PASEO REALTY & DEVELOPMENT CORPORATION vs. COURT OF APPEALS, COURT OF TAX ₱54,104.
₱54,104.00 subject of petitioner’s claim for refund has already been included as part and parcel of
APPEALS and COMMISSIONER OF INTERNAL REVENUE
The changes in the reportorial requirements and payment schedules of corporate income taxes
from annual to quarterly have created problems, especially on the matter of tax refunds.1 In this
case, the Court is called to resolve the question of whether alleged excess taxes paid by a
corporation during a taxable year should be refunded or credited against its tax liabilities for the
succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two
(2) parcels of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of the Court of
Appeals dismissing its petition for review of the resolution3 of the Court of Tax Appeals (CTA)
which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a
gross income of ₱1,855,000.00, deductions of ₱1,775,991.00, net income of ₱79,009.00, an income
tax due thereon in the amount of ₱27,653.00, prior year’s excess credit of ₱146,026.00, and
creditable taxes withheld in 1989 of ₱54,104.00 or a total tax credit of ₱200,130.00 and credit
balance of ₱172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for "the refund of excess
creditable withholding and income taxes for the years 1989 and 1990 in the aggregate amount of
₱147,036.15."
On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire on
December 30, 1991 and that it was necessary to interrupt the prescriptive period, petitioner filed
with the respondent Court of Tax Appeals a petition for review praying for the refund of
"₱54,104.00 representing creditable taxes withheld from income payments of petitioner for the
calendar year ending December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer and by way of special and/or
affirmative defenses averred the following: a) the petition states no cause of action for failure to
allege the dates when the taxes sought to be refunded were paid; b) petitioner’s claim for refund
is still under investigation by respondent Commissioner; c) the taxes claimed are deemed to have
been paid and collected in accordance with law and existing pertinent rules and regulations; d)
petitioner failed to allege that it is entitled to the refund or deductions claimed; e) petitioner’s
contention that it has available tax credit for the current and prior year is gratuitous and does
not ipso facto warrant the refund; f) petitioner failed to show that it has complied with the
provision of Section 230 in relation to Section 204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent Commissioner "to
refund in favor of petitioner the amount of ₱54,104.00, representing excess creditable
withholding taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the decision, alleging that the
₱54,104.00 ordered to be refunded "has already been included and is part and parcel of the
₱172,477.00 which petitioner automatically applied as tax credit for the succeeding taxable year
1990."
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29,
1993 and dismissed the petition for review, stating that it has "overlooked the fact that the
petitioner’s 1989 Corporate Income Tax Return (Exh. "A") indicated that the amount of
the ₱172,477.00 which the petitioner automatically applied as tax credit for the succeeding
taxable year 1990."
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March 10,
1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals. Resolving the
twin issues of whether petitioner is entitled to a refund of ₱54,104.00 representing creditable
taxes withheld in 1989 and whether petitioner applied such creditable taxes withheld to its 1990
income tax liability, the appellate court held that petitioner is not entitled to a refund because it
had already elected to apply the total amount of ₱172,447.00, which includes the ₱54,104.00
refund claimed, against its income tax liability for 1990. The appellate court elucidated on the
reason for its dismissal of petitioner’s claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the year 1989, it
filled up the box stating that the total amount of ₱172,477.00 shall be applied against its income
tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be applied as
tax credit to the succeeding taxable year, but merely marked an "x" to the box indicating "to be
applied as tax credit to the succeeding taxable year." Unlike what petitioner had done when it filed
its income tax return for the year 1988, it specifically stated that out of the ₱146,026.00 the entire
refundable amount, only ₱64,623.00 will be made available as tax credit, while the amount of
₱81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to succeeding
taxable year," which signified that instead of refund, petitioner will apply the total amount of
₱172,447.00, which includes the amount of ₱54,104.00 sought to be refunded, as tax credit for its
tax liabilities in 1990. Thus, there is really nothing left to be refunded to petitioner for the year
1989. To grant petitioner’s claim for refund is tantamount to granting twice the refund herein
sought to be refunded, to the prejudice of the Government.
The Court of Appeals denied petitioner’s Motion for Reconsideration7 dated November 8, 1994 in
its Resolution8dated February 21, 1995 because the motion merely restated the grounds which
have already been considered and passed upon in its Decision.9
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the
evidence presented before the lower courts conclusively shows that it did not apply the
₱54,104.00 to its 1990 income tax liability; that the Decision subject of the instant petition is
inconsistent with a final decision11 of the Sixteenth Division of the appellate court in C.A.-G.R. Sp.
No. 32890 involving the same parties and subject matter; and that the affirmation of the
questioned Decision would lead to absurd results in the manner of claiming refunds or in the
application of prior years’ excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on behalf of
respondents asserting that the claimed refund of ₱54,104.00 was, by petitioner’s election in its
Corporate Annual Income Tax Return for 1989, to be applied against its tax liability for 1990. Not
having submitted its tax return for 1990 to show whether the said amount was indeed applied
against its tax liability for 1990, petitioner’s election in its tax return stands. The OSG also
contends that petitioner’s election to apply its overpaid income tax as tax credit against its tax
liabilities for the succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the issue in
this case is not whether the amount of ₱54,104.00 was included as tax credit to be applied against
its 1990 income tax liability but whether the same amount was actually applied as tax credit for
1990. Petitioner claims that there is no need to show that the amount of ₱54,104.00 had not been
automatically applied against its 1990 income tax liability because the appellate court’s decision
in C.A.-G.R. Sp. No. 32890 clearly held that petitioner charged its 1990 income tax liability against
its tax credit for 1988 and not 1989. Petitioner also disputes the OSG’s assertion that the
taxpayer’s election as to the application of excess taxes is irrevocable averring that there is
nothing in the law that prohibits a taxpayer from changing its mind especially if subsequent
events leave the latter no choice but to change its election.
The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s 1988 tax return shows a
prior year’s excess credit of ₱81,403.00, creditable tax withheld of ₱92,750.00 and tax due of
₱27,127.00. Petitioner indicated that the prior year’s excess credit of ₱81,403.00 was to be
refunded, while the remaining amount of ₱64,623.00 (₱92,750.00 - ₱27,127.00) shall be
considered as tax credit for 1989. However, in its 1989 tax return, petitioner included the
₱81,403.00 which had already been segregated for refund in the computation of its excess credit,
and specified that the full amount of ₱172,479.00* (₱81,403.00 + ₱64,623.00 + ₱54,104.00** -
₱27,653.00***) be considered as its tax credit for 1990. Considering that it had obtained a
favorable ruling for the refund of its excess credit for 1988 in CA-G.R. SP. No. 32890, its remaining
tax credit for 1989 should be the excess credit to be applied against its 1990 tax liability. In fine,
the OSG argues that by its own election, petitioner can no longer ask for a refund of its creditable
taxes withheld in 1989 as the same had been applied against its 1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and required the
parties to simultaneously file their respective memoranda within 30 days from notice. In
compliance with this directive, petitioner submitted its Memorandum16 dated September 18,
1997 in due time, while the OSG filed its Memorandum17 dated April 27, 1998 only on April 29,
1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an
agency such as the CTA which is, by the very nature of its functions, dedicated exclusively to the
study and consideration of tax problems and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident exercise of its authority.18
This interdiction finds particular application in this case since the CTA, after careful consideration
of the merits of the Commissioner of Internal Revenue’s motion for reconsideration, reconsidered
its earlier decision which ordered the latter to refund the amount of ₱54,104.00 to petitioner. Its
resolution cannot be successfully assailed based, as it is, on the pertinent laws as applied to the
facts.
Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00, representing its
1988 excess credit of ₱146,026.00 and 1989 creditable tax of ₱54,104.00 less tax due for 1989,
which it elected to apply as tax credit for the succeeding taxable year.19 According to petitioner, it
successively utilized this amount when it obtained refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No.
32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability, leaving
a balance of ₱54,104.00, the amount subject of the instant claim for refund.20Represented
mathematically, petitioner accounts for its claim in this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to be applied as tax credit for the
succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
₱146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
₱87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991
₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for refund21
Other than its own bare allegations, however, petitioner offers no proof to the effect that its
creditable tax of ₱172,477.00 was applied as claimed above. Instead, it anchors its assertion of
entitlement to refund on an alleged finding in C.A.-G.R. Sp. No. 3289022 involving the same parties
to the effect that petitioner charged its 1990 income tax liability to its tax credit for 1988 and not
its 1989 tax credit. Hence, its excess creditable taxes withheld of ₱54,104.00 for 1989 was left
untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the Court of
Appeals make a categorical determination that petitioner’s tax liability for 1990 was applied
against its 1988 tax credit. The statement adverted to by petitioner was actually presented in the
appellate court’s decision in CA-G.R. Sp No. 32890 as part of petitioner’s own narration of facts.
The pertinent portion of the decision reads:
It would appear from petitioner’s submission as follows:
x x x since it has already applied to its prior year’s excess credit of ₱81,403.00 (which petitioner
wanted refunded when it filed its 1988 Income Tax Return on April 14, 1989) the income tax
liability for 1988 of ₱28,127.00 and the income tax liability for 1989 of ₱27,653.00, leaving a
balance refundable of ₱25,623.00 subject of C.T.A. Case No. 4439, the ₱92,750.00 (₱64,623.00 plus
₱28,127.00, since this second amount was already applied to the amount refundable of
₱81,403.00) should be the refundable amount. But since the taxpayer again used part of it to
satisfy its income tax liability of ₱33,240.00 for 1990, the amount refundable was ₱59,510.00,
which is the amount prayed for in the claim for refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988, 1989, and
1990, when it filed a claim for refund of ₱59,510.00 in this case (CTA Case No. 4528). Hence, the
present claim should be resolved together with the previous claims.23
The confusion as to petitioner’s entitlement to a refund could altogether have been avoided had it
presented its tax return for 1990. Such return would have shown whether petitioner actually
applied its 1989 tax credit of ₱172,477.00, which includes the ₱54,104.00 creditable taxes
withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as it had
elected in its 1989 return, or at least, whether petitioner’s tax credit of ₱172,477.00 was applied
to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable to
petitioner after deducting its tax liability for 1990. As it is, we only have petitioner’s allegation
that its tax due for 1990 was ₱33,240.00 and that this was applied against its remaining tax
credits using its own "first in, first out" method of computation.
It would have been different had petitioner not included the ₱54,104.00 creditable taxes for 1989
in the total amount it elected to apply against its 1990 tax liabilities. Then, all that would have
been required of petitioner are: proof that it filed a claim for refund within the two (2)-year
prescriptive period provided under Section 230 of the NIRC; evidence that the income upon which
the taxes were withheld was included in its return; and to establish the fact of withholding by a
copy of the statement (BIR Form No. 1743.1) issued by the payor24 to the payee showing the
amount paid and the amount of tax withheld therefrom. However, since petitioner opted to apply
its aggregate excess credits as tax credit for 1990, it was incumbent upon it to present its tax
return for 1990 to show that the claimed refund had not been automatically credited and applied
to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts
stated therein are true and correct.25 Without the tax return, it is error to grant a refund since it
would be virtually impossible to determine whether the proper taxes have been assessed and
paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner
could very well have attached a copy of its final adjustment return for 1990 when it filed its claim
for refund on November 13, 1991. Annex "B" of its Petition for Review26 dated December 26,
1991 filed with the CTA, in fact, states that its annual tax return for 1990 was submitted in
support of its claim. Yet, petitioner’s tax return for 1990 is nowhere to be found in the records of
this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s
allegation that it did not present evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would not have reconsidered its
earlier Decision. As it is, the absence of petitioner’s 1990 tax return was the principal basis of the
CTA’s Resolution reconsidering its earlier Decision to grant petitioner’s claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for review
before the Court of Appeals. The appellate court, being a trier of facts, is authorized to receive it in
evidence and would likely have taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its 1990
tax return, it presented other evidence to prove its claim that it did not apply and could not have
applied the amount in dispute as tax credit. Importantly, petitioner therein attached a copy of its
final adjustment return for 1990 to its motion for reconsideration before the CTA buttressing its
claim that it incurred a net loss and is thus entitled to refund. Considering this fact, the Court held
that there is no reason for the BIR to withhold the tax refund.
In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund is fatal
to its cause. After all, it is axiomatic that a claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed
strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC)
provides:
Sec. 69. Final Adjustment Return.—Every corporation liable to tax under Section 24 shall file a
final adjustment return covering the total net income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid,
the refundable amount shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. – A final or an
adjustment return on B.I.R. Form No. 1702 covering the total taxable income of the corporation
for the preceding calendar or fiscal year shall be filed on or before the 15th day of the fourth
month following the close of the calendar or fiscal year. The return shall include all the items of
gross income and deductions for the taxable year. The amount of income tax to be paid shall be
the balance of the total income tax shown on the final or adjustment return after deducting
therefrom the total quarterly income taxes paid during the preceding first three quarters of the
same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and shown in the
adjustment or final corporate income tax return shall either (a) be refunded to the corporation, or
(b) may be credited against the estimated quarterly income tax liabilities for the quarters of the
succeeding taxable year. The corporation must signify in its annual corporate adjustment return
its intention whether to request for refund of the overpaid income tax or claim for automatic
credit to be applied against its income tax liabilities for the quarters of the succeeding taxable
year by filling up the appropriate box on the corporate tax return (B.I.R. Form No. 1702).
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund
of the excess estimated quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income
tax for a given taxable year is limited to the succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or overpaid
income tax for a given taxable year then is limited to the succeeding taxable year only," we ruled
that since the case involved a claim for refund of overpaid taxes for 1993, petitioner could only
have applied the 1993 excess tax credits to its 1994 income tax liabilities. To further carry-over to
1995 the 1993 excess tax credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation of its
total excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld of
₱54,104.00 or a total of ₱172,477.00, as its total excess credit to be applied as tax credit for 1990.
By its own disclosure, petitioner effectively combined its 1988 and 1989 tax credits and applied
its 1990 tax due of ₱33,240.00 against the total, and not against its creditable taxes for 1989 only
as allowed by Section 69. This is a clear admission that petitioner’s 1988 tax credit was
incorrectly and illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its excess
taxes applied as tax credit for the succeeding taxable year, such election is not final. Prior
verification and approval by the Commissioner of Internal Revenue is required. The availment of
the remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the
taxpayer to avail of the tax credit scheme if it so chooses. Neither does it impose a duty on the part
of the government to sit back and allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer.30
Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking of
boxes in Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper
management of claims for refund or tax credit by leading tax authorities to the direction they
should take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No. 842431 emphasizes
that it is imperative to indicate in the tax return or the final adjustment return whether a tax
credit or refund is sought by making the taxpayer’s choice irrevocable. Section 76 provides:
SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section 27 shall file a
final adjustment return covering the total taxable income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefore.
As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its
quarterly tax payments made during the taxable year is not equal to the total tax due for that year:
(a) pay the balance of the tax still due; (b) carry-over the excess credit; or (c) be credited or
refunded the amount paid. If the taxpayer has paid excess quarterly income taxes, it may be
entitled to a tax credit or refund as shown in its final adjustment return which may be carried
over and applied against the estimated quarterly income tax liabilities for the taxable quarters of
the succeeding taxable years. However, once the taxpayer has exercised the option to carry-over
and to apply the excess quarterly income tax against income tax due for the taxable quarters of
the succeeding taxable years, such option is irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioner’s excess
credits for 1988 could have been properly applied to its 1990 tax liabilities. Unfortunately for
petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government. And
since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on language
in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is
the exception.
WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of Appeals is
hereby AFFIRMED. No pronouncement as to costs.
EMILIO Y. HILADO vs. THE COLLECTOR OF INTERNAL REVENUE and THE CA
On March 31, 1952, Petitioner filed his income tax return for 1951 with the treasurer of Bacolod
City wherein he claimed, among other things, the amount of P12,837.65 as a deductible item from
his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal
Revenue. This circular was issued pursuant to certain rules laid down by the Secretary of Finance
On the basis of said return, an assessment notice demanding the payment of P9,419 was sent
to Petitioner, who paid the tax in monthly installments, the last payment having been made on
January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal
Revenue, issued General Circular No. V-139 which not only revoked and declared void his general
Circular No. V- 123 but laid down the rule that losses of property which occurred during the
period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or
embezzlement are deductible in the year of actual loss or destruction of said property. As a
consequence, the amount of P12,837.65 was disallowed as a deduction from the gross income
of Petitioner for 1951 and the Collector of Internal Revenue demanded from him the payment of
the sum of P3,546 as deficiency income tax for said year. When the petition for reconsideration
filed by Petitioner was denied, he filed a petition for review with the Court of Tax Appeals. In due
time, this court rendered decision affirming the assessment made by Respondent Collector of
Internal Revenue. This is an appeal from said decision.
It appears that Petitioner claimed in his 1951 income tax return the deduction of the sum of
P12,837.65 as a loss consisting in a portion of his war damage claim which had been duly
approved by the Philippine War Damage Commission under the Philippine Rehabilitation Act of
1946 but which was not paid and never has been paid pursuant to a notice served upon him by
said Commission that said part of his claim will not be paid until the United States Congress
should make further appropriation. He claims that said amount of P12,837.65 represents a
“business asset” within the meaning of said Act which he is entitled to deduct as a loss in his
return for 1951. This claim is untenable.
To begin with, assuming that said a mount represents a portion of the 75% of his war damage
claim which was not paid, the same would not be deductible as a loss in 1951 because, according
to Petitioner, the last installment he received from the War Damage Commission, together with
the notice that no further payment would be made on his claim, was in 1950. In the circumstance,
said amount would at most be a proper deduction from his 1950 gross income. In the second
place, said amount cannot be considered as a “business asset” which can be deducted as a loss in
contemplation of law because its collection is not enforceable as a matter of right, but is
dependent merely upon the generosity and magnanimity of the U. S. government. Note that, as of
the end of 1945, there was absolutely no law under which Petitioner could claim compensation
for the destruction of his properties during the battle for the liberation of the Philippines. And
under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage
Commission merely depended upon its discretion to be exercised in the manner it may see fit, but
the non-payment of which cannot give rise to any enforceable right, for, under said Act, “All
findings of the Commission concerning the amount of loss or damage sustained, the cause of such
loss or damage, the persons to whom compensation pursuant to this title is payable, and the value
of the property lost or damaged, shall be conclusive and shall not be reviewable by any court”.
(section 113).
It is true that under the authority of section 338 of the National Internal Revenue Code the
Secretary of Finance, in the exercise of his administrative powers, caused the issuance of General
Circular No. V-123 as an implementation or interpretative regulation of section 30 of the same
Code, under which the amount of P12,837.65 was allowed to be deducted “in the year the last
installment was received with notice that no further payment would be made until the United
States Congress makes further appropriation therefor”, but such circular was found later to be
wrong and was revoked. Thus, when doubts arose as to the soundness or validity of such circular,
the Secretary of Finance sought the advice of the Secretary of Justice who, accordingly, gave his
opinion the pertinent portion of which reads as follows:
“Yet it might be argued that war losses were not included as deductions for the year when they
were sustained because the taxpayers had prospects that losses would be compensated for by the
United States Government; that since only uncompensated losses are deductible, they had to wait
until after the determination by the Philippine War Damage Commission as to the compensability
in part or in whole of their war losses so that they could exclude from the deductions those
compensated for by the said Commission; and that, of necessity, such determination could be
complete only much later than in the year when the loss was sustained. This contention falls to
the ground when it is considered that the Philippine Rehabilitation Act which authorized the
payment by the United States Government of war losses suffered by property owners in the
Philippines was passed only on August 30, 1946, long after the losses were sustained. It cannot be
said therefore, that the property owners had any conclusive assurance during the years said
losses were sustained, that the compensation was to be paid therefor. Whatever assurance they
could have had, could have been based only on some information less reliable and less conclusive
than the passage of the Act itself. Hence, as diligent property owners, they should adopt the safest
alternative by considering such losses deductible during the year when they were sustained.”
In line with this opinion, the Secretary of Finance, through the Collector of Internal Revenue,
issued General Circular No. V-139 which not only revoked and declared void his previous Circular
No. V — 123 but laid down the rule that losses of property which occurred during the period of
World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or
embezzlement are deductible for income tax purposes in the year of actual destruction of said
property. We can hardly argue against this opinion. Since we have already stated that the amount
claimed does not represent a “business asset” that may be deducted as a loss in 1951, it is clear
that the loss of the corresponding asset or property could only be deducted in the year it was
actually sustained. This is in line with section 30 (d) of the National Internal Revenue Code which
prescribes that losses sustained are allowable as deduction only within the corresponding taxable
year.
Petitioner’s contention that during the last war and as a consequence of enemy occupation in the
Philippines “there was no taxable year” within the meaning of our internal revenue laws because
during that period they were unenforceable, is without merit. It is well known that our internal
revenue laws are not political in nature and as such were continued in force during the period of
enemy occupation and in effect were actually enforced by the occupation government. As a matter
of fact, income tax returns were filed during that period and income tax payment were effected
and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory
and not of the occupying enemy.
“Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once established
continues until changed by some competent legislative power. It is not changed merely by change
of sovereignty.’ (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing
Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his Treatise on the Conflict
of Laws (Cambridge, 1916, section 131) ‘There can be no break or interregnun in law. From the
time the law comes into existence with the first-felt corporateness of a primitive people it must
last until the final disappearance of human society. Once created, it persists until a change takes
place, and when changed it continues in such changed condition until the next change and so
forever. Conquest or colonization is impotent to bring law to an end; chan
roblesvirtualawlibraryinspite of change of constitution, the law continues unchanged until the
new sovereign by legislative act creates a change.’“ (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75
Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General Circular No. V-123 is
vested exclusively in our courts in view of the principle of separation of powers and, therefore, the
Secretary of Finance acted without valid authority in revoking it and approving in lieu thereof
General Circular No. V-139. It cannot be denied, however, that the Secretary of Finance is vested
with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in
office because the construction of a statute by those administering it is not binding on their
successors if thereafter the latter become satisfied that a different construction should be given.
