IN LETTER (A)
ABOVE.

When it is joint venture or in collaboration with any entity such

collaboration or joint venture must not include activity activity letter (a)
which is the holding and conducting of sweepstakes races, lotteries
and other similar acts.

MR. ZAMORA.

We accept the amendment, Mr. Speaker.

MR. DAVIDE.

Thank you, Mr. Speaker.

THE SPEAKER.

Is there any objection to the amendment? (Silence) The amendment,

as amended, is approved. 57

Further amendments to paragraph B were introduced and approved. When Assemblyman Zamora read the final text
of paragraph B as further amended, the earlier approved amendment of Assemblyman Davide became "EXCEPT
FOR THE ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by virtue of the amendment introduced by
Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted before PARAGRAPH. Assemblyman Pelaez
introduced other amendments. Thereafter, the new paragraph B was approved. 58

This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42.

No interpretation of the said provision to relax or circumvent the prohibition can be allowed since the privilege to
hold or conduct charity sweepstakes races, lotteries, or other similar activities is a franchise granted by the
legislature to the PCSO. It is a settled rule that "in all grants by the government to individuals or corporations of
rights, privileges and franchises, the words are to be taken most strongly against the grantee .... [o]ne who claims a
franchise or privilege in derogation of the common rights of the public must prove his title thereto by a grant which is
clearly and definitely expressed, and he cannot enlarge it by equivocal or doubtful provisions or by probable
inferences. Whatever is not unequivocally granted is withheld. Nothing passes by mere implication." 59

In short then, by the exception explicitly made in paragraph B, Section 1 of its charter, the PCSO cannot share its
franchise with another by way of collaboration, association or joint venture. Neither can it assign, transfer, or lease
such franchise. It has been said that "the rights and privileges conferred under a franchise may, without doubt, be
assigned or transferred when the grant is to the grantee and assigns, or is authorized by statute. On the other hand,
the right of transfer or assignment may be restricted by statute or the constitution, or be made subject to the
approval of the grantor or a governmental agency, such as a public utilities commission, exception that an existing
right of assignment cannot be impaired by subsequent legislation." 60

It may also be pointed out that the franchise granted to the PCSO to hold and conduct lotteries allows it to hold and
conduct a species of gambling. It is settled that "a statute which authorizes the carrying on of a gambling activity or
business should be strictly construed and every reasonable doubt so resolved as to limit the powers and rights
claimed under its authority." 61

Does the challenged Contract of Lease violate or contravene the exception in Section 1 of R.A. No. 1169, as
amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting lotteries "in collaboration,
association or joint venture with" another?

We agree with the petitioners that it does, notwithstanding its denomination or designation as a (Contract of Lease).
We are neither convinced nor moved or fazed by the insistence and forceful arguments of the PGMC that it does not
because in reality it is only an independent contractor for a piece of work, i.e., the building and maintenance of a
lottery system to be used by the PCSO in the operation of its lottery franchise. Whether the contract in question is
one of lease or whether the PGMC is merely an independent contractor should not be decided on the basis of the
title or designation of the contract but by the intent of the parties, which may be gathered from the provisions of the
contract itself. Animus hominis est anima scripti. The intention of the party is the soul of the instrument. In order to
give life or effect to an instrument, it is essential to look to the intention of the individual who executed it. 62 And,
pursuant to Article 1371 of the Civil Code, "to determine the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered." To put it more bluntly, no one should be
deceived by the title or designation of a contract.

A careful analysis and evaluation of the provisions of the contract and a consideration of the contemporaneous acts
of the PCSO and PGMC indubitably disclose that the contract is not in reality a contract of lease under which the
PGMC is merely an independent contractor for a piece of work, but one where the statutorily
proscribed collaboration or association, in the least, or joint venture, at the most, exists between the contracting
parties. Collaboration is defined as the acts of working together in a joint project. 63 Association means the act of a
number of persons in uniting together for some special purpose or business. 64 Joint venture is defined as an
association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets
and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and
govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and
losses.65