“When the Commissioner determined in 1937 that the Petitioner was not exempt and never had
been, it was his duty to determine, assess and collect the tax due for all years not barred by the
statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was not
binding upon him. It did not exempt the Petitioner from tax, This same point was decided in this
way in Stanford University Bookstore, 29 B. T. A., 1280; 83 Fed. (2d) 710.” (Southern Maryland
Agricultural Fair Association vs. Commissioner of Internal Revenue, 40 B. T. A., 549, 554).
With regard to the contention that General Circular No. V-139 cannot be given retroactive effect
because that would affect and obliterate the vested right acquired by Petitioner under the
previous circular, suffice it to say that General Circular No. V-123, having been issued on a wrong
construction of the law, cannot give rise to a vested right that can be invoked by a taxpayer. The
reason is obvious: a vested right cannot spring from a wrong interpretation. This is too clear to
require elaboration.
“It seems too clear for serious argument that an administrative officer cannot change a law
enacted by Congress. A regulation that is merely an interpretation of the statute when once
determined to have been erroneous becomes nullity. An erroneous construction of the law by the
Treasury Department or the collector of internal revenue does not preclude or estop the
government from collecting a tax which is legally due.”
“Art. 2254. — No vested or acquired right can arise from acts or omissions which are against the
law or which infringe upon the rights of others.” (Article 2254, New Civil Code.) Wherefore, the
decision appealed from is affirmed Without pronouncement as to costs.
 ANTERO M. SISON, JR., vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal
Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS
TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of
Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA,
Minister of Finance
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of
its constitutional infirmity. The assailed provision further amends Section 21 of the National
Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a)
taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements, (e) dividends and share of individual partner in the net
profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by
virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-visthose which are imposed
upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as
arbitrary amounting to class legislation, oppressive and capricious in character 5 For petitioner,
therefore, there is a transgression of both the equal protection and due process clauses 6 of the
Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10
days from notice. Such an answer, after two extensions were granted the Office of the Solicitor
General, was filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner,
the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer
then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The
authorities and cases cited while correctly quoted or paraghraph do not support petitioner's
stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to
private enterprise and initiative and which the government was called upon to enter optionally,
and only 'because it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to
meet the increasing social challenges of the times." 11 Hence the need for more revenues. The
power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being
the lifeblood of the government, their prompt and certain availability is of the essence.
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is
the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its
plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits . Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases
a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves
v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized
it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free
use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun
from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to
abide by its command, then this Court must so declare and adjudge it null. The injury thus is
centered on the question of whether the imposition of a higher tax rate on taxable net income
derived from business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional
taint. Considering that petitioner here would condemn such a provision as void or its face, he has
not made out a case. This is merely to adhere to the authoritative doctrine that were the due
process and equal protection clauses are invoked, considering that they arc not fixed rules but
rather broad standards, there is a need for of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown
to amount to the confiscation of property. That would be a clear abuse of power. It then becomes
the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority
not conferred. That properly calls for the application of the Holmes dictum. It has also been held
that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public
purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on
due process grounds.
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of
this constitutional mandate whether the assailed act is in the exercise of the lice power or the
power of eminent domain is to demonstrated that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the
very least, discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in the privileges conferred
and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle
is that equal protection and security shall be given to every person under circumtances which if
not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall
within a class should be treated in the same fashion, whatever restrictions cast on some in the
group equally binding on the rest." 20 That same formulation applies as well to taxation
measures. The equal protection clause is, of course, inspired by the noble concept of
approximating the Ideal of the laws benefits being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is of the very essence of the Idea of law.
There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality
at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion to be treated in law as
though they were the same." 21 Hence the constant reiteration of the view that classification if
rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this
Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that administratrix. The estate was divided among and awarded to the heirs and the proceedings
'inequalities which result from a singling out of one particular class for taxation, or exemption terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.
infringe no constitutional limitation.'"
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
"The rule of taxation shag be uniform and equitable." This requirement is met according to Justice corresponding income tax returns were not filed. Thereupon, the representative of the Collector
Laurel in Philippine Trust Company v. Yatco, decided in 1940, when the tax "operates with the of Internal Revenue filed said returns for the estate on the basis of information and data obtained
same force and effect in every place where the subject may be found. " He likewise added: "The from the aforesaid estate proceedings and issued an assessment for the following:
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." The problem of classification did not present itself in that case. It did not arise until 1. Deficiency income tax
nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing 1945 P135.83
power has the authority to make reasonable and natural classifications for purposes of taxation, ...
. As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the 1946 436.95
practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause
and is therefore uniform." There is quite a similarity then to the standard of equal protection for 1947 1,206.91 P1,779.69
all that is required is that the tax "applies equally to all persons, firms and corporations placed in
similar situation." Add: 5% surcharge 88.98
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration
the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base 1% monthly interest from November
or taxable income by eliminating all deductible items and at the same time reducing the applicable 30, 1953 to April 15, 1957 720.77
tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the Compromise for late filing 80.00
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized rules removing Compromise for late payment 40.00
all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are e not entitled to make Total amount due
deductions for income tax purposes because they are in the same situation more or less. On the P2,707.44
other hand, in the case of professionals in the practice of their calling and businessmen, there is ===========
no uniformity in the costs or expenses necessary to produce their income. It would not be just
then to disregard the disparities by giving all of them zero deduction and indiscriminately impose P14.50
2. Additional residence tax for 1945
on all alike the same tax rates on the basis of gross income. There is ample justification then for ===========
the Batasang Pambansa to adopt the gross system of income taxation to compensation income,
while continuing the system of net income taxation as regards professional and business income. 3. Real Estate dealer's tax for the fourth quarter P207.50
of 1946 and the whole year of 1947 ===========
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1)
lack of factual foundation to show the arbitrary character of the assailed provision; (2) the force Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to
of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion
reasonableness of the distinction between compensation and taxable net income of professionals pertaining to him as one of the heirs."
and businessman certainly not a suspect classification, WHEREFORE, the petition is dismissed.
Costs against petitioner. After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of
the Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes
COMMISSIONER OF INTERNAL REVENUE vs. MANUEL B. PINEDA, as one of the heirs of for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24,
deceased ATANASIO PINEDA 1953; assessments for both taxable years were made within five years therefrom or on October
19, 1953; and the action to collect the tax was filed within five years from the latter date, on
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children,
August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; the
the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of
assessment was made on October 19, 1953, more than five years from the date the return was
First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed
filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We remanded
the case to the Tax Court for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda
liable for the payment corresponding to his share of the following taxes:
Deficiency income tax
P135.8
1945
3
1946 436.95
Real estate dealer's fixed tax 4th
quarter of 1946 and whole year of
1947 P187.50
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B.
Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in
the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in
the estate.
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received. He
relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the
partition of an estate, heirs and distributees are liable individually for the payment of all lawful
outstanding claims against the estate in proportion to the amount or value of the property they
have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes
assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to
the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate
to the share he received from the inheritance.3 His liability, however, cannot exceed the amount
of his share.
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the
property in his possession. The reason is that the Government has a lien on the P2,500.00
received by him from the estate as his share in the inheritance, for unpaid income taxes4a for
which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which
we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or
insurance company liable to pay the income tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging
to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After
such payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an
adjustment of the proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the
heirs and collecting from each one of them the amount of the tax proportionate to the inheritance
received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra.
In said case, the Government filed an action against all the heirs for the collection of the tax. This
action rests on the concept that hereditary property consists only of that part which remains after
the settlement of all lawful claims against the estate, for the settlement of which the entire estate
is first liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate
is levied proportionately against them is to achieve thereby two results: first, payment of the tax;
and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said
property of the estate which is in the hands of an heir or transferee to the payment of the tax due,
the estate. This second remedy is the very avenue the Government took in this case to collect the
tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the
necessary discretion to avail itself of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code above quoted, because taxes are the
lifeblood of government and their prompt and certain availability is an imperious need.7 And as
afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The
adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax, is
left to await the suit for contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay
to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945
and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year
1947, without prejudice to his right of contribution for his co-heirs. No costs. So ordered.
THE PHILIPPINE GUARANTY CO., INC. vs. THE COMMISSIONER OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the
Philippines namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance
Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance
Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of
the premiums on insurance it has originally underwritten in the Philippines, in consideration for
the assumption by the latter of liability on an equivalent portion of the risks insured. Said
reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign
reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which
was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with
that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where
entered, and entry therein was binding upon the reinsurers. A proportionate amount of taxes on
insurance premiums not recovered from the original assured were to be paid for by the foreign
reinsurers. The foreign reinsurers further agreed, in consideration for managing or administering
their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal
to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss
Reinsurance Company stipulated that their contract shall be construed by the laws of the
Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file
its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding
tax. Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is
hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes for
the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs against
petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954
to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign
reinsurers commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the
original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the
foreign reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the
Philippines the actual cession of the risks and premiums and assumption of the reinsurance
undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax
Code for the privilege of doing insurance business in the Philippines were payable by the foreign
reinsurers when the same were not recoverable from the original assured. The foreign reinsurers
paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the affairs of the former in the
Philippines in regard to their reinsurance activities here. Disputes and differences between the
parties were subject to arbitration in the City of Manila. All the reinsurance contracts, except that
with Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines
and later signed by the foreign reinsurers abroad. Although the contract between Philippine
Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the
same specifically provided that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources
within the Philippines. The word "sources" has been interpreted as the activity, property or
service giving rise to the income. 1 The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc.,
against liability for loss under original insurances. Such undertaking, as explained above, took
place in the Philippines. These insurance premiums, therefore, came from sources within the
Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business. Section 24
of the Tax Code does not require a foreign corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity creating the income is performed or done
in the Philippines. What is controlling, therefore, is not the place of business but the place
of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within
the Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section
37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned
therein should be treated as income from sources within the Philippines but it does not require
that other kinds of income should not be considered likewise.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the
state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner
of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding withholding tax thereon. This defense of
petitioner may free if from the payment of surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate if from liability to pay such
withholding tax The Government is not estopped from collecting taxes by the mistakes or errors
of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to withholding tax under Section 53 and 54 of
the Tax Code, suffice it to state that this question has already been answered in the affirmative
in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And since it did
not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in Section fifty-three a tax
equal to twenty-four per centum thereof, and such tax shall be returned and paid in the same
manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships
(compañias colectivas), in what ever capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and employees of the Government of the
Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed
or determinable annual or periodical gains, profits, and income of any nonresident alien
individual, not engaged in trade or business within the Philippines and not having any office or
place of business therein, shall (except in the case provided for in subsection [a] of this section)
deduct and withhold from such annual or periodical gains, profits, and income a tax equal to
twelve per centum thereof: Provided That no deductions or withholding shall be required in the
case of dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more than
eighty-five per centum of the gross income of such corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-seven: Provided, further, That
the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due on the
reinsurance premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954,
respectively. If the amount of P375,345.00 is not paid within 30 days from the date this judgement
becomes final, there shall be collected a surcharged of 5% on the amount unpaid, plus interest at
the rate of 1% a month from the date of delinquency to the date of payment, provided that the
maximum amount that may be collected as interest shall not exceed the amount corresponding to
a period of three (3) years. With costs againsts petitioner.
COLLECTOR OF INTERNAL REVENUE vs. J.C. YUSECO and The COURT OF TAX APPEALS
The Collector of Internal Revenue seeks a review, under section 18, Republic Act No. 1125, and
prays for the setting aside, of the judgment rendered by the Court of Tax Appeals on 25 March
1957, in C.T.A. Case No. 217, the dispositive part of which is, as follows:
WHEREFORE, pursuant to section 51(d) of the National Internal Revenue Code, judgment is
hereby rendered declaring the warrant of distraint and levy issued by respondent on January 20,
1955 to effect collection of "the amount of P2,447.30 as income tax for the year 1946 plus 5%
surcharge and the 1% monthly interest from August 16, 1953" allegedly due from petitioner, is
hereby declared null and void and of no legal force and effect and respondent is hereby directed
to return to petitioner the properties seized from the latter under said warrant. The respondent
Collector of Internal Revenue is likewise enjoined from taking any further proceeding to effect by
summary methods the collection of the alleged income taxes assessed against petitioner J. C.
Yuseco in the sums of P134.14 and P2,447.30 for the years 1945 and 1946, respectively. Without
pronouncement as to costs. and the resolution entered by the same Court on 17 June 1957
denying his motion for reconsideration
The facts, which are not disputed, are, as summarized by the Court, as follows:
The facts established in this case show that petitioner did not file income tax returns for the
calendar years 1945 and 1946. This fact having come to the knowledge of revenue examiners,
they accordingly made income tax returns for petitioner upon which respondent on August 20,
1948, assessed against and demanded from petitioner the sums of P134.14 and P7,563.28
representing alleged income taxes and corresponding surcharges for the years 1945 and 1946. On
September 1, 1948, petitioner wrote the respondent, requesting that he be informed as to how the
assessments were arrived at. In reply thereto, respondent in a letter dated September 17, 1948
furnished the information sought and at the same time demanded the payment of the aforesaid
assessments. On October 4, 1948, petitioner asked that he be given an opportunity to present his
side of the matter. However, respondent on December 13, 1948, denied reconsideration of the
assessment and reiterated his demand upon petitioner for payment thereof which was followed
with another demand on June 29, 1949. On July 28, 1949, petitioner once more requested for a
reinvestigation of the case but the same was denied by respondent in his letter dated February 7,
1951 wherein he repeated his demand for payment. On April 3, 1951, petitioner renewed his
request for reinvestigation and nothing was heard of the matter for almost three years thereafter.
On January 6, 1953, respondent issued a warrant of distraint and levy upon petitioner's
properties which, however, was not executed. On January 16, 1953 petitioner sought the
withdrawal and/or reconsideration of said warrant. Meanwhile, on July 2, 1953, respondent
issued a revised assessment notice which reduced the original assessment for the 1946 income
tax to P2,447.30, including surcharge. On July 18, 1953, petitioner asked that he be informed of
the action upon his petition for reinvestigation. This request was reiterated in his letter of August
18, 1953 wherein he acknowledged receipt of the modified assessment for the 1946 income tax.
On September 1, 1953, respondent wrote petitioner demanding from the latter payment of the
said sum of P2,447.30 as income tax for the year 1946 plus penalties incident to delinquency, and
reiterating the demand for the unrevised income tax assessment for 1945 in the sum of P134.14,
but respondent did not take any further action thereafter to effect collection of the assessment.
On January 20, 1955, respondent again issued a warrant of distraint and levy on the properties of
petitioner, this time only to effect collection of the said sum of P2,447.80 as income tax for 1946.
The distraint being still enforce, petitioner on December 12, 1955 filed his petition for prohibition
with this Court.
The petitioner Collector of Internal Revenue assails the jurisdiction of the respondent Court of Tax
Appeals to take cognizance of the respondent taxpayer's petition that seeks to enjoin him (the
petitioner) from collecting his income taxes due for the years 1945 and 1946 and surcharges by
summary distraint of and levy upon his personal and real properties, under the provisions of
sections 316 to 330 of the National Internal Revenue Code. The petitioner's contention is that the
respondent taxpayer cannot bring in the respondent Court an independent special civil action for
prohibition without taking to said Court an appeal from the decision or ruling of the Collector of
Internal Revenue in the cases provided for in sections 7 and 11 of Republic Act No. 1125.
Sections 7, 9 and 11 of Republic No. 1125, creating the Court of Tax Appeals, provides:
SEC. 7. Jurisdiction. — The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided —
(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue;
(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees
or other money charges; seizure, detention or release of property affected; fines; forfeitures or
other penalties imposed in relation thereto; or other matters arising under the Customs Law or
other law or part of law administered by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the
assessment and taxation of real property or other matters arising under the Assessment Law,
including rules and regulations relative thereto.
SEC. 9. Fees. — The Court shall fix reasonable fees for the filing of an appeal, for certified
document, and for other authorized services rendered by the Court or its personnel.
SEC. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely
affected by a decision or ruling of the Collector of Internal Revenue, the Collector 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 the receipt of such decision or ruling.
No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue
or the Collector of Customs shall suspend the payment, levy, distraint, and/or sale of any property
of the taxpayer for the satisfaction of his tax liability as provided by existing law; Provided,
however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue
or the Commissioner of Customs may jeopardize the interest of the Government and/or the
taxpayer the Court at any stage of the proceeding may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond for not more than double
the amount with the Court.
The foregoing provisions of the law refer and limit only to appeals from decisions or rulings of the
Collector of Internal Revenue, Commissioner of Customs and Provincial or City Boards of
Assessment Appeals in the proper cases. Nowhere does the law expressly vest in the Court of Tax
Appeals original jurisdiction to issue writs of prohibition and injunction independently of, and
apart from, an appealed case. The writ of prohibition or injunction that it may issue under the
provisions of section 11, Republic Act No. 1125, to suspend the collection of taxes, is merely
ancillary to and in furtherance of its appellate jurisdiction in the cases mentioned in section 7 of
the Act. The power to issue the writ exists only in cases appealed to it. This is reflected on the
explanatory note of the bill (House No. 175), creating the Court of Tax Appeals. We quote from the
explanatory note:
... It is proposed in the attached bill to establish not merely an administrative body but a regular
court vested with exclusive appellate jurisdiction over cases arising under the National Internal
Revenue Code, Customs Law and the Assessment Law. (Emphasis supplied, p. 2202, Congressional
Record, Third Congress, Vol. I, Part II.)
Congressman Castañeda, one of the proponents of the bill, in his opening remarks sponsoring its
enactment into law, said that "House Bill No. 175 has for its purpose the creation of a regular
court of tax appeals." (p. 2204, supra.) Answering a question from Congressman Alonzo whether
the Court of Tax Appeals would have only appellate jurisdiction and no concurrent or original
jurisdiction, the proponent said that "It has exclusive jurisdiction with reference to matters or
cases arising from the Internal Revenue Code, the Customs Law and the Assessment Law."
Dwelling further on the subject, the two members of the House of Representatives — continued
their discussion, as follows:
Mr. Alonzo. So that under this proposal you will bring the case immediately to this court that you
are proposing to create, without first having it decided by the Commissioner of Customs or the
Collector of Internal Revenue, as the case may be.
Mr. Castañeda. It will have to be appealed from the decision of the Collector of Internal Revenue,
the Collector of Customs or the Assessors, to the Court of Tax Appeals, then to the Supreme Court.
These statements made during the proceedings indicate that the intention of Congress was to vest
the Court of Tax Appeals with jurisdiction to issue writs of prohibition and injunction only in aid
of its appellate jurisdiction in cases appealed to it and not to clothe it with original jurisdiction to
issue them. Such intent is reflected on the second paragraph of section 11, Republic Act No. 1125
quoted above. Taxes being the chief source of revenue for the Government to keep it running must
be paid immediately and without delay. A taxpayer who feels aggrieved by the decision or ruling
handed down by a revenue officer and appeals from his decision or ruling to the Court of Tax
Appeals must pay the tax assessed, except that, if in the opinion of the Court the collection would
jeopardize the interest of the Government and/or the taxpayer, it could suspend the collection
and require the taxpayer either to deposit the amount claimed or to file a surety bond for not
more than double the amount of the tax assessed. The judgment under review is annulled and set
aside, without pronouncement as to costs.
COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX APPEALS
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether or not the appeal of the private
respondent from the decision of the Collector of Internal Revenue was made on time and in
accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years
1958 and 1959. On January 18, 1965, Algue flied a letter of protest or request for reconsideration,
which letter was stamp received on the same day in the office of the petitioner. On March 12,
1965, a warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending
protest. A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced
his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the
warrant. On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any
action on the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served. Sixteen days later, on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.
The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. It is true that as a rule the warrant of distraint and levy is "proof of the finality of the
assessment" and renders hopeless a request for reconsideration," being "tantamount to an
outright denial thereof and makes the said request deemed rejected." But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.
As the Court of Tax Appeals correctly noted," the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income but later conformed to the decision of the
respondent court rejecting this assertion. In fact, as the said court found, the amount was earned
through the joint efforts of the persons among whom it was distributed It has been established
that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in
it. Ultimately, after its incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties. For this sale, Algue received as agent a commission
of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals.
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00
as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission.
This was a reasonable proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase
by it of the Sugar Estate properties. This finding of the respondent court is in accord with the
following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ...
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are not paid
wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . .
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders.
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in a
new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it is an arbitrary metho d of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner. ACCORDINGLY, the appealed
decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J.
MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor, HON. TOMAS R. OSMEA, and EUSTAQUIO
B. CESA
For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22
March 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for
declaratory relief in Civil Case No. CEB-16900, entitled Mactan Cebu International Airport
Authority vs. City of Cebu, and its order of 4 May 1995 denying the motion to reconsider the
decision.
We resolved to give due course to this petition for it raises issues dwelling on the scope of the
taxing power of local government units and the limits of tax exemption privileges of government-
owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to principally undertake the economical, efficient and effective
control, management and supervision of the Mactan International Airport in the Province of Cebu
and the Lahug Airport in Cebu City, x x x and such other airports as may be established in the
Province of Cebu x x x (Sec. 3, RA 6958). It is also mandated to:
a) encourage, promote and develop international and domestic air traffic in the Central Visayas
and Mindanao regions as a means of making the regions centers of international trade and
tourism, and accelerating the development of the means of transportation and communication in
the country; and,
b) upgrade the services and facilities of the airports and to formulate internationally acceptable
standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment
of realty taxes in accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of
the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the
petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941,
942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu
City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor
the aforecited Section 14 of RA 6958 which exempts it from payment of realty taxes. It was also
asserted that it is an instrumentality of the government performing governmental functions,
citing Section 133 of the Local Government Code of 1991 which puts limitations on the taxing
powers of local government units:
Section 133. Common Limitations on the Taxing Powers of Local Government Units. -- Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
a) x x x
xxx
o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.
Respondent City refused to cancel and set aside petitioners realty tax account, insisting that the
MCIAA is a government-controlled corporation whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of the Local Government Code that took effect
on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.
xxx
Section 234. Exemptions from Real Property Taxes. x x x
(a) x x x
xxx
(e) x x x
Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by all persons, whether natural or juridical, including government-owned
or controlled corporations are hereby withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the
latter was compelled to pay its tax account under protest and thereafter filed a Petition for
Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29,
1994. MCIAA basically contended that the taxing powers of local government units do not extend
to the levy of taxes or fees of any kind on an instrumentality of the national government.
Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands
on the same footing as an agency or instrumentality of the national government by the very
nature of its powers and functions.
Respondent City, however, asserted that MCIAA is not an instrumentality of the government but
merely a government-owned corporation performing proprietary functions. As such, all
exemptions previously granted to it were deemed withdrawn by operation of law, as provided
under Sections 193 and 234 of the Local Government Code when it took effect on January 1, 1992.
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, the trial court dismissed the petition in light of its findings, to
wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of taxes by government-owned and controlled
corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to
quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government of Cebu are
exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the
same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that All general and special laws, acts, city charters, decrees
[sic], executive orders, proclamations and administrative regulations, or part of parts thereof
which are inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly. (/f/, Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided
for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local
Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties effective after
January 1, 1992 until the present.
This Courts ruling finds expression to give impetus and meaning to the overall objectives of the
New Local Government Code of 1991, RA 7160. It is hereby declared the policy of the State that
the territorial and political subdivisions of the State shall enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities and
make them more effective partners in the attainment of national goals. Toward this end, the State
shall provide for a more responsive and accountable local government structure instituted
through a system of decentralization whereby local government units shall be given more powers,
authority, responsibilities, and resources. The process of decentralization shall proceed from the
national government to the local government units. x x x
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the
petitioner filed the instant petition based on the following assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH
GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned or
controlled corporation, it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the people.
Considering its task not merely to efficiently operate and manage the Mactan-Cebu International
Airport, but more importantly, to carry out the Government policies of promoting and developing
the Central Visayas and Mindanao regions as centers of international trade and tourism, and
accelerating the development of the means of transportation and communication in the
country, and that it is an attached agency of the Department of Transportation and
Communication (DOTC), the petitioner may stand in [sic] the same footing as an agency or
instrumentality of the national government. Hence, its tax exemption privilege under Section 14 of
its Charter cannot be considered withdrawn with the passage of the Local Government Code of
1991 (hereinafter LGC) because Section 133 thereof specifically states that the `taxing powers of
local government units shall not extend to the levy of taxes or fees or charges of any kind on the
national government, its agencies and instrumentalities.
As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty taxes
upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs.
Philippine Amusement and Gaming Corporation:
Local governments have no power to tax instrumentalities of the National Government. PAGCOR
is a government owned or controlled corporation with an original charter, PD 1869. All of its
shares of stock are owned by the National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually is
exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to
control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National Government over local governments.
Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau,
Modern Constitutional Law, Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as
a tool for regulation (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice
Marshall as the power to destroy (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to wield it.
It then concludes that the respondent Judge cannot therefore correctly say that the questioned
provisions of the Code do not contain any distinction between a government corporation
performing governmental functions as against one performing merely proprietary ones such that
the exemption privilege withdrawn under the said Code would apply to all government
corporations. For it is clear from Section 133, in relation to Section 234, of the LGC that the
legislature meant to exclude instrumentalities of the national government from the taxing powers
of the local government units.
In its comment, respondent City of Cebu alleges that as a local government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution and enhanced further by the LGC. While it may be true
that under its Charter the petitioner was exempt from the payment of realty taxes, this exemption
was withdrawn by Section 234 of the LGC. In response to the petitioners claim that such
exemption was not repealed because being an instrumentality of the National Government,
Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of
any kind on it, respondent City of Cebu points out that the petitioner is likewise a government-
owned corporation, and Section 234 thereof does not distinguish between government-owned or
controlled corporations performing governmental and purely proprietary functions. Respondent
City of Cebu urges this Court to apply by analogy its ruling that the Manila International Airport
Authority is a government-owned corporation, and to reject the application of Basco because it
was promulgated . . . before the enactment and the signing into law of R.A. No. 7160, and was not,
therefore, decided in the light of the spirit and intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people through their
Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform
and equitable and Congress shall evolve a progressive system of taxation. So potent indeed is the
power that it was once opined that the power to tax involves the power to destroy. Verily,
taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the
government. Accordingly, tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the
lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the
taxing authority. A claim of exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption
therefrom is the exception. However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the government in
the course of its operations.
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter,
the exercise of the power may be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom
the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The
only exception to this rule is where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and is thus covered by
the non-impairment clause of the Constitution.
The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by
local government units of their power to tax, the scope thereof or its limitations, and the
exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
SEC. 133. Common Limitations on the Taxing Power of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise of charges for
wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever
upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended,
and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water, except
as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise
provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives
duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight
(R.A. No. 6938) otherwise known as the Cooperatives Code of the Philippines respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES
AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis supplied)
Needless to say, the last item (item o) is pertinent to this case. The taxes, fees or charges referred
to are of any kind; hence, they include all of these, unless otherwise provided by the LGC.The term
taxes is well understood so as to need no further elaboration, especially in light of the above
enumeration. The term fees means charges fixed by law or ordinance for the regulation or
inspection of business or activity, while charges are pecuniary liabilities such as rents or fees
against persons or property.
Among the taxes enumerated in the LGC is real property tax, which is governed by Section 232. It
reads as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvements not hereafter specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government-owned and controlled corporations, except as provided therein. It provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof had been granted, for consideration or otherwise, to a
taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or juridical, including all government-
owned or controlled corporations are hereby withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership, character, and use of the property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are
real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their character are:
(i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non-profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and
exclusive use to which they are devoted are: (i) all lands, buildings and improvements which are
actually directly and exclusively used for religious, charitable or educational purposes; (ii) all
machineries and equipment actually, directly and exclusively used by local water districts or by
government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power; and (iii) all machinery and equipment used
for pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the country, all
machinery and equipment for pollution control and environmental protection may not be taxed
by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical
persons including government-owned or controlled corporations are withdrawn upon the
effectivity of the Code.
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units may, through
ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and
the exceptions thereto. The use of exceptions or provisos in these sections, as shown by the
following clauses:
(1) unless otherwise provided herein in the opening paragraph of Section 133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause
in Section 133 seems to be inaccurately worded. Instead of the clause unless otherwise
provided herein, with the herein to mean, of course, the section, it should have used the clause
unless otherwise provided in this Code. The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local government units and, where exceptions
were intended, the exceptions are explicitly indicated in the next. For instance, in item (a) which
excepts income taxes when levied on banks and other financial institutions; item (d) which
excepts wharfage on wharves constructed and maintained by the local government unit
concerned; and item (1) which excepts taxes, fees and charges for the registration and issuance of
licenses or permits for the driving of tricycles. It may also be observed that within the body itself
of the section, there are exceptions which can be found only in other parts of the LGC, but the
section interchangeably uses therein the clause except as otherwise provided herein as in items
(c) and (i), or the clause except as provided in this Code in item (j). These clauses would be
obviously unnecessary or mere surplusages if the opening clause of the section were Unless
otherwise provided in this Code instead of Unless otherwise provided herein. In any event, even if
the latter is used, since under Section 232 local government units have the power to levy real
property tax, except those exempted therefrom under Section 234, then Section 232 must be
deemed to qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule,
as laid down in Section 133, the taxing powers of local government units cannot extend to the levy
of, inter alia, taxes, fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units; however, pursuant to Section 232, provinces, cities,
and municipalities in the Metropolitan Manila Area may impose the real property tax except
on, inter alia, real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person, as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,
including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the LGC. The latter
proviso could refer to Section 234 which enumerates the properties exempt from real property
tax. But the last paragraph of Section 234 further qualifies the retention of the exemption insofar
as real property taxes are concerned by limiting the retention only to those enumerated therein;
all others not included in the enumeration lost the privilege upon the effectivity of the
LGC. Moreover, even as to real property owned by the Republic of the Philippines or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable person for
consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under
any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since,
as shown above, the said section is qualified by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers
of the local government units cannot extend to the levy of:
(o) taxes, fees or charges of any kind on the National Government, its agencies or
instrumentalities, and local government units.
It must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most
likely, it could only be the first, but not under any explicit provision of the said section, for none
exists. In light of the petitioners theory that it is an instrumentality of the Government, it could
only be within the first item of the first paragraph of the section by expanding the scope of the
term Republic of the Philippines to embrace its instrumentalities and agencies. For expediency,
we quote:
(a) real property owned by the Republic of the Philippines, or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.
This view does not persuade us. In the first place, the petitioners claim that it is an instrumentality
of the Government is based on Section 133(o), which expressly mentions the word
instrumentalities; and, in the second place, it fails to consider the fact that the legislature used the
phrase National Government, its agencies and instrumentalities in Section 133(o), but only the
phrase Republic of the Philippines or any of its political subdivisions in Section 234(a).
The terms Republic of the Philippines and National Government are not interchangeable. The
former is broader and synonymous with Government of the Republic of the Philippines which the
Administrative Code of 1987 defines as the corporate governmental entity through which the
functions of government are exercised throughout the Philippines, including, save as the contrary
appears from the context, the various arms through which political authority is made affective in
the Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal or
barangay subdivisions or other forms of local government. These autonomous regions, provincial,
city, municipal or barangay subdivisions are the political subdivisions.
On the other hand, National Government refers to the entire machinery of the central government,
as distinguished from the different forms of local governments. The National Government then is
composed of the three great departments: the executive, the legislative and the judicial.
An agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a
local government or a distinct unit therein; while an instrumentality refers to any agency of the
National Government, not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned and controlled corporations.
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the agencies
and instrumentalities of the National Government mentioned in Section 133(o), then it should
have restated the wording of the latter. Yet, it did not. Moreover, that Congress did not wish to
expand the scope of the exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned and controlled
corporations is further borne out by the fact that the source of this exemption is Section 40(a) of
P.D. No. 464, otherwise known as The Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions and
any government-owned or controlled corporation so exempt by its charter: Provided, however,
That this exemption shall not apply to real property of the above-mentioned entities the beneficial
use of which has been granted, for consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase and any government-owned or controlled
corporation so exempt by its charter was excluded. The justification for this restricted exemption
in Section 234(a) seems obvious: to limit further tax exemption privileges, especially in light of
the general provision on withdrawal of tax exemption privileges in Section 193 and the special
provision on withdrawal of exemption from payment of real property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. The power to
tax is the most effective instrument to raise needed revenues to finance and support myriad
activities of local government units for the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace, progress, and prosperity of the people. It may
also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all other units of government
were that such privilege resulted in serious tax base erosion and distortions in the tax treatment
of similarly situated enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other charges due from
them.
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to
the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b)
whether the petitioner is a taxable person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities,
runways, lands, buildings and other properties, movable or immovable, belonging to or presently
administered by the airports, and all assets, powers, rights, interests and privileges relating on
airport works or air operations, including all equipment which are necessary for the operations of
air navigation, aerodrome control towers, crash, fire, and rescue facilities are hereby transferred
to the Authority: Provided, however, that the operations control of all equipment necessary for
the operation of radio aids to air navigation, airways communication, the approach control office,
and the area control center shall be retained by the Air Transportation Office. No equipment,
however, shall be removed by the Air Transportation Office from Mactan without the concurrence
of the Authority. The Authority may assist in the maintenance of the Air Transportation Office
equipment.
The airports referred to are the Lahug Air Port in Cebu City and the Mactan International Airport
in the Province of Cebu, which belonged to the Republic of the Philippines, then under the Air
Transportation Office (ATO).
It may be reasonable to assume that the term lands refer to lands in Cebu City then administered
by the Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on
for real property taxes. This section involves a transfer of the lands, among other things, to the
petitioner and not just the transfer of the beneficial use thereof, with the ownership being
retained by the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership thereof because the petitioners
authorized capital stock consists of, inter alia, the value of such real estate owned and/or
administered by the airports. Hence, the petitioner is now the owner of the land in question and
the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable person under its Charter. It
was only exempted from the payment of real property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to
all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property tax,
in light of the foregoing disquisitions, it had already become, even if it be conceded to be an
agency or instrumentality of the Government, a taxable person for such purpose in view of the
withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property
taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of
the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the Government performing governmental functions may be subject to tax. Where it is
done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional
Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
ABAKADA GURO PARTYLIST VS SEC. ERMITA, ET AL
The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold himself
honored in contributing to those expenses.
- Anne Robert Jacques Turgot (1727-1781) French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full value-added tax benefits these are the
reasons why Republic Act No. 9337 (R.A. No. 9337) was enacted. Reasons, the wisdom of which,
the Court even with its extensive constitutional power of review, cannot probe. The petitioners in
these cases, however, question not only the wisdom of the law, but also perceived constitutional
infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No.
9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705,
and Senate Bill No. 1950.
House Bill No. 3555 was introduced on first reading on January 7, 2005. The House Committee on
Ways and Means approved the bill, in substitution of House Bill No. 1468, which Representative
(Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7,
2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the
bill on second and third reading.
House Bill No. 3705 on the other hand, substituted House Bill No. 3105 introduced by Rep.
Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its mother bill is
House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2,
2005. The President also certified it as urgent on February 8, 2005. The House of Representatives
approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 1950 on March 7,
2005, in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill
Nos. 3555 and 3705. Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos.
1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N.
Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate on
second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives
for a committee conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555,
House Bill No. 3705, and Senate Bill No. 1950, after having met and discussed in full free and
conference, recommended the approval of its report, which the Senate did on May 10, 2005, and
with the House of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted
to the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337. When said date came, the Court issued a
temporary restraining order, effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking
through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a lot of complaints aired on television and on
radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices that theyll have to pay would have to go up
by 10%. While all that was being aired, per your presentation and per our own understanding of
the law, thats not true. Its not true that the e-vat law necessarily increased prices by 10%
uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of
the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to
petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to
deliver a point that different industries, different products, different services are hit differently. So
its not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%,
correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day,
were being increased arbitrarily by 10%. And thats one reason among many others this Court had
to issue TRO because of the confusion in the implementation. Thats why we added as an issue in
this case, even if its tangentially taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now admit and I think even the Government
will admit is incorrect. In some cases, it should be 3% only, in some cases it should be 6%
depending on these mitigating measures and the location and situation of each product, of each
service, of each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification
of all these and we wish the government will take time to clarify all these by means of a more
detailed implementing rules, in case the law is upheld by this Court. . . .
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code
(NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10%
VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or
lease of properties. These questioned provisions contain a uniform proviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%,
effective January 1, 2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing
the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate
to 12%, on the ground that it amounts to an undue delegation of legislative power, petitioners
also contend that the increase in the VAT rate to 12% contingent on any of the two conditions
being satisfied violates the due process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be returned to the original 10%
if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the
GDP of the previous year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the
Bicameral Conference Committee is a violation of the no-amendment rule upon last reading of a
bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association
of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT
components, exceeds One Million Pesos (P1, 000,000.00);
 2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input
tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final
withholding tax on gross payments of goods and services, which are subject to 10% VAT under
Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or
property without due process of law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount of input tax that may be
claimed. Petitioners also argue that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law. Petitioners further contend
that like any other property or property right, the input tax credit may be transferred or disposed
of, and that by limiting the same, the government gets to tax a profit or value-added even if there
is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal
protection of the law under Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to
output tax ratio that will suffer the consequences thereof for it wipes out whatever meager
margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this
petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the
following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121,
125, 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI,
Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills
shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on
July 20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the
creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes
they collect, thus violating the principle that tax collection and revenue should be solely allocated
for public purposes and expenditures. Petitioner Garcia further claims that allowing these
establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section
28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and
petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of the two conditions
provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the 70%
limitation on the creditable input tax, the 60-month amortization on the purchase or importation
of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by government
agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle
on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform
agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt
the balance towards a sustainable macroeconomic environment necessary for economic growth.
ISSUES The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and; b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added
tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of
goods or properties and services. Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax
collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-
consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or
business it engages in, without transferring the burden to someone else. Examples are individual
and corporate income taxes, transfer taxes, and residence taxes.
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a single-stage tax computed under the cost
deduction method and was payable only by the original sellers. The single-stage system was
subsequently modified, and a mixture of the cost deduction method and tax credit method was
used to determine the value-added tax payable. Under the tax credit method, an entity can credit
against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the
VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using
the tax credit method.
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, R.A. No. 8241 or the
Improved VAT Law, R.A. No. 8424 or the Tax Reform Act of 1997, and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I. Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and; b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee
exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No.
9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against
the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of
taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, [i]f the power did not exist, it would
be utterly impracticable to transact the business of the nation, either at all, or at least with
decency, deliberation, and order. Thus, Article VI, Section 16 (3) of the Constitution provides that
each House may determine the rules of its proceedings. Pursuant to this inherent constitutional
power to promulgate and implement its own rules of procedure, the respective rules of each
house of Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the
amendment to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they
materially impair the House Bill, the panel shall report such fact to the House for the latters
appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report prior
to the voting thereon. The House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee
of both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled
version thereof with the explanatory statement of the conference committee shall be attached to
the report.. . .
The creation of such conference committee was apparently in response to a problem, not
addressed by any constitutional provision, where the two houses of Congress find themselves in
disagreement over changes or amendments introduced by the other house in a legislative bill.
Given that one of the most basic powers of the legislative branch is to formulate and implement its
own rules of proceedings and to discipline its members, may the Court then delve into the details
of how Congress complies with its internal rules or how it conducts its business of passing
legislation? Note that in the present petitions, the issue is not whether provisions of the rules of
both houses creating the bicameral conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary, the Court En
Banc, unanimously reiterated and emphasized its adherence to the enrolled bill doctrine, thus,
declining therein petitioners plea for the Court to go behind the enrolled copy of the bill. Assailed
in said case was Congress creation of two sets of bicameral conference committees, the lack of
records of said committees proceedings, the alleged violation of said committees of the rules of
both houses, and the disappearance or deletion of one of the provisions in the compromise bill
submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.
Congress has not seen it fit to make such changes adverted to by the Court. It seems, therefore,
that Congress finds the practices of the bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements
were as follows:

Striking down such argument, the Court held thus:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of both Houses of Congress that it was passed are With regard to Stand-By Authority in favor of President
conclusive of its due enactment. A review of cases reveals the Courts consistent adherence to the
Provides for 12% VAT Provides for 12% VAT in Provides for a single rate of
rule. The Court finds no reason to deviate from the salutary rule in this case where the
on every sale of goods general on sales of goods or 10% VAT on sale of goods or
irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,
or properties properties and reduced properties (amending Sec.
creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the
(amending Sec. 106 of rates for sale of certain 106 of NIRC), 10% VAT on
proper forum for the enforcement of these internal rules of Congress, whether House or Senate.
NIRC); 12% VAT on locally manufactured goods sale of services including
Parliamentary rules are merely procedural and with their observance the courts have no concern.
importation of goods and petroleum products sale of electricity by
Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
(amending Sec. 107 of and raw materials to be generation companies,
its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
NIRC); and 12% VAT on used in the manufacture transmission and
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the sale of services and use thereof (amending Sec. 106 distribution companies, and
power to inquire into allegations that, in enacting a law, a House of Congress failed to comply with or lease of properties of NIRC); 12% VAT on use or lease of properties
its own rules, in the absence of showing that there was a violation of a constitutional provision or (amending Sec. 108 of importation of goods and (amending Sec. 108 of NIRC)
the rights of private individuals. In Osmea v. Pendatun, it was held: At any rate, courts have NIRC) reduced rates for certain
declared that the rules adopted by deliberative bodies are subject to revocation, modification or imported products
waiver at the pleasure of the body adopting them. And it has been said that Parliamentary rules including petroleum
are merely procedural, and with their observance, the courts have no concern. They may be products (amending Sec.
waived or disregarded by the legislative body. Consequently, mere failure to conform to 107 of NIRC); and 12% VAT
parliamentary usage will not invalidate the action (taken by a deliberative body) when the on sale of services and use
requisite number of members have agreed to a particular measure. or lease of properties and a
reduced rate for certain
The foregoing declaration is exactly in point with the present cases, where petitioners allege services including power
irregularities committed by the conference committee in introducing changes or deleting generation (amending Sec.
provisions in the House and Senate bills. Akin to the Farias case, the present petitions also raise an 108 of NIRC)
issue regarding the actions taken by the conference committee on matters regarding Congress
compliance with its own internal rules. As stated earlier, one of the most basic and inherent With regard to the no pass-on provision
power of the legislature is the power to formulate rules for its proceedings and the discipline of its
No similar provision Provides that the VAT Provides that the VAT
members. Congress is the best judge of how it should conduct its own business expeditiously and
imposed on power imposed on sales of
in the most orderly manner. It is also the sole concern of Congress to instill discipline among the
generation and on the sale electricity by generation
members of its conference committee if it believes that said members violated any of its rules of
of petroleum products shall companies and services of
proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding
be absorbed by generation transmission companies and
only the internal operation of Congress, thus, the Court is wont to deny a review of the internal
companies or sellers, distribution companies, as
proceedings of a co-equal branch of government.
respectively, and shall not well as those of franchise
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of be passed on to consumers grantees of electric utilities
Finance, the Court already made the pronouncement that [i]f a change is desired in the practice shall not apply to residential
[of the Bicameral Conference Committee] it must be sought in Congress since this question is not
covered by any constitutional provision but is only an internal rule of each house. To date,

With regard to 70% limit on input tax credit
Provides that the input
tax credit for capital
goods on which a VAT
has been paid shall be
equally distributed over
5 years or the
depreciable life of such
capital goods; the input
tax credit for goods and
services other than
capital goods shall not
exceed 5% of the total
amount of such goods
and services; and for
persons engaged in
retail trading of goods,
the allowable input tax
credit shall not exceed
11% of the total
amount of goods
purchased.