The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither funds of its own nor the
expertise to operate and manage an on-line lottery system, and that although it wished to have the system, it would
have it "at no expense or risks to the government." Because of these serious constraints and unwillingness to bear
expenses and assume risks, the PCSO was candid enough to state in its RFP that it is seeking for "a suitable
contractor which shall build, at its own expense, all the facilities needed to operate and maintain" the system;
exclusively bear "all capital, operating expenses and expansion expenses and risks"; and submit "a comprehensive
nationwide lottery development plan . . . which will include the game, the marketing of the games, and the logistics
to introduce the game to all the cities and municipalities of the country within five (5) years"; and that the operation
of the on-line lottery system should be "at no expense or risk to the government" meaning itself, since it is a
government-owned and controlled agency. The facilities referred to means "all capital equipment, computers,
terminals, software, nationwide telecommunications network, ticket sales offices, furnishings and fixtures, printing
costs, costs of salaries and wages, advertising and promotions expenses, maintenance costs, expansion and
replacement costs, security and insurance, and all other related expenses needed to operate a nationwide on-line
lottery system."

In short, the only contribution the PCSO would have is its franchise or authority to operate the on-line lottery system;
with the rest, including the risks of the business, being borne by the proponent or bidder. It could be for this reason
that it warned that "the proponent must be able to stand to the acid test of proving that it is an entity able to take on
the role of responsible maintainer of the on-line lottery system." The PCSO, however, makes it clear in its RFP that
the proponent can propose a period of the contract which shall not exceed fifteen years, during which time it is
assured of a "rental" which shall not exceed 12% of gross receipts. As admitted by the PGMC, upon learning of the
PCSO's decision, the Berjaya Group Berhad, with its affiliates, wanted to offer its services and resources to the
PCSO. Forthwith, it organized the PGMC as "a medium through which the technical and management services
required for the project would be offered and delivered to PCSO." 66

Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with an on-line lottery system, the
PCSO had nothing but its franchise, which it solemnly guaranteed it had in the General Information of the
RFP. 67Howsoever viewed then, from the very inception, the PCSO and the PGMC mutually understood that any
arrangement between them would necessarily leave to the PGMC the technical, operations, and
managementaspects of the on-line lottery system while the PCSO would, primarily, provide the franchise. The
words Gaming andManagement in the corporate name of respondent Philippine Gaming Management Corporation
could not have been conceived just for euphemistic purposes. Of course, the RFP cannot substitute for the Contract
of Lease which was subsequently executed by the PCSO and the PGMC. Nevertheless, the Contract of Lease
incorporates their intention and understanding.

The so-called Contract of Lease is not, therefore, what it purports to be. Its denomination as such is a crafty device,
carefully conceived, to provide a built-in defense in the event that the agreement is questioned as violative of the
exception in Section 1 (B) of the PCSO's charter. The acuity or skill of its draftsmen to accomplish that purpose
easily manifests itself in the Contract of Lease. It is outstanding for its careful and meticulous drafting designed to
give an immediate impression that it is a contract of lease. Yet, woven therein are provisions which negate its title
and betray the true intention of the parties to be in or to have a joint venture for a period of eight years in the
operation and maintenance of the on-line lottery system.

Consistent with the above observations on the RFP, the PCSO has only its franchise to offer, while the PGMC
represents and warrants that it has access to all managerial and technical expertise to promptly and effectively carry
out the terms of the contract. And, for a period of eight years, the PGMC is under obligation to keep all
the Facilitiesin safe condition and if necessary, upgrade, replace, and improve them from time to time as new
technology develops to make the on-line lottery system more cost-effective and competitive; exclusively bear all
costs and expenses relating to the printing, manpower, salaries and wages, advertising and promotion,
maintenance, expansion and replacement, security and insurance, and all other related expenses needed to
operate the on-line lottery system; undertake a positive advertising and promotions campaign for both institutional
and product lines without engaging in negative advertising against other lessors; bear the salaries and related costs
of skilled and qualified personnel for administrative and technical operations; comply with procedural and
coordinating rulesissued by the PCSO; and to train PCSO and other local personnel and to effect the transfer of
technology and other expertise, such that at the end of the term of the contract, the PCSO will be able to effectively
take over the Facilities and efficiently operate the on-line lottery system. The latter simply means that, indeed, the
managers, technicians or employees who shall operate the on-line lottery system are not managers, technicians or
employees of the PCSO, but of the PGMC and that it is only after the expiration of the contract that the PCSO will
operate the system. After eight years, the PCSO would automatically become the owner of the Facilities without any
other further consideration.