No similar provision
end-users. VAT shall be
absorbed by generation,
transmission, and
distribution companies.
Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods
shall not exceed 90% of the
output VAT.
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in
the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12%
as the highest VAT rate proposed by the House, by striking a compromise whereby the present
10% VAT rate would be retained until certain conditions arise, i.e., the value-added tax collection
as a percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the previous year exceeds 1%, when the President,
upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers or whether both
the VAT imposed on electricity generation, transmission and distribution companies and the VAT
imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference
Committee chose to settle such disagreement by altogether deleting from its Report any no pass-
on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the
Bicameral Conference Committee decided to adopt the position of the House by putting a
limitation on the amount of input tax that may be credited against the output tax, although it
crafted its own language as to the amount of the limitation on input tax credits and the manner of
computing the same by providing thus:
(A) Creditable Input Tax. . . .. . .

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or
With regard to amendments to be made to NIRC provisions regarding income and excise taxes business for which deduction for depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate
No similar provision No similar provision Provided for amendments to
acquisition cost for such goods, excluding the VAT component thereof, exceeds one million Pesos
several NIRC provisions
(P1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less
regarding corporate income,
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
percentage, franchise and
such shorter period: . . .
excise taxes
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the
The disagreements between the provisions in the House bills and the Senate bill were with regard
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity
output tax, the excess shall be carried over to the succeeding quarter or quarters: PROVIDED that
generation, transmission and distribution companies should not be passed on to consumers, as
the input tax inclusive of input VAT carried over from the previous quarter that may be credited
proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and
in every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED,
distribution companies and the VAT imposed on sale of petroleum products should not be passed
HOWEVER, THAT any input tax attributable to zero-rated sales by a VAT-registered person may at
on to consumers, as proposed in the House bill; (3) in what manner input tax credits should be
his option be refunded or credited against other internal revenue taxes, . .
limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise
and excise taxes should be amended. 4. With regard to the amendments to other provisions of the NIRC on corporate income tax,
franchise, percentage and excise taxes, the conference committee decided to include such
There being differences and/or disagreements on the foregoing provisions of the House and
amendments and basically adopted the provisions found in Senate Bill No. 1950, with some
Senate bills, the Bicameral Conference Committee was mandated by the rules of both houses of
changes as to the rate of the tax to be imposed.
Congress to act on the same by settling said differences and/or disagreements. The Bicameral
Conference Committee acted on the disagreeing provisions by making the following changes: Under the provisions of both the Rules of the House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated to settle the differences between the disagreeing
provisions in the House bill and the Senate bill. The term settle is synonymous to reconcile and
harmonize. To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the provisions in the Senate bill would be
carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions
for it did not inject any idea or intent that is wholly foreign to the subject embraced by the original
provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted
by the Senate is retained until such time that certain conditions arise when the 12% VAT wanted
by the House shall be imposed, appears to be a compromise to try to bridge the difference in the
rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still
totally within the subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the
Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate
Panel, explained the reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no
sector should be a beneficiary of legislative grace, neither should any sector be discriminated on.
The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse
the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this
two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of
the Senate is basically simple, lets keep the VAT simple.
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never really
enjoyed the support of either House.
With regard to the amount of input tax to be credited against output tax, the Bicameral
Conference Committee came to a compromise on the percentage rate of the limitation or cap on
such input tax credit, but again, the change introduced by the Bicameral Conference Committee
was totally within the intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of
Representatives, one of the major objectives was to plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input VAT tax credits . . . and [b]y
introducing limitations on the claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage.
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in
Senate Bill No. 1950, since said provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs. Prado and Tolentino vs. Secretary of
Finance, the Court recognized the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate and the House. Thus,
in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. If the committee can
propose an amendment consisting of one or two provisions, there is no reason why it cannot
propose several provisions, collectively considered as an amendment in the nature of a substitute,
so long as such amendment is germane to the subject of the bills before the committee. After all,
its report was not final but needed the approval of both houses of Congress to become valid as an
act of the legislative department. The charge that in this case the Conference Committee acted as a
third legislative chamber is thus without any basis.
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the No-
Amendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and
nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add
or delete provisions in the House bill and the Senate bill after these had passed three readings is
in effect a circumvention of the no amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution),
fails to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time
in either house of Congress, not to the conference committee report.
The Court reiterates here that the no-amendment rule refers only to the procedure to be followed
by each house of Congress with regard to bills initiated in each of said respective houses, before
said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe
said provision in a way as to proscribe any further changes to a bill after one house has voted on it
would lead to absurdity as this would mean that the other house of Congress would be deprived
of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of
the Constitution cannot be taken to mean that the introduction by the Bicameral Conference
Committee of amendments and modifications to disagreeing provisions in bills that have been
acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive
Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on
corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions,
to wit:
 Section 27 The foregoing question had been squarely answered in the Tolentino case, wherein the Court
held, thus:
Rates of Income Tax on Domestic Corporation
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to
28(A)(1) Tax on Resident Foreign Corporation originate exclusively in the House of Representatives. It is important to emphasize this, because a
bill originating in the House may undergo such extensive changes in the Senate that the result
28(B)(1) Inter-corporate Dividends may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of
the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the
34(B)(1) Inter-corporate Dividends
bill which initiated the legislative process culminating in the enactment of the law must
116 Tax on Persons Exempt from VAT substantially be the same as the House bill would be to deny the Senates power not only to concur
with amendments but also to propose amendments. It would be to violate the coequality of
117 Percentage Tax on domestic carriers and keepers of Garage legislative power of the two houses of Congress and in fact make the House superior to the Senate.

119 Tax on franchises Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.
121 Tax on banks and Non-Bank Financial Intermediaries ..
148 Excise Tax on manufactured oils and other fuels Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application
151 Excise Tax on mineral products
must come from the House of Representatives on the theory that, elected as they are from the
236 Registration requirements districts, the members of the House can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at large, are expected to approach the
237 Issuance of receipts or sales or commercial invoices same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.
288 Disposition of Incremental Revenue
Since there is no question that the revenue bill exclusively originated in the House of
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate Representatives, the Senate was acting within its constitutional power to introduce amendments
from the House. They aver that House Bill No. 3555 proposed amendments only regarding to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income
Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does
amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections not contain any prohibition or limitation on the extent of the amendments that may be introduced
of the NIRC which the Senate amended but which amendments were not found in the House bills by the Senate to the House revenue bill.
are not intended to be amended by the House of Representatives. Hence, they argue that since the
proposed amendments did not originate from the House, such amendments are a violation of Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
Article VI, Section 24 of the Constitution. touched in the House bills are still in furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on
The argument does not hold water. the floor, which was later substituted by House Bill No. 3555, stated:

Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives
but the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax.
Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the value-added tax but also amendments
to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not
dealing directly with the value- added tax, which is the only kind of tax being amended in the
House bills, still within the purview of the constitutional provision authorizing the Senate to
propose or concur with amendments to a revenue bill that originated from the House?
One of the challenges faced by the present administration is the urgent and daunting task of
solving the countrys serious financial problems. To do this, government expenditures must be
strictly monitored and controlled and revenues must be significantly increased. This may be
easier said than done, but our fiscal authorities are still optimistic the government will be
operating on a balanced budget by the year 2009. In fact, several measures that will result to
significant expenditure savings have been identified by the administration. It is supported with a
credible package of revenue measures that include measures to improve tax administration and
control the leakages in revenues from income taxes and the value-added tax (VAT).
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged
that on top of our agenda must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective and beneficial to the overall status of
our economy. One such opportunity is a review of existing tax rates, evaluating the relevance
given our present conditions.
Notably therefore, the main purpose of the bills emanating from the House of Representatives is
to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and
control of the leakages in revenues from income taxes and value-added taxes. As these house bills
were transmitted to the Senate, the latter, approaching the measures from the point of national
perspective, can introduce amendments within the purposes of those bills. It can provide for ways
that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden
across all sectors instead of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were
included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in
additional revenues annually even while by mitigating prices of power, services and petroleum
products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the
VAT on twelve goods and services. The rest of the tab P10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on the
burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back,
not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the
tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will
be there to share the burden.
As the Court has said, the Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the house bills
which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to
the reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be burdened more as they would be paying
the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the
impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker
fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the
VAT chain, we will however bring down the excise tax on socially sensitive products such as
diesel, bunker, fuel and kerosene.. . .
What do all these exercises point to? These are not contortions of giving to the left hand what was
taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so
that the people can cushion the blow of higher prices they will have to pay as a result of VAT.
The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and
purposes of the house bills, which is to supplement our countrys fiscal deficit, among others. Thus,
the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from
10% to 12% when a certain condition is met, constitutes undue delegation of the legislative
power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: provided, that the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any
of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 %).
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate
is a virtual abdication by Congress of its exclusive power to tax because such delegation is not
within the purview of Section 28 (2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services, which cannot be included within the purview of tariffs
under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods or merchandise imported or
exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the
legislative power to tax is contrary to republicanism. They insist that accountability, responsibility
and transparency should dictate the actions of Congress and they should not pass to the President
the decision to impose taxes. They also argue that the law also effectively nullified the Presidents
power of control, which includes the authority to set aside and nullify the acts of her subordinates
like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create
the conditions provided by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without representation. They submit that the
Secretary of Finance is not mandated to give a favorable recommendation and he may not even
give his recommendation. Moreover, they allege that no guiding standards are provided in the law
on what basis and as to how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the President since
the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of government
has exclusive cognizance of and is supreme in matters falling within its own constitutionally
allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-
delegation of powers, as expressed in the Latin maxim: potestas delegata non
delegari potest which means what has been delegated, cannot be delegated. This doctrine is based
on the ethical principle that such as delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not through the
intervening mind of another.
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate
and a House of Representatives. The powers which Congress is prohibited from delegating are
those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which
can never be delegated, has been described as the authority to make a complete law complete as
to the time when it shall take effect and as to whom it shall be applicable and to determine the
expediency of its enactment. Thus, the rule is that in order that a court may be justified in holding
a statute unconstitutional as a delegation of legislative power, it must appear that the power
involved is purely legislative in nature that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability of its use or the manner of its
exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid.
It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed,
carried out, or implemented by the delegate; and (b) fixes a standard the limits of which are
sufficiently determinate and determinable to which the delegate must conform in the
performance of his functions. A sufficient standard is one which defines legislative policy, marks
its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be effected. Both tests are intended to
prevent a total transference of legislative authority to the delegate, who is not allowed to step into
the shoes of the legislature and exercise a power essentially legislative.
In People vs. Vera, the Court, through eminent Justice Jose P. Laurel, expounded on the concept
and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual
to inquire whether the statute was complete in all its terms and provisions when it left the hands
of the legislature so that nothing was left to the judgment of any other appointee or delegate of
the legislature. . . .
The true distinction, says Judge Ranney, is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring an authority or
discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot
be done; to the latter no valid objection can be made.. .
It is contended, however, that a legislative act may be made to the effect as law after it leaves the
hands of the legislature. It is true that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may
delegate a power not legislative which it may itself rightfully exercise. The power to ascertain
facts is such a power which may be delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis of the taking into effect of a law. That
is a mental process common to all branches of the government. Notwithstanding the apparent
tendency, however, to relax the rule prohibiting delegation of legislative authority on account of
the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds
restatement in Prof. Willoughby's treatise on the Constitution of the United States in the following
language speaking of declaration of legislative power to administrative agencies: The principle
which permits the legislature to provide that the administrative agent may determine when the
circumstances are such as require the application of a law is defended upon the ground that at the
time this authority is granted, the rule of public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the legislature, as it is its duty to do, determines
that, under given circumstances, certain executive or administrative action is to be taken, and
that, under other circumstances, different or no action at all is to be taken. What is thus left to the
administrative official is not the legislative determination of what public policy demands, but
simply the ascertainment of what the facts of the case require to be done according to the terms of
the law by which he is governed. The efficiency of an Act as a declaration of legislative will must,
of course, come from Congress, but the ascertainment of the contingency upon which the Act shall
take effect may be left to such agencies as it may designate. The legislature, then, may provide that
a law shall take effect upon the happening of future specified contingencies leaving to some other
person or body the power to determine when the specified contingency has arisen.
In Edu vs. Ericta, the Court reiterated: What cannot be delegated is the authority under the
Constitution to make laws and to alter and repeal them; the test is the completeness of the statute
in all its terms and provisions when it leaves the hands of the legislature. To determine whether
or not there is an undue delegation of legislative power, the inquiry must be directed to the scope
and definiteness of the measure enacted. The legislative does not abdicate its functions when it
describes what job must be done, who is to do it, and what is the scope of his authority. For a
complex economy, that may be the only way in which the legislative process can go forward. A
distinction has rightfully been made between delegation of power to make the laws which
necessarily involves a discretion as to what it shall be, which constitutionally may not be done,
and delegation of authority or discretion as to its execution to be exercised under and in
pursuance of the law, to which no valid objection can be made. The Constitution is thus not to be
regarded as denying the legislature the necessary resources of flexibility and practicability.
Clearly, the legislature may delegate to executive officers or bodies the power to determine
certain facts or conditions, or the happening of contingencies, on which the operation of a statute
is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or
limitations on their authority. While the power to tax cannot be delegated to executive agencies,
details as to the enforcement and administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its operation depends.
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty
of correlating information and making recommendations is the kind of subsidiary activity which
the legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the absence
of accurate information on the part of the legislators, and any reasonable method of securing such
information is proper. The Constitution as a continuously operative charter of government does
not require that Congress find for itself every fact upon which it desires to base legislative action
or that it make for itself detailed determinations which it has declared to be prerequisite to
application of legislative policy to particular facts and circumstances impossible for Congress
itself properly to investigate.
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5
and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January
1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the
law is contingent. The legislature has made the operation of the 12% rate effective January 1,
2006, contingent upon a specified fact or condition. It leaves the entire operation or non-
operation of the 12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the
fact that the word shall is used in the common proviso. The use of the word shall connotes a
mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with
the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly
what it says, and courts have no choice but to see to it that the mandate is obeyed.
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the
existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by
the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by
the President does not come into play. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the
law effectively nullified the Presidents power of control over the Secretary of Finance by
mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of
Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase upon
the recommendation of the Secretary of Finance. Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance
can easily be brushed aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that
as head of the Department of Finance he is the assistant and agent of the Chief Executive. The
multifarious executive and administrative functions of the Chief Executive are performed by and
through the executive departments, and the acts of the secretaries of such departments, such as
the Department of Finance, performed and promulgated in the regular course of business, are,
unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief
Executive. The Secretary of Finance, as such, occupies a political position and holds office in an
advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General Cushing, is subject to the direction of the
President."
In the present case, in making his recommendation to the President on the existence of either of
the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even
her subordinate. In such instance, he is not subject to the power of control and direction of the
President. He is acting as the agent of the legislative department, to determine and declare the
event upon which its expressed will is to take effect. The Secretary of Finance becomes the means
or tool by which legislative policy is determined and implemented, considering that he possesses
all the facilities to gather data and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present. His personality
in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress
and not of the President, the President cannot alter or modify or nullify, or set aside the findings
of the Secretary of Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1%). If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must be
imposed by the President effective January 1, 2006. There is no undue delegation of legislative
power but only of the discretion as to the execution of a law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes what job
must be done, who must do it, and what is the scope of his authority; in our complex economy that
is frequently the only way in which the legislative process can go forward.
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to the principle of republicanism, the same
deserves scant consideration. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to inquire into, its task
being to interpret the law.
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause,
influence or create the conditions to bring about either or both the conditions precedent does not
deserve any merit as this argument is highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at all.The Court deals with facts, not
fancies; on realities, not appearances. When the Court acts on appearances instead of realities,
justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax
Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on
any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not
state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied.
Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set
forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the
law are clear. It does not provide for a return to the 10% rate nor does it empower the President
to so revert if, after the rate is increased to 12%, the VAT collection goes below the 24/5 of the
GDP of the previous year or that the national government deficit as a percentage of GDP of the
previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or
limitations be introduced where none is provided for. Rewriting the law is a forbidden ground
that only Congress may tread upon.
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the
Court finds none, petitioners argument is, at best, purely speculative. There is no basis for
petitioners fear of a fluctuating VAT rate because the law itself does not provide that the rate
should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The
rule is that where the provision of the law is clear and unambiguous, so that there is no occasion
for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial
addition or subtraction.
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be
based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is
another condition, i.e., the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is
less than 2.8%, it means that government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition
of government has reached a relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a
relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need
to increase the VAT rate.
That the first condition amounts to an incentive to the President to increase the VAT collection
does not render it unconstitutional so long as there is a public purpose for which the law was
passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for
a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the state.
It simply means that sources of revenues must be adequate to meet government expenditures and
their variations.
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe.
During the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly
depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position
where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. Thats interest plus amortization of our debt. So clearly,
this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries
that borrow money from that international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is
not as benign as what it used to be the past five years.
What do I mean by that? In the past five years, weve been lucky because we were operating in a
period of basically global growth and low interest rates. The past few months, we have seen an
inching up, in fact, a rapid increase in the interest rates in the leading economies of the world.
And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is
now, at least based on the forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then convince them to improve our
ability to borrow at lower rates. But conditions have changed on us because the interest rates
have gone up. In fact, just within this room, we tried to access the market for a billion dollars
because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount,
we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We were
trying to access last week and the market was not as favorable and up to now we have not
accessed and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end
our deficit reduction. Because it is deficit that is causing the increase of the debt and we are in
what we call a debt spiral. The more debt you have, the more deficit you have because interest
and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And
the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our
revenue base.
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the states economic dilemma is not
for the Court to judge. In the Farias case, the Court refused to consider the various arguments
raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act),
pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the
wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within its prescribed limits should be
exercised in a particular manner are matters for the judgment of the legislature, and the serious
conflict of opinions does not suffice to bring them within the range of judicial cognizance.
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the
executive policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or
expediency of legislation.
II. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and; b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C)
of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on
the constitutional right against deprivation of life, liberty of property without due process of law,
as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal
protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption
of validity must prevail.
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited against the output tax. It states, in part: [P]rovided, that
the input tax inclusive of the input VAT carried over from the previous quarter that may be
credited in every quarter shall not exceed seventy percent (70%) of the output VAT:
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax
due from or paid by a VAT-registered person on the importation of goods or local purchase of
good and services, including lease or use of property, in the course of trade or business, from a
VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that
may be claimed. In effect, a portion of the input tax that has already been paid cannot now be
credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax,
and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the
input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and
remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which
provides that if the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. In addition, Section 112(B) allows a VAT-registered person to
apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent
that such input taxes have not been applied against the output taxes. Such unused input tax may
be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete
and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a
given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may
be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or
that it may later on be refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the
70% limitation on the input tax. According to petitioner, the limitation on the creditable input tax
in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which
violates the principle that tax collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he
buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing
the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input
taxes that he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal Revenue (BIR);[69] and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be refunded to the taxpayer or
credited against other internal revenue taxes, at the taxpayers option.[70]
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can
credit his input tax only up to the extent of 70% of the output tax. In laymans term, the value-
added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up
to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention
of any tax collection because the person/taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for
the payment of the tax is the seller.[71] What only needs to be done is for the person/taxpayer to
apply or credit these input taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes
the nature of a property that may not be confiscated, appropriated, or limited without due process
of law.
The input tax is not a property or a property right within the constitutional purview of the due
process clause. A VAT-registered persons entitlement to the creditable input tax is a mere
statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons
have no vested rights in statutory privileges. The state may change or take away rights, which
were created by the law of the state, although it may not take away property, which was vested by
virtue of such rights.[72]
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible from
the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all
sales, it was then that the crediting of the input tax paid on purchase or importation of goods and
services by VAT-registered persons against the output tax was introduced.[73] This was adopted
by the Expanded VAT Law (R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No.
8424).[75] The right to credit input tax as against the output tax is clearly a privilege created by
law, a privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade
or business for which deduction for depreciation is allowed under this Code, shall be spread
evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input
tax on purchase or importation of capital goods with acquisition cost of P1 Million pesos,
exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input
tax. Petitioners argument is without basis because the taxpayer is not permanently deprived of his
privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in
this case amounts to a 4-year interest-free loan to the government.[76] In the same breath,
Congress also justified its move by saying that the provision was designed to raise an annual
revenue of 22.6 billion.[77] The legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax incentives provided by law, and
citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not
deterred.[78] Again, for whatever is the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government
for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC,
reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided,
That the payment for lease or use of properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section,
the payor or person in control of the payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more
simplified VAT withholding system. The government in this case is constituted as a withholding
agent with respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be
withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services
supplied by contractors other than by public works contractors; 8.5% on gross payments for
services supplied by public work contractors; or 10% on payment for the lease or use of
properties or property rights to nonresident owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or property rights payment to nonresidents, were
deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as opposed
to creditable, means full. Thus, it is provided in Section 114(C): final value-added tax at the rate of
five percent (5%).
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the
concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of the payee on
said income. Taxes withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions with the government are
subject to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This
represents the net VAT payable of the seller. The other 5% effectively accounts for the standard
input VAT (deemed input VAT), in lieu of the actual input VAT directly or attributable to the
taxable transaction.
The Court need not explore the rationale behind the provision. It is clear that Congress intended
to treat differently taxable transactions with the government.[80] This is supported by the fact
that under the old provision, the 5% tax withheld by the government remains creditable against
the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each purchase of goods from
sellers and services rendered by contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of
three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross
receipts for services rendered by contractors on every sale or installment payment which shall
be creditable against the value-added tax liability of the seller or contractor: Provided, however,
That in the case of government public works contractors, the withholding rate shall be eight and
one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor or person in control of the payment shall be
considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made.
As amended, the use of the word final and the deletion of the word creditable exhibits Congresss
intention to treat transactions with the government differently. Since it has not been shown that
the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no
reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones
subjected to the 5% final withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the
BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form
part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as
income.[81]
Petitioners also argue that by imposing a limitation on the creditable input tax, the government
gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain.
Any disquisition by the Court on this point will only be, as Shakespeare describes life
in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the proposition that there is no profit or value-
added. It need not take an astute businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-added. It cannot be overstressed that a
business is created precisely for profit.
The equal protection clause under the Constitution means that no person or class of persons shall
be deprived of the same protection of laws which is enjoyed by other persons or other classes in
the same place and in like circumstances.
The power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the
rates to be levied, or the amounts to be raised, the methods of assessment, valuation and
collection, the States power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of
input tax, or invests in capital equipment, or has several transactions with the government, is not
based on real and substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the
subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners alleged distinctions are based on
variables that bear different consequences. While the implementation of the law may yield
varying end results depending on ones profit margin and value-added, the Court cannot go
beyond what the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons
or things without distinction. This might in fact sometimes result in unequal protection. What the
clause requires is equality among equals as determined according to a valid classification. By
classification is meant the grouping of persons or things similar to each other in certain
particulars and different from all others in these same particulars.[85]
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R.
Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep.
Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the
same to 90%. This, according to petitioners, supports their stance that the 70% limitation is
arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations.
Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the
70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. Different articles may be taxed at different amounts provided that the
rate is uniform on the same class everywhere with all people at all times.
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all
goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the rule
of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0%
or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts
not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original
state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain
accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
Tan:
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its application. Likewise exempt from the
tax are sales of farm and marine products, so that the costs of basic food and other necessities,
spared as they are from the incidence of the VAT, are expected to be relatively lower and within
the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and
unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize
the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on
VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the
tax on those previously exempt. Excise taxes on petroleum products[91]and natural gas[92] were
reduced. Percentage tax on domestic carriers was removed.[93] Power producers are now
exempt from paying franchise tax.
Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now
subject to a 35% income tax rate, from a previous 32%.[95] Intercorporate dividends of non-
resident foreign corporations are still subject to 15% final withholding tax but the tax credit
allowed on the corporations domicile was increased to 20%.[96] The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.[97] Even the sale by an
artist of his works or services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the
consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was
also lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle
of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same regardless of
income. In other words, the VAT paid eats the same portion of an income, whether big or small.
The disparity lies in the income earned by a person or profit margin marked by a business, such
that the higher the income or profit margin, the smaller the portion of the income or profit that is
eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT
eats away. At the end of the day, it is really the lower income group or businesses with low-profit
margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The
Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall evolve a progressive system of taxation.
The constitutional provision has been interpreted to mean simply that direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be minimized. (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are
the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII,
17 (1) of the 1973 Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are
also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a
first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning
a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law
seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply
because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions.
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies
for all political or social ills; We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the guardian of the others and
that, for official wrong-doing, each may be brought to account, either by impeachment, trial or by
the ballot box.
The words of the Court in Vera vs. Avelino holds true then, as it still holds true now. All things
considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are hereby DISMISSED.
NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated
March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation
(NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act
No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric generations 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."5 Concomitant to its mandated duty,
petitioner has, among others, the power to construct, operate and maintain power plants,
auxiliary plants, power stations and substations for the purpose of developing hydraulic power
and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75%
of 1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority
to impose tax on government entities. Petitioner also contended that as a non-profit organization,
it is exempted from the payment of all forms of taxes, charges, duties or fees11 in accordance with
sec. 13 of Rep. Act No. 6395, as amended, viz:
"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 return 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 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."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding
that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax,
and 2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has
been repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act
No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no power to tax instrumentalities of
the national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the particular law or laws, and
portions thereof, that are intended to be repealed. A declaration in a statute, usually in its
repealing clause, that a particular and specific law, identified by its number or title is repealed is
an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing
clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled
rule of statutory construction that repeals of statutes by implication are not favored. The
presumption is against inconsistency and repugnancy for the legislative is presumed to know the
existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a
well-settled rule that, generally, general law does not repeal a special law unless it clearly appears
that the legislative has intended by the latter general act to modify or repeal the earlier special
law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92
was based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the case
of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National Government. PAGCOR
is a government owned or controlled corporation with an original charter, PD 1869. All of its
shares of stocks are owned by the National Government. xxx Being an instrumentality of the
government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing power of
the Local Government. Corollary to this, it should be noted here that in the NPC Charter's
declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of industrial development
and dispersal and needs of rural electrification are primary objectives of the nations which shall
be pursued coordinately and supported by all instrumentalities and agencies of the
government, including its financial institutions.' (underscoring supplied). To allow plaintiff to
subject defendant to its tax-ordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is to
be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff
could not impose the subject tax on the defendant.”
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193,
in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a)
the sum of P808,606.41 representing the franchise tax due based on gross receipts for the year
1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all
cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as
litigation expense.
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's
Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein
that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers
merely to private persons or corporations in which category it (NPC) does not belong, and that
the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a
special law—finds the answer in Section 193 of the LGC to the effect that 'tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations except local water districts xxx are hereby
withdrawn.' The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED. SO ORDERED.
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT
CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT
SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY
TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL
FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE
AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF
POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT
CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding calendar
year, or any fraction thereof, as provided herein." x x x
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy
the taxes, fees, and charges which the province or municipality may impose: Provided, however,
That the taxes, fees and charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent
city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit
the taxing power of the respondent city government to private entities that are engaged in trade
or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public
interest which is conferred upon private persons or corporations, under such terms and
conditions as the government and its political subdivisions may impose in the interest of the
public welfare, security and safety." From the phraseology of this provision, the petitioner claims
that the word "private" modifies the terms "persons" and "corporations." Hence, when the LGC
uses the term "franchise," petitioner submits that it should refer specifically to franchises granted
to private natural persons and to private corporations.23 Ergo, its charter should not be
considered a "franchise" for the purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is
not engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-
profit organization." In any case, petitioner argues that the accumulation of profit is merely
incidental to its operation; all these profits are required by law to be channeled for expansion and
improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as such,
may not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no
power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere
local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the
United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even seriously burden it from accomplishment of
them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as '
a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law,
its charter cannot be amended or modified impliedly by the local government code which is a
general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges
under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic Act
No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a later
legislation which is a general law cannot be construed to have repealed a special law. Where there
is a conflict between a general law and a special statute, the special statute should prevail since it
evinces the legislative intent more clearly than the general statute.
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power,
should prevail over the LGC. It alleges that the power of the local government to impose franchise
tax is subordinate to petitioner's exemption from taxation; "police power being the most
pervasive, the least limitable and most demanding of all powers, including the power of
taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity;32 without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges34 pursuant
to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall
accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only
by strengthening local autonomy and promoting decentralization of governance. For a long time,
the country's highly centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also "dampened the spirit of
initiative, innovation and imaginative resilience in matters of local development on the part of
local government leaders."35 The only way to shatter this culture of dependence is to give the
LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate
their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987
Constitution mandates Congress to enact a local government code that will, consistent with the
basic policy of local autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among
the different local government units their powers, responsibilities, and resources, and provide for
the qualifications, election, appointment and removal, term, salaries, powers and functions and
duties of local officials, and all other matters relating to the organization and operation of the local
units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act
of 196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the
shackles of dependence on the national government remained. Local government units were faced
with the same problems that hamper their capabilities to participate effectively in the national
development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve development projects,
(d) heavy dependence on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following: x x x
(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.”
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National Government was
in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority
(MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to tax.46 In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held
that MCIAA, although an instrumentality of the national government, was subject to real property
tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule,
as laid down in section 133, the taxing power of local governments cannot extend to the levy
of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and
instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities
and municipalities in the Metropolitan Manila Area may impose the real property tax except
on, inter alia, 'real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted for consideration or
otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12.'"
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which
does not belong to citizens of the country generally as a matter of common right.48 In its specific
sense, a franchise may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by virtue of duly approved
articles of incorporation, or a charter pursuant to a special law creating the corporation.49 The
right under a primary or general franchise is vested in the individuals who compose the
corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or
privileges conferred upon an existing corporation such as the right to use the streets of a
municipality to lay pipes of tracks, erect poles or string wires.51 The rights under a secondary or
special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged
under a general power granted to a corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use.
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in
the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state."53 It is not levied
on the corporation simply for existing as a corporation, upon its property54 or its income,55 but
on its exercise of the rights or privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is
within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the
LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered
by the franchise tax in question, the following requisites should concur: (1) that petitioner has a
"franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights
or privileges under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No.
7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's
charter, defining its composition, capitalization, the appointment and the specific duties of its
corporate officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act
No. 120, as amended, vests the petitioner the following powers which are not available to
ordinary corporations, viz:
"x x x (e) To conduct investigations and surveys for the development of water power in any part
of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines,
for the purposes specified in this Act; to intercept and divert the flow of waters from lands of
riparian owners and from persons owning or interested in waters which are or may be necessary
for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or
increase the flow of water in streams or water channels intersecting or connecting therewith or
contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any
person or persons whose property is, directly or indirectly, adversely affected or damaged
thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines
and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain,
operate, and improve gas, oil, or steam engines, and/or other prime movers, generators and
machinery in plants and/or auxiliary plants for the production of electric power; to establish,
develop, operate, maintain and administer power and lighting systems for the transmission and
utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2)
city, municipal or provincial systems and other government institutions, (3) electric cooperatives,
(4) franchise holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes for
which the Corporation was created: Provided, That in case a right of way is necessary for its
transmission lines, easement of right of way shall only be sought: Provided, however, That in case
the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at
the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street,
avenue, highway or railway of private and public ownership, as the location of said works may
require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by
law for instituting condemnation proceedings by the national, provincial and municipal
governments; x x x
(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of
plants and/or projects constructed or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for watersheds for a specific project, the
Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written
advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas
embraced within the watersheds, subject to existing private rights, the needs of waterworks
systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to
prevent environmental pollution and promote the conservation, development and maximum
utilization of natural resources xxx “
With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No.
40,59 nationalizing the electric power industry. Although Exec. Order No. 21560 thereafter
allowed private sector participation in the generation of electricity, the transmission of electricity
remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act
No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross
income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be,
subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply
because its stocks are wholly owned by the National Government, and its charter characterized it
as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
202963 classifies government-owned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation, whether
performing governmental or proprietary functions, which is directly chartered by special law or if
organized under the general corporation law is owned or controlled by the government directly,
or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a
majority of its outstanding voting capital stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such,
are treated as absolute obligation on the part of the state to perform while proprietary functions
are those that are undertaken only by way of advancing the general interest of society, and are
merely optional on the government.64 Included in the class of GOCCs performing proprietary
functions are "business-like" entities such as the National Steel Corporation (NSC), the National
Development Corporation (NDC), the Social Security System (SSS), the Government Service
Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA),65 among
others.
Petitioner was created to "undertake the development of hydroelectric 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."66 Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities do not partake of the
sovereign functions of the government. They are purely private and commercial undertakings,
albeit imbued with public interest. The public interest involved in its activities, however, does not
distract from the true nature of the petitioner as a commercial enterprise, in the same league with
similar public utilities like telephone and telegraph companies, railroad companies, water supply
and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of
which are declared by this Court as ministrant or proprietary functions of government aimed at
advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent
(12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry out
the business and purposes for which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%)
of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent
(12%) on profits.69 The main difference is that the petitioner is mandated to devote "all its
returns from its capital investment, as well as excess revenues from its operation, for
expansion"70 while other franchise holders have the option to distribute their profits to its
stockholders by declaring dividends. We do not see why this fact can be a source of difference in
tax treatment. In both instances, the taxable entity is the corporation, which exercises the
franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown
to exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "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." However,
section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges
previously enjoyed by private and public corporations. Contrary to the contention of petitioner,
section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions
from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code." (emphases
supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-
stock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC
that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law."
This particular provision of the LGC does not admit any exception. In City Government of San
Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was
brought as an issue before this Court. The same issue was involved in the subsequent case
of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in
both instances, we ruled that the franchise tax in question is imposable despite any exemption
enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to
support their position that MERALCO's tax exemption has been withdrawn. The explicit language
of section 137 which authorizes the province to impose franchise tax 'notwithstanding any
exemption granted by any law or other special law' is all-encompassing and clear. The franchise
tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless
otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by
all persons, whether natural or juridical, including government-owned or controlled corporations
except (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock
and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this
code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic
precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. In the absence of any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing
law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing
law or charter is clearly manifested by the language used on (sic) Sections 137 and 193
categorically withdrawing such exemption subject only to the exceptions enumerated. Since it
would be not only tedious and impractical to attempt to enumerate all the existing statutes
providing for special tax exemptions or privileges, the LGC provided for an express, albeit general,
withdrawal of such exemptions or privileges. No more unequivocal language could have been
used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance
No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by
law or other special law," the respondent city government clearly did not intend to exempt the
petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance
and support myriad activities of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or controlled corporations
and all other units of government were that such privilege resulted in serious tax base erosion
and distortions in the tax treatment of similarly situated enterprises."78 With the added burden
of devolution, it is even more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of
the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.
PABLO LORENZO, as trustee of the estate of Thomas Hanley vs. JUAN POSADAS, JR.,
Collector of Internal Revenue
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas
Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount
of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interst thereon at the rate of 6 per cent per annum, computed from September 15,
1932, the date when the aforesaid tax was [paid under protest. The defendant set up a
counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not
included in the original assessment. From the decision of the Court of First Instance of Zamboanga
dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed
to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a
will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and distribution of his estate were
begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will
provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or otherwise
disposed of for a period of ten (10) years after my death, and that the same be handled and
managed by the executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at
Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the
same be used only for the education of my brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the above mentioned
Matthew Hanley to be disposed of in the way he thinks most advantageous. x x x xxx x
8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew,
Matthew Hanley, is a son of my said brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate
to appoint a trustee to administer the real properties which, under the will, were to pass to
Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924,
appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as
trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his
stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
alleging that the estate left by the deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against
the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for
deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of
payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932,
the defendant filed a motion in the testamentary proceedings pending before the Court of First
Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be
ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On
September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the
same time that unless the amount was promptly refunded suit would be brought for its recovery.
The defendant overruled the plaintiff's protest and refused to refund the said amount hausted,
plaintiff went to court with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir,
Matthew Hanley, from the moment of the death of the former, and that from the time, the latter
became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the
estate of said deceased.
III. In holding that the inheritance tax in question be based upon the value of the estate upon the
death of the testator, and not, as it should have been held, upon the value thereof at the expiration
of the period of ten years after which, according to the testator's will, the property could be and
was to be delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the net amount of the estate
subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid
to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error
besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June
30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant
against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal: (a) When does
the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be
computed on the basis of the value of the estate at the time of the testator's death, or on its value
ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct
the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of
Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency
in the payment of the inheritance tax? If so, should the additional interest claimed by the
defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the
parties in their briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536
as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or under a will or the intestacy
law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the
Civil Code, "the rights to the succession of a person are transmitted from the moment of his
death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the
property of the deceased ancestor. The property belongs to the heirs at the moment of the death
of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the
same before his death." Plaintiff, however, asserts that while article 657 of the Civil Code is
applicable to testate as well as intestate succession, it operates only in so far as forced heirs are
concerned. But the language of article 657 of the Civil Code is broad and makes no distinction
between different classes of heirs. That article does not speak of forced heirs; it does not even use
the word "heir". It speaks of the rights of succession and the transmission thereof from the
moment of death. The provision of section 625 of the Code of Civil Procedure regarding the
authentication and probate of a will as a necessary condition to effect transmission of property
does not affect the general rule laid down in article 657 of the Civil Code. The authentication of a
will implies its due execution but once probated and allowed the transmission is effective as of the
death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time
when actual transmission of the inheritance takes place, succession takes place in any event at the
moment of the decedent's death. The time when the heirs legally succeed to the inheritance may
differ from the time when the heirs actually receive such inheritance. "Poco importa", says
Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante,
hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado,
transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte,
y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5
Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922,
the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is
clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in
relation to section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be
taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
trustees.
(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that
paid by the first, the former must pay the difference.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance into possession of
the property.
(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial
testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the
payment shall be made by the executor or administrator before delivering to each beneficiary his
share.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per
centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid
within ten days after the date of notice and demand thereof by the collector, there shall be further
added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the Collector of
Internal Revenue by the Clerk of Court within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section
1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in
translation from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-
quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the
tax should have been paid before the delivery of the properties in question to P. J. M. Moore as
trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance
tax should be based on the value of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real properties in question had a
reasonable value of only P5,787. This amount added to the value of the personal property left by
the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which,
excluding deductions, interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance taxes
takes its being and if, upon the death of the decedent, succession takes place and the right of the
estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the
time of the decedent's death, regardless of any subsequent contingency value of any subsequent
increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft,
Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law.
ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and hence is
ordinarily measured as to any beneficiary by the value at that time of such property as passes to
him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol.
37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the
estate vests in possession or the contingency is settled. This rule was formerly followed in New
York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and
Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those
interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior
system, we find upon examination of cases and authorities that New York has varied and now
requires the immediate appraisal of the postponed estate at its clear market value and the
payment forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt,
172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy,
179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App.
Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq.
H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is
taxable at the time of the predecessor's death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the
property transmitted at that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at the
net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of
only P480.81. This sum represents the expenses and disbursements of the executors until March
10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff
contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C,
AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised
Administrative Code which provides, in part, as follows: "In order to determine the net sum which
must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident,
. . . the judicial expenses of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs.
Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation
due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is
no statute in the Philippines which requires trustees' commissions to be deducted in determining
the net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a
testamentary trust has been created, it does not appear that the testator intended that the duties
of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp.,
893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph
5 of his will, the testator expressed the desire that his real estate be handled and managed by his
executors until the expiration of the period of ten years therein provided. Judicial expenses are
expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112
N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the benefit of the legatees or
devises, does not come properly within the class or reason for exempting administration
expenses. . . . Service rendered in that behalf have no reference to closing the estate for the
purpose of a distribution thereof to those entitled to it, and are not required or essential to the
perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before
the court, are created for the the benefit of those to whom the property ultimately passes, are of
voluntary creation, and intended for the preservation of the estate. No sound reason is given to
support the contention that such expenses should be taken into consideration in fixing the value
of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley
under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3
of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the
law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-
mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the
death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can
not foresee and ought not to be required to guess the outcome of pending measures. Of course, a
tax statute may be made retroactive in its operation. Liability for taxes under retroactive
legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49
Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate
retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First
Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish,
247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts,
amends, or repeals an inheritance tax, unless the language of the statute clearly demands or
expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph
of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606,
amending section 1544 of the Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions
indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by
this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act
No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are
penal in nature and, therefore, should operate retroactively in conformity with the provisions of
article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act
No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only,
instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is
allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which
to pay the tax, instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed
against the state which, under the Constitution, the Executive has the power to pardon. In
common use, however, this sense has been enlarged to include within the term "penal statutes" all
status which command or prohibit certain acts, and establish penalties for their violation, and
even those which, without expressly prohibiting certain acts, impose a penalty upon their
commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the
means ordinarily resorted to for the collection of taxes are not classed as penal laws, although
there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs.
Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs.
Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the
Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative
intent, we cannot give Act No. 3606 a retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the
tax may be paid within another given time. As stated by this court, "the mere failure to pay one's
tax does not render one delinqent until and unless the entire period has eplased within which the
taxpayer is authorized by law to make such payment without being subjected to the payment of
penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil.,
239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the
meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative
Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee
was made by the trial court in conformity with the wishes of the testator as expressed in his will.
It is true that the word "trust" is not mentioned or used in the will but the intention to create one
is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p.
711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the
use of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714).
"To create a trust by will the testator must indicate in the will his intention so to do by using
language sufficient to separate the legal from the equitable estate, and with sufficient certainty
designate the beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the
property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust
there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a
definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in
effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a
trust. He ordered in his will that certain of his properties be kept together undisposed during a
fixed period, for a stated purpose. The probate court certainly exercised sound judgment in
appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil
Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582
in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from
the payment of the inheritance tax. The corresponding inheritance tax should have been paid on
or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already
stated that the delivery of the estate to the trustee was in esse delivery of the same estate to
the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for
the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When
Moore accepted the trust and took possesson of the trust estate he thereby admitted that the
estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65
C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate
only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p.
542).
The highest considerations of public policy also justify the conclusion we have reached. Were we
to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the
type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has
provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty
years, or for a longer period which does not offend the rule against petuities. The collection of the
tax would then be left to the will of a private individual. The mere suggestion of this result is a
sufficient warning against the accpetance of the essential to the very exeistence of government.
The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to,
a citizen by the government but upon the necessity of money for the support of the state (Dobbins
vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of
taxes solely because no personal benefit to him can be pointed out..) While courts will not enlarge,
by construction, the government's power of taxation they also will not place upon tax laws so
loose a construction as to permit evasions on merely fanciful and insubstantial distictions. When
proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no
court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec.
1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui
vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this
policy of the law. It held that "the fact that on account of riots directed against the Chinese on
October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on
time and by mutual agreement closed their homes and stores and remained therein, does not
authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the
taxes or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any
delay in the proceedings of the officers, upon whom the duty is developed of collecting the taxes,
may derange the operations of government, and thereby, cause serious detriment to the public."
(Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of
inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in
such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee.
The interest due should be computed from that date and it is error on the part of the defendant to
compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs.
Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or
decrease such interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand
thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be
added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the
Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931
(Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and
interest due were not paid on that date, the estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from the estate of
Thomas Hanley inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal
properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81,
representing allowable deductions under secftion 1539 of the Revised Administrative Code, we
have P28,904.19 as the net value of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code,
should be imposed at the rate of one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two
hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or
P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of the
Revised Administrative Code. First should be added P1,465.31 which stands for interest at the
rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to September
15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To
the tax and interest thus computed should be added the sum of P724.88, representing a surhcarge
of 25 per cent on both the tax and interest, and also P10, the compromise sum fixed by the
defendant (Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due
from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that
the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.
PHILIPPINE AIRLINES, INC., vs. ROMEO F. EDU in his capacity as Land Transportation
Commissioner, and UBALDO CARBONELL, in his capacity as National Treasurer,
What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
This question has been brought before this Court in the past. The parties are, in effect, asking for a
re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for
refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from
the payment of taxes. The pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the National Government during the life of this franchise a tax of two per cent of the gross revenue
or gross earning derived by the grantee from its operations under this franchise. Such tax shall be
due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied,
established or collected by any municipal, provincial or national automobiles, Provided, that if,
after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a
deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in conformity with
existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation
requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v.
Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality
taxes from the payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not
come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint
against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo
Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case
No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of
action. In support of the motion to dismiss, defendants repatriation the ruling in Republic v.
Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but
regulatory fees imposed as an incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on
its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as
motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court
until after trial on the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved
by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit
Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified
the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at
bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed by Section 8 of the
Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration
fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee
for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees
shall be charged." (lbid.,Subsection H) The conclusion is difficult to resist therefore that the Motor
Vehicle Act requires the payment not of a tax but of a registration fee under the police power.
Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It is
not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay
certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by
Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on
privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created
and its title expressly sets forth that a tax on privately-owned passenger automobiles,
motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which
clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee
under the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative
will, even on the assumption that the earlier legislation could by subdivision the point be
susceptible of the interpretation that a tax rather than a fee was levied. What is thus most
apparent is that where the legislative body relies on its authority to tax it expressly so states, and
where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other
hand, held:
The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles
are in section 8 of that law called "fees". But the appellation is no impediment to their being
considered taxes if taxes they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional.
for purposes of regulation and inspection and are for that reason limited in amount to what is
necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by
statute for the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its way into the
treasury of the branch of the government whose officer or officers collected the chauffeur, is not a
fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle
Office are but a small portion—about 5 per centum—of the total collections from motor vehicle
registration fees. And as proof that the money collected is not intended for the expenditures of
that office, the law itself provides that all such money shall accrue to the funds for the
construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees
are not collected for regulatory purposes, that is to say, as an incident to the enforcement of
regulations governing the operation of motor vehicles on public highways, for their express object
is to provide revenue with which the Government is to discharge one of its principal functions—
the construction and maintenance of public highways for everybody's use. They are veritable
taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it
provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the
registration or operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal corporation, the provisions of any city charter to the
contrary notwithstanding: Provided, however, That any provincial board, city or municipal
council or board, or other competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as
may be authorized and approved by the Secretary of Public Works and Communications, and also
for the use of such public roads, as may be authorized by the President of the Philippines upon the
recommendation of the Secretary of Public Works and Communications, but in none of these
cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls
shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle
Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and
1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per centum of the money collected under the
provisions of this Act shall accrue to the road and bridge funds of the different provinces and
chartered cities in proportion to the centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the Philippine Treasury to create a special fund
for the construction and maintenance of national and provincial roads and bridges. as well as the
streets and bridges in the chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public Works in the different
provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of this Act shall
be deposited in a special trust account in the National Treasury to constitute the Highway Special
Fund, which shall be apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and
equip the Land Transportation Commission but not to exceed twenty per cent of the total
collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved
August 6, 1971).
It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay for the operating
expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions a
presumption arising from the use of the term "fees," which appears to have been favored by the
legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act
4136 which reads:
Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles subject to
payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of
the taxes due thereon has been presented to the Commission.
referring to taxes other than those imposed on the registration, operation or ownership of a May the respondent administrative agency be required to refund the amounts stated in the
motor vehicle (Sec. 59, b, Rep. Act 4136, as amended). complaint of PAL?

Fees may be properly regarded as taxes even though they also serve as an instrument of The answer is NO.
regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on
various aspects of taxpayers The claim for refund is made for payments given in 1971. It is not clear from the records as to
what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No.
It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to as 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in
a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, legislative franchises similar to that invoked by PAL in this case.
for example, of automobile license fees. Isabela such case, the fees may properly be regarded as
taxes even though they also serve as an instrument of regulation. If the purpose is primarily In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July
revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is 11, 1985), this Court ruled:
properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.)
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are
Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In
sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S.
1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that
Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.)
its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in
(Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby
148). expressly exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial 24 of Republic Act No. 5448 dated June 27, 1968 which reads:
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 "(d) The provisions of existing special or general laws to the contrary notwithstanding, all
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled
law refers to the imposition on the registration, operation or ownership of a motor vehicle as a by the government, including the Government Service Insurance System and the Social Security
"tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is System but excluding educational institutions, shall pay such rate of tax upon their taxable net
a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the income as are imposed by this section upon associations or corporations engaged in a similar
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the business or industry. "
intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of
An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all
an "additional" tax," where the law could have referred to an original tax and not one in
corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the
addition to the tax already imposed on the registration, operation, or ownership of a motor
power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935
vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a
Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also
that no franchise shall be granted to any individual, firm, or corporation except under the
speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10)
condition that it shall be subject to amendment, alteration, or repeal by the legislature when the
and additional fees for change of registration (Sec. 11). These are not to be understood as taxes
public interest so requires. There is no question as to the public interest involved. The country
because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec.
needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of
591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee.
entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the
Such fees are to go into the expenditures of the Land Transportation Commission as provided for
foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the
in the last proviso of see. 61, aforequoted.
respondent court is affirmed.
It is quite apparent that vehicle registration fees were originally simple exceptional. intended only
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
for rigidly purposes in the exercise of the State's police powers. Over the years, however, as
because the tax exemption in the franchise of PAL was repealed during the period. However, an
vehicular traffic exploded in number and motor vehicles became absolute necessities without
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
which modem life as we know it would stand still, Congress found the registration of vehicles a
provides:
very convenient way of raising much needed revenues. Without changing the earlier deputy. of
registration payments as "fees," their nature has become that of "taxes." In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine
Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted
will result in a lower taxes.)
pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional
revenues. of government even if one fifth or less of the amount collected is set aside for the
operating expenses of the agency administering the program.
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all
specific. without distinction as to transport or nontransport corporations; provided that with
respect to international airtransport service, only the gross passengers, mail, and freight
revenues. from its outgoing flights shall be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature or description
imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national
authority or government, agency, now or in the future, including but not limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of
airtransport equipment, motor vehicles, and all other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees
paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is
enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of
the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.
ARTURO M. TOLENTINO vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE
These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the
several petitioners in these cases, with the exception of the Philippine Educational Publishers
Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply.
In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and
Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not
"originate exclusively" in the House of Representatives as required by Art. VI, §24 of the
Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
where it passed three readings and that afterward it was sent to the Senate where after first
reading it was referred to the Senate Ways and Means Committee, they complain that the Senate
did not pass it on second and third readings. Instead what the Senate did was to pass its own
version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that what the
Senate committee should have done was to amend H. No. 11197 by striking out the text of the bill
and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill
and the Senate version just becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at least two
occasions during the Eighth Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING
FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX
CREDIT ON CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This
Act is actually a consolidation of H. No. 34254, which was approved by the House on January 29,
1992, and S. No. 1920, which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO
ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the
President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by
the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the
Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers
of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE
PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE
PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT
UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE
NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE PLACE
FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS
PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
(February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,
INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE
RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX
PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6,
1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE
DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE
DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC
PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED
AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC
OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF
(May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of
its power to propose amendments to bills required to originate in the House, passed its own
version of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630,
petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and third
readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would
make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as
a substitute measure, "taking into Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
§68. Not more than one amendment to the original amendment shall be considered.
No amendment by substitution shall be entertained unless the text thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
§69. No amendment which seeks the inclusion of a legislative provision foreign to the subject
matter of a bill (rider) shall be entertained.
xxx xxx xxx
§70-A. A bill or resolution shall not be amended by substituting it with another which covers a
subject distinct from that proposed in the original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine
Senate possesses less power than the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or concur with amendments.
Art. I, §7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may
propose or concur with amendments as on other Bills.
Art. VI, §24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate"
and "the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not
to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of the
Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral National
Assembly. When it was decided in 1939 to change to a bicameral legislature, it became necessary
to provide for the procedure for lawmaking by the Senate and the House of Representatives. The
work of proposing amendments to the Constitution was done by the National Assembly, acting as
a constituent assembly, some of whose members, jealous of preserving the Assembly's lawmaking
powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and private
bills shall originate exclusively in the Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so repassed shall be deemed
enacted and may be submitted to the President for corresponding action. In the event that the
Senate should fail to finally act on any such bills, the Assembly may, after thirty days from the
opening of the next regular session of the same legislative term, reapprove the same with a vote of
two-thirds of all the members of the Assembly. And upon such reapproval, the bill shall be
deemed enacted and may be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved
by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73.
(J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was
submitted to the people and ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of the
Senate to propose amendments must be understood to be full, plenary and complete "as on other
Bills." Thus, because revenue bills are required to originate exclusively in the House of
Representatives, the Senate cannot enact revenue measures of its own without such bills. After a
revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of the two chambers of
Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur is
clear from the following commentaries:
The power of the Senate to propose or concur with amendments is apparently without restriction.
It would seem that by virtue of this power, the Senate can practically re-write a bill required to
come from the House and leave only a trace of the original bill. For example, a general revenue bill
passed by the lower house of the United States Congress contained provisions for the imposition
of an inheritance tax . This was changed by the Senate into a corporation tax. The amending
authority of the Senate was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the House of Representatives because
it is more numerous in membership and therefore also more representative of the people.
Moreover, its members are presumed to be more familiar with the needs of the country in regard
to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or concur
with amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill initiated in the
House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively
in the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a
bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections
or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case
it will be known as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the enacting
clause must be preserved although the text of the Senate amendment may be incorporated in
place of the original body of the bill is to insist on a mere technicality. At any rate there is no rule
prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an amendment of
H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that
S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification
that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197," implying that there is something substantially different
between the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they
conclude that R.A. No. 7716 originated both in the House and in the Senate and that it is the
product of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both
houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates
that the provisions of the Senate bill were precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was
a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two bills could be referred to the Conference
Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630.
When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure
of bank deposits), were referred to a conference committee, the question was raised whether the
two bills could be the subject of such conference, considering that the bill from one house had not
been passed by the other and vice versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by
the House but not passed by the Senate, and a Senate bill of a similar nature is passed in the
Senate but never passed in the House, can the two bills be the subject of a conference, and can a
law be enacted from these two bills? I understand that the Senate bill in this particular instance
does not refer to investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of deposits in banks
but also investigation of investments in government securities. Now, since the two bills differ in
their subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this
where a conference should be had. If the House bill had been approved by the Senate, there would
have been no need of a conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we are now considering the
report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are
distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's)
contention that because the President separately certified to the need for the immediate
enactment of these measures, his certification was ineffectual and void. The certification had to be
made of the version of the same revenue bill which at the moment was being considered.
Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as many
bills as are presented in a house of Congress even though the bills are merely versions of the bill
he has already certified. It is enough that he certifies the bill which, at the time he makes the
certification, is under consideration. Since on March 22, 1994 the Senate was considering S. No.
1630, it was that bill which had to be certified. For that matter on June 1, 1993 the President had
earlier certified H. No. 9210 for immediate enactment because it was the one which at that time
was being considered by the House. This bill was later substituted, together with other bills, by H.
No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main
decision that the phrase "except when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a
bill] in its final form [must be] distributed to the members three days before its passage" but also
the requirement that before a bill can become a law it must have passed "three readings on
separate days." There is not only textual support for such construction but historical basis as well.
Art. VI, §21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in
its final form furnished its Members at least three calendar days prior to its passage, except when
the President shall have certified to the necessity of its immediate enactment. Upon the last
reading of a bill, no amendment thereof shall be allowed and the question upon its passage shall
be taken immediately thereafter, and the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):
(2) No bill shall become a law unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to the Members three days before its
passage, except when the Prime Minister certifies to the necessity of its immediate enactment to
meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of
the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be passed, the
need for a law may be rendered academic by the occurrence of the very emergency or public
calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the case,
an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the
situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases) believed
that there was an urgent need for consideration of S. No. 1630, because they responded to the call
of the President by voting on the bill on second and third readings on the same day. While the
judicial department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where
it was discussed for six days. Only its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on
second reading and its approval on March 24, 1994 elapsed before it was finally voted on by the
Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND
STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially achieved
in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full public disclosure and the people's right to know (Art.
II, §28 and Art. III, §7) the Conference Committee met for two days in executive session with only
the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing open hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least
staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case
who on the last two days of the conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving state interests, conferees keep
notes of their meetings. Above all, the public's right to know was fully served because the
Conference Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in the original bills without the need of
a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a
point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report of the conference
committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of
the Rules of this House which provides specifically that the conference report must be
accompanied by a detailed statement of the effects of the amendment on the bill of the House. This
conference committee report is not accompanied by that detailed statement, Mr. Speaker.
Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of
order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from Pangasinan,
but this provision applies to those cases where only portions of the bill have been amended. In
this case before us an entire bill is presented; therefore, it can be easily seen from the reading of
the bill what the provisions are. Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions
of the Rules, and the reason for the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases inserted in or deleted from the
provisions of the bill included in the conference report, and we cannot understand what those
words and phrases mean and their relation to the bill. In that case, it is necessary to make a
detailed statement on how those words and phrases will affect the bill as a whole; but when the
entire bill itself is copied verbatim in the conference report, that is not necessary. So when the
reason for the Rule does not exist, the Rule does not exist.
Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was sustained
by a vote of 48 to 5.
Nor is there any doubt about the power of a conference committee to insert new provisions as
long as these are germane to the subject of the conference. As this Court held in Philippine Judges
Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving differences between the
Senate and the House. It may propose an entirely new provision. What is important is that its
report is subsequently approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been added by the conference
committee, there was thereby a violation of the constitutional injunction that "upon the last
reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A. No. 7354 and
that copies thereof in its final form were not distributed among the members of each House. Both
the enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in
accordance with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official
assurances from a coordinate department of the government, to which we owe, at the very least, a
becoming courtesy.
It is interesting to note the following description of conference committees in the Philippines in a
1979 study:
Conference committees may be of two types: free or instructed. These committees may be given
instructions by their parent bodies or they may be left without instructions. Normally the
conference committees are without instructions, and this is why they are often critically referred
to as "the little legislatures." Once bills have been sent to them, the conferees have almost
unlimited authority to change the clauses of the bills and in fact sometimes introduce new
measures that were not in the original legislation. No minutes are kept, and members' activities
on conference committees are difficult to determine. One congressman known for his idealism put
it this way: "I killed a bill on export incentives for my interest group [copra] in the conference
committee but I could not have done so anywhere else." The conference committee submits a
report to both houses, and usually it is accepted. If the report is not accepted, then the committee
is discharged and new members are appointed.
In citing this study, we pass no judgment on the methods of conference committees. We cite it
only to say that conference committees here are no different from their counterparts in the United
States whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events,
under Art. VI, §16(3) each house has the power "to determine the rules of its proceedings,"
including those of its committees. Any meaningful change in the method and procedures of
Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26
(1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one
subject which shall be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.
Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature,
or description, imposed, levied, established, assessed or collected by any municipal, city,
provincial or national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by §103 of the National
Internal Revenue Code, which provides as follows:
§103. Exempt transactions. — The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international agreements to which the
Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
§103, as follows:
§103. Exempt transactions. — The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM
[BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES," Congress thereby
clearly expresses its intention to amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent
provisions of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually, it
is the bill which becomes a law that is required to express in its title the subject of legislation. The
titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the
provisions sought to be amended. We are satisfied that sufficient notice had been given of the
pendency of these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF
THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It contained a provision
repealing all franking privileges. It was contended that the withdrawal of franking privileges was
not expressed in the title of the law. In holding that there was sufficient description of the subject
of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general objectives of the
statute to be expressed in its title would not only be unreasonable but would actually render
legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:
The details of a legislative act need not be specifically stated in its title, but matter germane to the
subject as expressed in the title, and adopted to the accomplishment of the object in view, may
properly be included in the act. Thus, it is proper to create in the same act the machinery by which
the act is to be enforced, to prescribe the penalties for its infraction, and to remove obstacles in
the way of its execution. If such matters are properly connected with the subject as expressed in
the title, it is unnecessary that they should also have special mention in the title. (Southern Pac.
Co. v. Bartine, 170 Fed. 725)
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the
press is not exempt from the taxing power of the State and that what the constitutional guarantee
of free press prohibits are laws which single out the press or target a group belonging to the press
for special treatment or which in any way discriminate against the press on the basis of the
content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden
to which other businesses have long ago been subject. It is thus different from the tax involved in
the cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L.
Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising
receipts only of newspapers whose weekly circulation was over 20,000, with the result that the
tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical of
Senator Huey Long who controlled the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could
have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using,
storing or consuming tangible goods, the press was not. Instead, the press was exempted from
both taxes. It was, however, later made to pay a special use tax on the cost of paper and ink which
made these items "the only items subject to the use tax that were component of goods to be sold
at retail." The U.S. Supreme Court held that the differential treatment of the press "suggests that
the goal of regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those
previously granted to PAL, petroleum concessionaires, enterprises registered with the Export
Processing Zone Authority, and many more are likewise totally withdrawn, in addition to
exemptions which are partially withdrawn, in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) or for professional use, like professional instruments and
implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the
First Amendment is not so restricted. A license tax certainly does not acquire constitutional
validity because it classifies the privileges protected by the First Amendment along with the
wares and merchandise of hucksters and peddlers and treats them all alike. Such equality in
treatment does not save the ordinance. Freedom of press, freedom of speech, freedom of religion
are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with
the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court
put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing
to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by
the American Bible Society without restraining the free exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or
properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more
than to make the press pay income tax or subject it to general regulation is not to violate its
freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to
those who cannot afford to pay so that to tax the sales would be to increase the price, while
reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of
religious freedom is so incidental as to make it difficult to differentiate it from any other economic
imposition that might make the right to disseminate religious doctrines costly. Otherwise, to
follow the petitioner's argument, to increase the tax on the sale of vestments would be to lay an
impermissible burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by
§7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies
transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a progressive system of
taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would result in
substantial increases in the monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not anticipate at the time he
entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a contract or impairs its obligation,
within the meaning of the Constitution. Even though such taxation may affect particular contracts,
as it may increase the debt of one person and lessen the security of another, or may impose
additional burdens upon one class and release the burdens of another, still the tax must be paid
unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any
existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39
Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-
American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful authority of
the government and no obligation of contract can extend to the defeat of that authority. (Norman
v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be
exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can afford to rent houses in the meantime
that they cannot yet buy their own homes. The two social classes are thus differently situated in
life. "It is inherent in the power to tax that the State be free to select the subjects of taxation, and it
has been repeatedly held that 'inequalities which result from a singling out of one particular class
for taxation, or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148,
153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130
SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163
SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,
§28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms and corporations placed in similar
situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A.
No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on
grounds similar to those made in these cases, namely, that the law was "oppressive,
discriminatory, unjust and regressive in violation of Art. VI, §28(1) of the Constitution." (At 382)
Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public,
which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner
sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are
sales of farm and marine products, so that the costs of basic food and other necessities, spared as
they are from the incidence of the VAT, are expected to be relatively lower and within the reach of
the general public.
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of
the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a
flat rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to
pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are .
. . to be preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO,
THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation
of Art. VIII, §17(1) of the 1973 Constitution from which the present Art. VI, §28(1) was taken.
Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are exempted
from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest
products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn
sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture
of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens
returning to the Philippines) and or professional use, like professional instruments and
implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of
petroleum products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered
under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which involve goods
and services which are used or availed of mainly by higher income groups. These include real
properties held primarily for sale to customers or for lease in the ordinary course of trade or
business, the right or privilege to use patent, copyright, and other similar property or right, the
right or privilege to use industrial, commercial or scientific equipment, motion picture films, tapes
and discs, radio, television, satellite transmission and cable television time, hotels, restaurants
and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and
other common carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed
record which can impart to adjudication the impact of actuality. There is no factual foundation to
show in the concrete the application of the law to actual contracts and exemplify its effect on
property rights. For the fact is that petitioner's members have not even been assessed the VAT.
Petitioner's case is not made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here, does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void on its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that where the due process
and equal protection clauses are invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.
Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual
case and not an abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not
really settle legal issues.
We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that
"there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the government." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" and all
that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we have
the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.
Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a
court to hear and decide cases pending between parties who have the right to sue and be sued in
the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly appropriated until it is
apportioned among several courts either by the Constitution, as in the case of Art. VIII, §5, or by
statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization
Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction,"
defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the
exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming
within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by
the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of
the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt
a definite policy of granting tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in
1986, P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until
December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in
1987 the framers of the Constitution "repudiated the previous actions of the government adverse
to the interests of the cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant
of tax exemptions," by providing the following in Art. XII:
§1. The goals of the national economy are a more equitable distribution of opportunities, income,
and wealth; a sustained increase in the amount of goods and services produced by the nation for
the benefit of the people; and an expanding productivity as the key to raising the quality of life for
all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human
and natural resources, and which are competitive in both domestic and foreign markets. However,
the State shall protect Filipino enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be
given optimum opportunity to develop. Private enterprises, including corporations, cooperatives,
and similar collective organizations, shall be encouraged to broaden the base of their ownership.