For these reasons, too, the PGMC has the initial prerogative to prepare the detailed plan of all games and the
marketing thereof, and determine the number of players, value of winnings, and the logistics required to introduce
the games, including the Master Games Plan. Of course, the PCSO has the reserved authority to disapprove
them. 68 And, while the PCSO has the sole responsibility over the appointment of dealers and retailers throughout
the country, the PGMC may, nevertheless, recommend for appointment dealers and retailers which shall be acted
upon by the PCSO within forty-eight hours and collect and retain, for its own account, a security deposit from
dealers and retailers in respect of equipment supplied by it.

This joint venture is further established by the following:

(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as compensation for the fulfillment of
its obligations under the contract, including, but not limited to the lease of the Facilities. However, this rent is not
actually a fixed amount. Although it is stated to be 4.9% of gross receipts from ticket sales, payable net of taxes
required by law to be withheld, it may be drastically reduced or, in extreme cases, nothing may be due or
demandable at all because the PGMC binds itself to "bear all risks if the revenue from the ticket sales, on an
annualized basis, are insufficient to pay the entire prize money." This risk-bearing provision is unusual in a lessor-
lessee relationship, but inherent in a joint venture.

(b) In the event of pre-termination of the contract by the PCSO, or its suspension of operation of the on-line lottery
system in breach of the contract and through no fault of the PGMC, the PCSO binds itself "to promptly, and in any
event not later than sixty (60) days, reimburse the Lessor the amount of its total investment cost associated with the
On-Line Lottery System, including but not limited to the cost of the Facilities, and further compensate the LESSOR
for loss of expected net profit after tax, computed over the unexpired term of the lease." If the contract were indeed
one of lease, the payment of the expected profits or rentals for the unexpired portion of the term of the contract
would be enough.

(c) The PGMC cannot "directly or indirectly undertake any activity or business in competition with or adverse to the
On-Line Lottery System of PCSO unless it obtains the latter's prior written consent." If the PGMC is engaged in the
business of leasing equipment and technology for an on-line lottery system, we fail to see any acceptable reason
why it should allow a restriction on the pursuit of such business.

(d) The PGMC shall provide the PCSO the audited Annual Report sent to its stockholders, and within two years from
the effectivity of the contract, cause itself to be listed in the local stock exchange and offer at least 25% of its equity
to the public. If the PGMC is merely a lessor, this imposition is unreasonable and whimsical, and could only be tied
up to the fact that the PGMC will actually operate and manage the system; hence, increasing public participation in
the corporation would enhance public interest.

(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the requirements of the RFP, which
it may, at its option, maintain as its initial performance bond required to ensure its faithful compliance with the terms
of the contract.

(f) The PCSO shall designate the necessary personnel to monitor and audit the daily performance of the on-line
lottery system; and promulgate procedural and coordinating rules governing all activities relating to the on-line
lottery system. The first further confirms that it is the PGMC which will operate the system and the PCSO may, for
the protection of its interest, monitor and audit the daily performance of the system. The second admits
the coordinating and cooperative powers and functions of the parties.

(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or bankrupt or is unable to pay its
debts, or if it stops or suspends or threatens to stop or suspend payment of all or a material part of its debts.

All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit, operation, conduct, and
management of the On-Line Lottery System. They exhibit and demonstrate the parties' indivisible community of
interest in the conception, birth and growth of the on-line lottery, and, above all, in its profits, with each having a right
in the formulation and implementation of policies related to the business and sharing, as well, in the losses with
the PGMC bearing the greatest burden because of its assumption of expenses and risks, and the PCSO the least,
because of its confessed unwillingness to bear expenses and risks. In a manner of speaking, each is wed to the
other for better or for worse. In the final analysis, however, in the light of the PCSO's RFP and the above highlighted
provisions, as well as the "Hold Harmless Clause" of the Contract of Lease, it is even safe to conclude that the
actual lessor in this case is the PCSO and the subject matter thereof is its franchise to hold and conduct lotteries
since it is, in reality, the PGMC which operates and manages the on-line lottery system for a period of eight years.

We thus declare that the challenged Contract of Lease violates the exception provided for in paragraph B, Section 1
of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid for being contrary to law. This conclusion
renders unnecessary further discussion on the other issues raised by the petitioners.

WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract of Lease executed on 17
December 1993 by respondent Philippine Charity Sweepstakes Office (PCSO) and respondent Philippine Gaming
Management Corporation (PGMC) is hereby DECLARED contrary to law and invalid.

The Temporary Restraining Order issued on 11 April 1994 is hereby MADE PERMANENT.

No pronouncement as to costs.

SO ORDERED.