§15. The Congress shall create an agency to promote the viability and growth of cooperatives as
instruments for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5.
What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in general, in view of the economic crisis
which then beset the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions
of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, but then again
cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in order to
promote their growth and viability. Hence, there is no basis for petitioner's assertion that the
government's policy toward cooperatives had been one of vacillation, as far as the grant of tax
privileges was concerned, and that it was to put an end to this indecision that the constitutional
provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If Congress does not grant exemption
and there is no discrimination to cooperatives, no violation of any constitutional policy can be
charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary to the Constitution under which only the following
are exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI,
§28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives
the equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination
that there is greater need to provide cheaper electric power to as many people as possible,
especially those living in the rural areas, than there is to provide them with other necessities in
life. We cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A. No.
7716. We have in fact taken the extraordinary step of enjoining its enforcement pending
resolution of these cases. We have now come to the conclusion that the law suffers from none of
the infirmities attributed to it by petitioners and that its enactment by the other branches of the
government does not constitute a grave abuse of discretion. Any question as to its necessity,
desirability or expediency must be addressed to Congress as the body which is electorally
responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians
of the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri,
Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public accountability of
legislators, that those who took part in passing the law in question by voting for it in Congress
should later thrust to the courts the burden of reviewing measures in the flush of enactment. This
Court does not sit as a third branch of the legislature, much less exercise a veto power over
legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the temporary
restraining order previously issued is hereby lifted.
JOHN H. OSMEÑA vs. OSCAR ORBOS, in his capacity as Executive Secretary; JESUS
ESTANISLAO, in his capacity as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity
as Head of the Office of Energy Affairs; REX V. TANTIONGCO, and the ENERGY REGULATORY
BOARD
The petitioner seeks the corrective,1 prohibitive and coercive remedies provided by Rule 65 of
the Rules of Court,2upon the following posited grounds, viz.:3
1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now,
the Office of Energy Affairs), created pursuant to § 8, paragraph 1, of P.D. No. 1956, as amended,
"said creation of a trust fund being contrary to Section 29 (3), Article VI of the . . Constitution;4
2) the unconstitutionality of § 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order
No. 137, for "being an undue and invalid delegation of legislative power . . to the Energy
Regulatory Board;"5
3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization
Fund,6 because it contravenes § 8, paragraph 2 (2) of
P. D. 1956, as amended; and
4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of
the pump prices and petroleum products to the levels prevailing prior to the said Order.
It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating
a Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The
OPSF was designed to reimburse oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustments and from increases in the world
market prices of crude oil.
Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024,7 and
ordered released from the National Treasury to the Ministry of Energy. The same Executive Order
also authorized the investment of the fund in government securities, with the earnings from such
placements accruing to the fund.
President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on
February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by the Ministry of Finance.
Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal
Fund Balance deficit" of some P12.877 billion;8 that to abate the worsening deficit, "the Energy
Regulatory Board . . issued an Order on December 10, 1990, approving the increase in pump
prices of petroleum products," and at the rate of recoupment, the OPSF deficit should have been
fully covered in a span of six (6) months, but this notwithstanding, the respondents — Oscar
Orbos, in his capacity as Executive Secretary; Jesus Estanislao, in his capacity as Secretary of
Finance; Wenceslao de la Paz, in his capacity as Head of the Office of Energy Affairs; Chairman Rex
V. Tantiongco and the Energy Regulatory Board — "are poised to accept, process and pay claims
not authorized under P.D. 1956."9
The petition further avers that the creation of the trust fund violates §
29(3), Article VI of the Constitution, reading as follows:
(3) All money collected on any tax levied for a special purpose shall be treated as a special fund
and paid out for such purposes only. If the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.
The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be
treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is
collected for a specific purpose, the revenue generated therefrom shall 'be treated as a special
fund' to be used only for the purpose indicated, and not channeled to another government
objective." 10 Petitioner further points out that since "a 'special fund' consists of monies collected
through the taxing power of a State, such amounts belong to the State, although the use thereof is
limited to the special purpose/objective for which it was created." 11
He also contends that the "delegation of legislative authority" to the ERB violates § 28 (2). Article
VI of the Constitution, viz.:
(2) The Congress may, by law, authorize the President to fix, within specified limits, and subject to
such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government;
and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits,
limitations and restrictions must be quantitative, that is, the law must not only specify how to tax,
who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how much to
tax." 12
The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the
monies collected, which form part of the OPSF, should be maintained in a special account of the
general fund for the reason that the Constitution so provides, and because they are,
supposedly, taxes levied for a special purpose. He assumes that the Fund is formed from a tax
undoubtedly because a portion thereof is taken from collections of ad valorem taxes and the
increases thereon.
It thus appears that the challenge posed by the petitioner is premised primarily on the view that
the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation
power of the State. The Solicitor General observes that the "argument rests on the assumption
that the OPSF is a form of revenue measure drawing from a special tax to be expended for a
special purpose." 13 The petitioner's perceptions are, in the Court's view, not quite correct.
To address this critical misgiving in the position of the petitioner on these issues, the Court recalls
its holding in Valmonte v. Energy Regulatory Board, et al. 14 —
The foregoing arguments suggest the presence of misconceptions about the nature and functions
of the OPSF. The OPSF is a "Trust Account" which was established "for the purpose of minimizing
the frequent price changes brought about by exchange rate adjustment and/or changes in world
market prices of crude oil and imported petroleum products." 15 Under P.D. No. 1956, as
amended by Executive Order No. 137 dated 27 February 1987, this Trust Account may be funded
from any of the following sources:
a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum
products subject to tax under this Decree arising from exchange rate adjustment, as may be
determined by the Minister of Finance in consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions of government
corporations, as may be determined by the Minister of Finance in consultation with the Board of
Energy:
c) Any additional amount to be imposed on petroleum products to augment the resources of the
Fund through an appropriate Order that may be issued by the Board of Energy requiring payment
of persons or companies engaged in the business of importing, manufacturing and/or marketing
petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the
importation of crude oil and petroleum products is less than the peso costs computed using the
reference foreign exchange rate as fixed by the Board of Energy. xxx xxx xxx
The fact that the world market prices of oil, measured by the spot market in Rotterdam, vary from
day to day is of judicial notice. Freight rates for hauling crude oil and petroleum products from
sources of supply to the Philippines may also vary from time to time. The exchange rate of the
peso vis-a-vis the U.S. dollar and other convertible foreign currencies also changes from day to
day. These fluctuations in world market prices and in tanker rates and foreign exchange rates
would in a completely free market translate into corresponding adjustments in domestic prices of
oil and petroleum products with sympathetic frequency. But domestic prices which vary from day
to day or even only from week to week would result in a chaotic market with unpredictable
effects upon the country's economy in general. The OPSF was established precisely to protect
local consumers from the adverse consequences that such frequent oil price adjustments may
have upon the economy. Thus, the OPSF serves as a pocket, as it were, into which a portion of the
purchase price of oil and petroleum products paid by consumers as well as some tax revenues are
inputted and from which amounts are drawn from time to time to reimburse oil companies, when
appropriate situations arise, for increases in, as well as underrecovery of, costs of crude
importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices
of oil and petroleum products are stabilized, instead of fluctuating every so often, and oil
companies are allowed to recover those portions of their costs which they would not otherwise
recover given the level of domestic prices existing at any given time. To the extent that some tax
revenues are also put into it, the OPSF is in effect a device through which the domestic prices of
petroleum products are subsidized in part. It appears to the Court that the establishment and
maintenance of the OPSF is well within that pervasive and non-waivable power and responsibility
of the government to secure the physical and economic survival and well-being of the community,
that comprehensive sovereign authority we designate as the police power of the State. The
stabilization, and subsidy of domestic prices of petroleum products and fuel oil — clearly critical
in importance considering, among other things, the continuing high level of dependence of the
country on imported crude oil — are appropriately regarded as public purposes.
Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of
which is not far different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld
the legality of the sugar stabilization fees and explained their nature and character, viz.:
The stabilization fees collected are in the nature of a tax, which is within the power of the State to
impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil. 148). . . . The tax
collected is not in a pure exercise of the taxing power. It is levied with a regulatory purpose, to
provide a means for the stabilization of the sugar industry. The levy is primarily in the exercise of
the police power of the State (Lutz v. Araneta, supra). xxx xxx xxx
The stabilization fees in question are levied by the State upon sugar millers, planters and
producers for a special purpose — that of "financing the growth and development of the sugar
industry and all its components, stabilization of the domestic market including the foreign
market." The fact that the State has taken possession of moneys pursuant to law is sufficient to
constitute them state funds, even though they are held for a special purpose (Lawrence v.
American Surety Co. 263 Mich. 586, 249 ALR 535, cited in 42 Am Jur Sec. 2, p. 718). Having been
levied for a special purpose, the revenues collected are to be treated as a special fund, to be, in the
language of the statute, "administered in trust" for the purpose intended. Once the purpose has
been fulfilled or abandoned, the balance if any, is to be transferred to the general funds of the
Government. That is the essence of the trust intended (SEE 1987 Constitution, Article VI, Sec.
29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(1). 17
The character of the Stabilization Fund as a special kind of fund is emphasized by the fact that the
funds are deposited in the Philippine National Bank and not in the Philippine Treasury, moneys
from which may be paid out only in pursuance of an appropriation made by law (1987)
Constitution, Article VI, Sec. 29 (3), lifted from the 1935 Constitution, Article VI, Sec. 23(1).
(Emphasis supplied).
Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted
in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain
from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it
is placed in what the law refers to as a "trust liability account," the fund nonetheless remains
subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply
with the constitutional description of a "special fund." Indeed, the practice is not without
precedent.
With regard to the alleged undue delegation of legislative power, the Court finds that the
provision conferring the authority upon the ERB to impose additional amounts on petroleum
products provides a sufficient standard by which the authority must be exercised. In addition to
the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic
pump rates, § 8(c) of P.D. 1956 18 expressly authorizes the ERB to impose additional amounts to
augment the resources of the Fund.
What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific
limit on how much to tax." 19 The Court is cited to this requirement by the petitioner on the
premise that what is involved here is the power of taxation; but as already discussed, this is not
the case. What is here involved is not so much the power of taxation as police power. Although the
provision authorizing the ERB to impose additional amounts could be construed to refer to the
power of taxation, it cannot be overlooked that the overriding consideration is to enable the
delegate to act with expediency in carrying out the objectives of the law which are embraced by
the police power of the State.
The interplay and constant fluctuation of the various factors involved in the determination of the
price of oil and petroleum products, and the frequently shifting need to either augment or exhaust
the Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as
proposed by the petitioner. To do so would render the ERB unable to respond effectively so as to
mitigate or avoid the undesirable consequences of such fluidity. As such, the standard as it is
expressed, suffices to guide the delegate in the exercise of the delegated power, taking account of
the circumstances under which it is to be exercised.
For a valid delegation of power, it is essential that the law delegating the power must be (1)
complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must
fix a standard — limits of which
are sufficiently determinate or determinable — to which the delegate must conform. 20
. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there must be a
standard, which implies at the very least that the legislature itself determines matters of principle
and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard to
repel. A standard thus defines legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it. It indicates the circumstances under which the legislative
command is to be effected. It is the criterion by which the legislative purpose may be carried out.
Thereafter, the executive or administrative office designated may in pursuance of the above
guidelines promulgate supplemental rules and regulations. The standard may either be express or
implied. If the former, the non-delegation 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. 21
It would seem that from the above-quoted ruling, the petition for prohibition should fail.
The standard, as the Court has already stated, may even be implied. In that light, there can be no
ground upon which to sustain the petition, inasmuch as the challenged law sets forth a
determinable standard which guides the exercise of the power granted to the ERB. By the same
token, the proper exercise of the delegated power may be tested with ease. It seems obvious that
what the law intended was to permit the additional imposts for as long as there exists a need to
protect the general public and the petroleum industry from the adverse consequences of pump
rate fluctuations. "Where the standards set up for the guidance of an administrative officer and
the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and
the public are assured that the orders in the judgment of such officer conform to the legislative
standard, there is no failure in the performance of the legislative functions." 22
This Court thus finds no serious impediment to sustaining the validity of the legislation; the
express purpose for which the imposts are permitted and the general objectives and purposes of
the fund are readily discernible, and they constitute a sufficient standard upon which the
delegation of power may be justified.
In relation to the third question — respecting the illegality of the reimbursements to oil
companies, paid out of the Oil Price Stabilization Fund, because allegedly in contravention of § 8,
paragraph 2 (2) of P.D. 1956, amended 23 — the Court finds for the petitioner.
The petition assails the payment of certain items or accounts in favor of the petroleum companies
(i.e., inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.)
because not authorized by law. Petitioner contends that "these claims are not embraced in the
enumeration in § 8 of P.D. 1956 . . since none of them was incurred 'as a result of the reduction of
domestic prices of petroleum products,'" 24 and since these items are reimbursements for which
the OPSF should not have responded, the amount of the P12.877 billion deficit "should be reduced
by P5,277.2 million." 25 It is argued "that under the principle of ejusdem generis . . . the term
'other factors' (as used in § 8 of P.D. 1956) . . can only include such 'other factors' which
necessarily result in the reduction of domestic prices of petroleum products." 26
The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive
confines of the rule of ejusdem generis would reduce (E.O. 137) to a meaningless provision."
This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., 27 passed
upon the application of ejusdem generis to paragraph 2 of § 8 of P.D. 1956, viz.:
The rule of ejusdem generis states that "[w]here words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed
in their widest extent, but are held to be as applying only to persons or things of the same kind or
class as those specifically mentioned." 28 A reading of subparagraphs (i) and (ii) easily discloses
that they do not have a common characteristic. The first relates to price reduction as directed by
the Board of Energy while the second refers to reduction in internal ad valorem taxes. Therefore,
subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What should be
considered for purposes of determining the "other factors" in subparagraph (iii) is the first
sentence of paragraph (2) of the Section which explicitly allows the cost underrecovery only if
such were incurred as a result of the reduction of domestic prices of petroleum products.
The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph
2 of § 8 of P.D. 1956, for the reason that they were not incurred as a result of the reduction of
domestic prices of petroleum products. Under the same provision, however, the payment of
inventory losses is upheld as valid, being clearly a result of domestic price reduction, when oil
companies incur a cost underrecovery for yet unsold stocks of oil in inventory acquired at a
higher price.
Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is
equally permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws
and regulations as held in Caltex 29 and which have been pointed to by the Solicitor General. At
any rate, doubts about the propriety of such reimbursements have been dispelled by the
enactment of R.A. 6952, establishing the Petroleum Price Standby Fund, § 2 of which specifically
authorizes the reimbursement of "cost underrecovery incurred as a result of fuel oil sales to the
National Power Corporation."
Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been
presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any
effort to defend the propriety of this refund. In fine, neither of the parties, beyond the mere
mention of overpayment refunds, has at all bothered to discuss the arguments for or against the
legality of the so-called overpayment refunds. To be sure, the absence of any argument for or
against the validity of the refund cannot result in its disallowance by the Court. Unless the
impropriety or illegality of the overpayment refund has been clearly and specifically shown, there
can be no basis upon which to nullify the same.
Finally, the Court finds no necessity to rule on the remaining issue, the same having been
rendered moot and academic. As of date hereof, the pump rates of gasoline have been reduced to
levels below even those prayed for in the petition.
WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the
reimbursement of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other
respects.
CALTEX PHILIPPINES, INC.,vs. COMMISSION ON AUDIT, HONORABLE COMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ
This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the
authority of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement
from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's
decision denying its claims for recovery of financing charges from the Fund and reimbursement of
underrecovery arising from sales to the National Power Corporation, Atlas Consolidated Mining
and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER),
preventing it from exercising the right to offset its remittances against its reimbursement vis-a-
vis the OPSF and disallowing its claims which are still pending resolution before the Office of
Energy Affairs (OEA) and the Department of Finance (DOF).
Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the
findings and rulings of the administrator of the fund itself and in disallowing a claim which is still
pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without
jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it
may be required under the law to remit to the OPSF against any amount that it may receive by
way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of
Court, and, considering further the importance of the issues raised, the error in the designation of
the remedy pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.)
No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as
follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy
to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent
price changes brought about by exchange rate adjustments and/or changes in world market
prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may be
sourced from any of the following:
a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum
products subject to tax under this Decree arising from exchange rate adjustment, as may be
determined by the Minister of Finance in consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions of government
corporations, as may be determined by the Minister of Finance in consultation with the Board of
Energy;
c) Any additional amount to be imposed on petroleum products to augment the resources of the
Fund through an appropriate Order that may be issued by the Board of Energy requiring payment
by persons or companies engaged in the business of importing, manufacturing and/or marketing
petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the
importation of crude oil and petroleum products is less than the peso costs computed using the
reference foreign exchange rate as fixed by the Board of Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustment and/or increase in world market prices of
crude oil;
2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to
as Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for
the years 1986 and 1988, of the additional tax on petroleum products authorized under the
aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to
P335,037,649.00 and informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification
with the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:
1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to
March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to
forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action
on the reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for
the payment of the collections and the recovery of claims, since the outright payment of the sum
of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF
will cause a very serious impairment of its cash position. 10 The proposal reads:
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and
reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated by
law to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF,
similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted expeditiously.
(4) The review of current claims (1989) will be conducted expeditiously to preclude further
accumulation of reimbursement from OPSF.
On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances
and reimbursements for the current and ensuing years. 11 Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for
reconsideration of this Commission's adverse action embodied in its letters dated February 2,
1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization
Fund of collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987,
and the latter reiterating the same directive but further advising the firms to desist from offsetting
collections against their claims with the notice that "this Commission will hold in abeyance the
audit of all . . . claims for reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization
Fund against their outstanding claims from the said Fund for the calendar years 1987 and 1988,
pending with the then Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting
of all types of reimbursements from the OPSF against all categories of remittances, advised these
oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these companies
now seek reconsideration and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of the amount of collections
equivalent to what has been previously offset, provided that this Commission authorizes the
Office of Energy Affairs to prepare the corresponding checks representing reimbursement from
the OPSF. It is alleged that the implementation of such an arrangement, whereby the remittance of
collections due to the OPSF and the reimbursement of claims from the Fund shall be made within
a period of not more than one week from each other, will benefit the Fund and not unduly
jeopardize the continuing daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives
no further objectionable feature in the proposed arrangement, provided that 15% of whatever
amount is due from the Fund is retained by the Office of Energy Affairs, the same to be answerable
for suspensions or disallowances, errors or discrepancies which may be noted in the course of
audit and surcharges for late remittances without prejudice to similar future retentions to answer
for any deficiency in such surcharges, and provided further that no offsetting of remittances and
reimbursements for the current and ensuing years shall be allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive
Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our
initial verification of documents submitted to us by your Office in support of Caltex (Philippines),
Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil
Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that
Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906,
representing remittances to the OPSF which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of Energy
Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially allowed
in audit, the details of which are presented hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535, which
included P130,420,235 representing those claims disallowed by OEA, details of which is (sic)
shown in Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300
Disallowances of OEA 130,420,235
————————— ——————
Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of
financing charges by oil companies is not among the items for which the OPSF may be utilized.
Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for
such claims is provided in DOF Circular 1-87.
b. Product Sales –– Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095
indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay
OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to
international vessels/airlines should not be included as part of its domestic sales. Changing the
effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by
subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in
their domestic sales volumes to international vessels/airlines and claim the corresponding
reimbursements from OPSF during the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.
c. Inventory losses –– Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA) transactions including the related
BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed
that oil companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances
therefore are not tax paid inventories of Caltex subject to reimbursements but those of the
borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987
amounting to P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and
payable by the copper mining companies in distress to the national and local governments." It is
our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as
effected by OEA has no legal basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein
authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable
auditing rules and regulations. With regard to the disallowances, it is further informed that the
aggrieved party has 30 days within which to appeal the decision of the Commission in accordance
with law.
On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds: 13
A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,
RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY
REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.
xxx xxx xxx
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER
BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE
RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY
LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE
EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.
xxx xxx xxx
On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14
On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171
reads as follows:
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-
87, dated February 18, 1987, which allowed oil companies to "recover cost of financing working
capital associated with crude oil shipments," and provided a schedule of reimbursement in terms
of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the
President of the Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:
As part of your program to promote economic recovery, . . . oil companies (were authorized) to
refinance their imports of crude oil and petroleum products from the normal trade credit of 30
days up to 360 days from date of loading . . . Conformably . . ., the oil companies deferred their
foreign exchange remittances for purchases by refinancing their import bills from the normal 30-
day payment term up to the desired 360 days. This refinancing of importations carried additional
costs (financing charges) which then became, due to government mandate, an inherent part of the
cost of the purchases of our country's oil requirement.
We beg to disagree with such contention. The justification that financing charges increased oil
costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support
alleged increase (sic) were not validated in our independent inquiry. As manifested in Exhibit 2,
using the same formula which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies are
actually gaining rather than losing from the extension of credit because such extension enables
them to invest the collections in marketable securities which have much higher rates than those
they incur due to the extension. The Data we used were obtained from CPI (CALTEX) Management
and can easily be verified from our records.
With respect to product sales or those arising from sales to international vessels or airlines, . . ., it
is believed that export sales (product sales) are entitled to claim refund from the OPSF.
As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view
of this Commission that the OPSF is not liable to refund such surtax on inventory losses because
these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . .
.
Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim
recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining
companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.
Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has
no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated
July 17, 1984, which exempts distressed mining companies from "all taxes, duties, import fees and
other charges" was issued when OPSF was not yet in existence and could not have contemplated
OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to
aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil
prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16
I RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES
FROM THE OPSF.
II RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.
III RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON
SALES TO ATLAS AND MARCOPPER.
IV RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT
TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.
V RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL
PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties to
file their respective Memoranda within twenty (20) days from notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a
second purpose, to wit:
2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department)
of Finance may include financing charges for "in essence, financing charges constitute
unrecovered cost of acquisition of crude oil incurred by the oil companies," as explained in the 6
November 1989 Memorandum to the President of the Department of Finance; they "directly
translate to cost underrecovery in cases where the money market placement rates decline and at
the same time the tax on interest income increases. The relationship is such that the presence of
underrecovery or overrecovery is directly dependent on the amount and extent of financing
charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the
basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:
To allow oil companies to recover the costs of financing working capital associated with crude oil
shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining
to the payment of the foregoing (sic) exchange risk premium and recovery of financing charges
will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the
first (6) months and 1/32 of one percent per month thereafter up to a maximum period of one
year, to be applied on crude oil' shipments from January 1, 1987. Shipments with outstanding
financing as of January 1, 1987 shall be charged on the basis of the fee applicable to the remaining
period of financing.
2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover
financing charges directly from the OPSF per barrel of crude oil based on the following schedule:
Financing Period Reimbursement Rate
Pesos per Barrel
Less than 180 days None
180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty
days. 22
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:
HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and
subsequent discussions held by the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of Finance recognizes the necessity to
reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF).
Such a reduction would allow the industry to recover partly associated financing charges on crude
oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1%
for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of
one year, effective January 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be secured from the OPSF in
accordance with the provisions of the attached Department of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing
charges from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both
crude and product shipments loaded after January 1, 1987 based on the following rates:
Financing Period Reimbursement Rate
(PBbl.)
Less than 180 days None
180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28
2. The above rates shall be subject to review every sixty days. 24
Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:
Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February
18, 1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization
Fund. (OPSF):
1. The Claim for reimbursement shall be on a per shipment basis.
2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost
differential for a particular shipment and duly certified supporting documents providedfor under
Ministry of Finance No. 11-85.
3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by
the Office of Energy Affairs. The said certificate may be used to offset against amounts payable to
the OPSF. The oil companies may also redeem said certificates in cash if not utilized, subject to
availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-
017. 26
The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance
and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing
certain expenditures, is limited to the promulgation of accounting and auditing rules for, among
others, the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties. 28
(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim
that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not
supported by expert analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:
1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the
COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of
the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or
analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow
reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the theory
of petitioner –– that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only
to the promulgation of accounting and auditing rules for, among others, such disallowance –– to
be untenable in the light of the provisions of the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct
the deficiencies. It shall keep the general accounts, of the Government and, for such period as may
be provided by law, preserve the vouchers and other supporting papers pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable
expenditures, or uses of government funds and properties.
These present powers, consistent with the declared independence of the Commission, 30 are
broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the
Commission was empowered to:
Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the
revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities
including government-owned or controlled corporations, keep the general accounts of the
Government and, for such period as may be provided by law, preserve the vouchers pertaining
thereto; and promulgate accounting and auditing rules and regulations including those for the
prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses of funds and
property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was markedly
passive. Section 2 of Article XI thereofprovided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues
and receipts from whatever source, including trust funds derived from bond issues; and audit, in
accordance with law and administrative regulations, all expenditures of funds or property
pertaining to or held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the preserve the vouchers pertaining
thereto. It shall be the duty of the Auditor General to bring to the attention of the proper
administrative officer expenditures of funds or property which, in his opinion, are irregular,
unnecessary, excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the power
to issue rules and regulations to prevent the same. His was merely to bring that matter to the
attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided in
the light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and property. Our present Constitution
retains that same power and authority, further strengthened by the definition of the COA's
general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing
rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55.
Since the COA is responsible for the enforcement of the rules and regulations, it goes without
saying that failure to comply with them is a ground for disapproving the payment of the proposed
expenditure. As observed by one of the Commissioners of the 1986 Constitutional Commission, Fr.
Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the
Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures
of public funds but could only "bring [the matter] to the attention of the proper administrative
officer," under the 1987 Constitution, as also under the 1973 Constitution, the Commission on
Audit can "promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures or uses of government funds and properties." Hence, since the Commission on Audit
must ultimately be responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of a proposed
expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active
role and invested it with broader and more extensive powers, they did not intend merely to make
the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent
watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No.
1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued
pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine
"other factors" which may result in cost underrecovery and a consequent reimbursement from
the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges
are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.
These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they
are in the nature of government mandated price reductions. Hence, any other factor which seeks
to be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the
same class or nature as those specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons
or things, by words of a particular and specific meaning, such general words are not to be
construed in their widest extent, but are held to be as applying only to persons or things of the
same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii)
easily discloses that they do not have a common characteristic. The first relates to price reduction
as directed by the Board of Energy while the second refers to reduction in internal ad
valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these
subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of domestic prices of
petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in
the sense that such were incurred as a result of the inability to fully offset financing expenses from
yields in money market placements, they do not, however, fall under the foregoing provision of
P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic
price of petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further
amended by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to
apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in
this case have shown, it was at the behest of the Government that petitioner refinanced its oil
import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could
be correct in its assertion that owing to the extended period for payment, the financial institution
which refinanced said payments charged a higher interest, thereby resulting in higher financing
expenses for the petitioner. It would appear then that equity considerations dictate that petitioner
should somehow be allowed to recover its financing losses, if any, which may have been sustained
because it accommodated the request of the Government. Although under Section 29 of the
National Internal Revenue Code such losses may be deducted from gross income, the effect of that
loss would be merely to reduce its taxable income, but not to actually wipe out such losses. The
Government then may consider some positive measures to help petitioner and others similarly
situated to obtain substantial relief. An amendment, as aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for
the exercise of the authority. It is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise is provided and that the
legislature, in making the delegation, has prescribed the manner of the exercise of the delegated
authority. 39
Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant
by reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to
disprove COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to
sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising from
sales to NPC are reimbursable because NPC was granted full exemption from the payment of
taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law
cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which
provides, in part, "that the tax and duty exemption privileges of the National Power Corporation,
including those pertaining to its domestic purchases of petroleum and petroleum products . . . are
restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of
the President, NPC's tax exemption was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products
to the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum
Price Standby Fund to support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952
provides:
Sec. 2. Application of the Fund shall be subject to the following conditions:
(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported
crude oil and finished petroleum products resulting from foreign exchange rate adjustments
and/or increases in world market prices of crude oil; (b) cost underrecovery incurred as a result
of fuel oil sales to the National Power Corporation (NPC); and (c) other cost underrecoveries
incurred as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products to the National
Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable
by the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation
are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI
1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no
legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority
to claim reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was
issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the
time of its formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not
created to aid distressed mining companies but rather to help the domestic oil industry by
stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have
intended to exempt said distressed mining companies from the payment of OPSF dues for the
following reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the
OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on
February 25, 1987.
b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was
issued for the purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported petroleum
product's; and
c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether
direct or indirect, due and payable by the copper mining companies in distress to the Notional and
Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed copper
companies but by oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil
products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed
mining companies, it does not accord petitioner the same privilege with respect to its obligation
to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of
the Civil Code, which reads:
Laws shall take effect after fifteen days following the completion of their publication in the Official
Gazette, unless it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published they
shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:
We hold therefore that all statutes, including those of local application and private laws, shall be
published as a condition for their effectivity, which shall begin fifteen days after publication
unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the President
in the exercise of legislative powers whenever the same are validly delegated by the legislature or,
at present, directly conferred by the Constitution. Administrative rules and regulations must also
be published if their purpose is to enforce or implement existing laws pursuant also to a valid
delegation.
xxx xxx xxx
WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their
approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become
effective only after fifteen days from their publication, or on another date specified by the
legislature, in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette
after its issuance or at any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18
June 1987. As amended, the said provision now reads:
Laws shall take effect after fifteen days following the completion of their publication either in the
Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant
to Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must
still fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally
in favor of the taxing authority. 48The burden of proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption so claimed. The party claiming exemption must
therefore be expressly mentioned in the exempting law or at least be within its purview by clear
legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to
ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI
1416 may suspend the payment of taxes by copper mining companies, it does not give petitioner
the same privilege with respect to the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its
jurisdiction. 49 Respondents, on the other hand, contend that said amount was already disallowed
by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner
for pre-audit, the abovementioned amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has
already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner
contends that it should be allowed to offset its claims from the OPSF against its contributions to
the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner
also mentions communications from the Board of Energy and the Department of Finance that
supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can
be no offsetting of taxes against the claims that a taxpayer may have against the government, as
taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law.
Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because "while this provision empowers the COA to withhold
payment of a government indebtedness to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner of Internal Revenue vs. Algue,
Inc., 55 is that money due the government, either in the form of taxes or other dues, is its lifeblood
and should be collected without hindrance. Thus, instead of giving petitioner a reason for
compensation or set-off, the Revised Administrative Code makes it the respondents' duty to
collect petitioner's indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," 56 and that the OPSF contributions do not go to the general fund of
the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose
behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is
inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:
Sec. 2. Application of the fund shall be subject to the following conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company
which has an outstanding obligation to the Government without said obligation being offset first,
subject to the requirements of compensation or offset under the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public
purpose because they go to a special fund of the government. Taxation is no longer envisioned as
a measure merely to raise revenue to support the existence of the government; taxes may be
levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the
state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as it
vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a
majority of the people and cause economic crisis of untold proportions. It would have a chain
reaction in terms of, among others, demands for wage increases and upward spiralling of the cost
of basic commodities. The stabilization then of oil prices is of prime concern which the state, via
its police power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality,
passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and remit the taxes collected to the
administrator of the OPSF. This duty stems from the fiduciary relationship between the two;
petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible.
Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the government from paying any amount
from the Petroleum Price Standby Fund to oil companies which have outstanding obligations with
the government, without said obligation being offset first subject to the rules on compensation in
the Civil Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged
decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for
reimbursement of underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.
FRANCISCO I. CHAVEZ, vs. JAIME B. ONGPIN, in his capacity as Minister of Finance and
FIDELINA CRUZ, in her capacity as Acting Municipal Treasurer of the Municipality of Las
Piñas, respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, INC., petitioner-
intervenor.
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986,
which We quote in full, as follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE,
AS AMENDED
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to implement
this Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with this
Executive Order are hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of
Executive Order No. 73 until June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He
alleges the following: that Executive Order No. 73 accelerated the application of the general
revision of assessments to January 1, 1987 thereby mandating an excessive increase in real
property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase in
the value of real property brought about by the revision of real property values and assessments
would necessarily lead to a proportionate increase in real property taxes; that sheer oppression is
the result of increasing real property taxes at a period of time when harsh economic conditions
prevail; and that the increase in the market values of real property as reflected in the schedule of
values was brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national
association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive
Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is
unconstitutional insofar as it imposes an additional one percent (1%) tax on all property owners
to raise funds for education, as real property tax is admittedly a local tax for local governments;
that the General Revision of Assessments does not meet the requirements of due process as
regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes
"replacement cost" of buildings (improvements) which is not provided in Presidential Decree No.
464, but only in an administrative regulation of the Department of Finance; and that the Joint
Local Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and unconstitutional
as it imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73
insofar as the revision of the assessments and the effectivity thereof are concerned. It should be
emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of Presidential
Decree No. 464 which provides, as follows:
SEC. 21. General Revision of Assessments. — Beginning with the assessor shall make a calendar
year 1978, the provincial or city general revision of real property assessments in the province or
city to take effect January 1, 1979, and once every five years thereafter: Provided; however, That if
property values in a province or city, or in any municipality, have greatly changed since the last
general revision, the provincial or city assesor may, with the approval of the Secretary of Finance
or upon bis direction, undertake a general revision of assessments in the province or city, or in
any municipality before the fifth year from the effectivity of the last general revision.
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73
has no legal basis as the general revision of assessments is a continuing process mandated by
Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which should
be challenged as constitutionally infirm. However, Chavez failed to raise any objection against said
decree. It was ROAP which questioned the constitutionality thereof. Furthermore, Presidential
Decree No. 464 furnishes the procedure by which a tax assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. — Any owner who is not satisfied with the action of
the provincial or city assessor in the assessment of his property may, within sixty days from the
date of receipt by him of the written notice of assessment as provided in this Code, appeal to the
Board of Assessment Appeals of the province or city, by filing with it a petition under oath using
the form prescribed for the purpose, together with copies of the tax declarations and such
affidavit or documents submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. — The Local Board of Assessment
Appeals shall decide the appeal within one hundred and twenty days from the date of receipt of
such appeal. The decision rendered must be based on substantial evidence presented at the
hearing or at least contained in the record and disclosed to the parties or such relevant evidence
as a reasonable mind might accept as adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and
subpoena duces tecum. The proceedings of the Board shall be conducted solely for the purpose of
ascertaining the truth without-necessarily adhering to technical rules applicable in judicial
proceedings.
The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor
with a copy each of the decision of the Board. In case the provincial or city assessor concurs in the
revision or the assessment, it shall be his duty to notify the property owner of such fact using the
form prescribed for the purpose. The owner or administrator of the property or the assessor who
is not satisfied with the decision of the Board of Assessment Appeals, may, within thirty days after
receipt of the decision of the local Board, appeal to the Central Board of Assessment Appeals by
filing his appeal under oath with the Secretary of the proper provincial or city Board of
Assessment Appeals using the prescribed form stating therein the grounds and the reasons for the
appeal, and attaching thereto any evidence pertinent to the case. A copy of the appeal should be
also furnished the Central Board of Assessment Appeals, through its Chairman, by the appellant.
Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment Appeals
concerned shall forward the same and all papers related thereto, to the Central Board of
Assessment Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. — The Central Board of Assessment Appeals shall have
jurisdiction over appealed assessment cases decided by the Local Board of Assessment Appeals.
The said Board shall decide cases brought on appeal within twelve (12) months from the date of
receipt, which decision shall become final and executory after the lapse of fifteen (15) days from
the date of receipt of a copy of the decision by the appellant.
In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.
The Central Board of assessment Appeals shall adopt and promulgate rules of procedure relative
to the conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any
owner who doubts the assessment of his property, may appeal to the Local Board of Assessment
Appeals. In case the, owner or administrator of the property or the assessor is not satisfied with
the decision of the Local Board of Assessment Appeals, he may, within thirty days from the receipt
of the decision, appeal to the Central Board of Assessment Appeals. The decision of the Central
Board of Assessment Appeals shall become final and executory after the lapse of fifteen days from
the date of receipt of the decision.
Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R.
No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et al. (G.R. No. 59431, July 25,
1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process requirement
called for therein applies to the "power to tax." Executive Order No. 73 does not impose new taxes
nor increase taxes.
Indeed, the government recognized the financial burden to the taxpayers that will result from an
increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985,
deferring the implementation of the increase in real property taxes resulting from the revised real
property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof is quoted herein
as follows:
SEC. 5. The increase in real property taxes resulting from the revised real property assessments as
provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential Decree
No. 1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to
enable the Ministry of Finance and the Ministry of Local Government to establish the new systems
of tax collection and assessment provided herein and in order to alleviate the condition of the
people, including real property owners, as a result of temporary economic difficulties. (emphasis
supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the increase
in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive
Order No. 1019, also finds ample justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to
be resolved in the present petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but an
ancillary and supplemental one which, in the nature of things, unless otherwise provided for by
legislation (or Rules of Court), must be in subordination to the main proceeding, and it may be laid
down as a general rule that an intervention is limited to the field of litigation open to the original
parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive Order
No. 73, the basis for collection of real property taxes win still be the 1978 revision of property
values. Certainly, to continue collecting real property taxes based on valuations arrived at several
years ago, in disregard of the increases in the value of real properties that have occurred since
then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources of revenues must be adequate to meet
government expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
DIAZ VS. SECRETARY OF FINANCE
May toll fees collected by tollway operators be subjected to value- added tax?
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief[1] assailing the validity of the impending imposition of value-added tax (VAT)
by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored
the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act
8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the
Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of
the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno C.
Aquino IIIs assumption of office in 2010, the BIR revived the idea and would impose the
challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll
fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not
a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and
that, since VAT was never factored into the formula for computing toll fees, its imposition would
violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from
notice.[2] Later, the Court issued another resolution treating the petition as one for
prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the governments comment.[4] The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should
seek the meaning and intent of the law from the words used in the statute; and that the imposition
of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and
circulars.[5]
The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating agreements
(TOAs) between the government and tollway operators. At any rate, the non-impairment clause
cannot limit the States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the
VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would
have very minimal effect on motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that tollway operators cannot
be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any
excess collection in an escrow account. But this would be illegal since only the Congress can
modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-
2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition;
and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms franchise grantees and sale of services under
Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a
tax on services; b) will impair the tollway operators right to a reasonable return of investment
under their TOAs; and c) is not administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave
their action. The government has sought reconsideration of the Courts resolution,[7] however,
arguing that petitioners allegations clearly made out a case for declaratory relief, an action over
which the Court has no original jurisdiction. The government adds, moreover, that the petition
does not meet the requirements of Rule 65 for actions for prohibition since the BIR did not
exercise judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll
fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the
ordinary course of law against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the
case has far-reaching implications and raises questions that need to be resolved for the public
good.[8] The Court has also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday, but
more so on the governments effort to raise revenue for funding various projects and for reducing
budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the government. A belated
declaration of nullity of the BIR action would make any attempt to refund to the motorists what
they paid an administrative nightmare with no solution.Consequently, it is not only the right, but
the duty of the Court to take cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved are of
great importance to the public. The same may be said of the requirement of locus standi which is a
mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed,
and collected, according to Section 108, on the gross receipts derived from the sale or exchange of
services as well as from the use or lease of properties. The third paragraph of Section 108 defines
sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing
or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another place in the Philippines;
sales of electricity by generation companies, transmission, and distribution companies; services of
franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of this Code and non-life
insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected services
is not exclusive.[11] By qualifying services with the words all kinds, Congress has given the term
services an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VATs reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of service rendered for a fee
should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also called
tollways, at the operators expense. Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads. Traffic in the regular public
highways is for this reason slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved fees from motorists using the
tollways until such operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of
the tollway facilities over which the operator enjoys private proprietary rights[12]that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their
transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered
for a fee regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. This means that services to be subject to VAT need not fall under the
traditional concept of services, the personal or professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the broad term all kinds of services, they also come
under the specific class described in Section 108 as all other franchise grantees who are subject to
VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than P10
million and gas and water utilities) that Section 119[13] spares from the payment of VAT. The
word franchise broadly covers government grants of a special right to do an act or series of acts of
public concern.[14]
Petitioners of course contend that tollway operators cannot be considered franchise grantees
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the franchise grantees it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction
between franchises granted by Congress and franchises granted by some other government
agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or
granted by local authorities, as agents of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself.[15] The term franchise has been broadly
construed as referring, not only to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.[16]
Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant
to the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is
evidenced by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of the services rendered by tollway operators excludes
such services from the term sale of services under Section 108 of the Code.But, again, nothing in
Section 108 supports this contention. The reverse is true. In specifically including by way of
example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-
covered businesses, Section 108 opens other companies rendering public service for a fee to the
imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls
or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,[20] statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently, the meaning
and intention of the law must first be sought in the words of the statute itself, read and considered
in their natural, ordinary, commonly accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to
taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:[22]
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code,
like roads, canals, rivers, torrents, ports and bridges constructed by the State,are owned by the
State. The term ports includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a port constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the
State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as
one for public use. Someone must pay for the maintenance of the road, either the public indirectly
through the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is
for public dominion or not. Article 420 of the Civil Code defines property of public dominion as
one intended for public use. Even if the government collects toll fees, the road is still intended for
public use if anyone can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the
road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for public use. Such fees are often
termed users tax. This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular public facility. A users
tax is more equitable a principle of taxation mandated in the 1987 Constitution.
Petitioners assume that what the Court said above, equating terminal fees to a users tax must also
pertain to tollway fees. But the main issue in the MIAA case was whether or
not Paraaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the
national government, the Court held that the City could not proceed with the auction sale. MIAA
forms part of the national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public
auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are users tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes.Indeed, they are not assessed
and collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible
from motorists, for the construction and maintenance of certain roadways.The tax in such a case
goes directly to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax here are fees collected
from tollways that are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the government has
adopted for expressways.[26] Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities, therefore, they are
not government exactions that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by either the government
or private individuals or entities, as an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the
sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order
to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden
of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as
a users tax. VAT is assessed against the tollway operators gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will
not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the
toll fees that one has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in
and right to recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion
that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if
VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither
can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make
the VAT on tollway operations impractical and incapable of implementation. They cite the fact
that, in order to claim input VAT, the name, address and tax identification number of the tollway
user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to
implement the VAT by rounding off the toll rate and putting any excess collection in an escrow
account is also illegal, while the alternative of giving change to thousands of motorists in order to
meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid except to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to
the matter are not sufficiently established for the Court to pass judgment on. Besides, any concern
about how the VAT on tollway operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively rests. The Court cannot
preempt the BIRs discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations
with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-
inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities.
Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who
have not questioned the circulars validity. They are thus the ones who have a right to challenge
the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT laws coverage when she sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code.Tollway operators are not among the franchise
grantees subject to franchise tax under the latter provision. Neither are their services among the
VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified
by clear statutory grant and based on language in the law too plain to be mistaken.[37] But as the
law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to
simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be properly referred to Congress. The Court
has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts
temporary restraining order dated August 13, 2010.
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as
judicial co-guardians of JOSE ROXAS vs. COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas
and Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which
they actually occupied. For its part, the Government, in consonance with the constitutional
mandate to acquire big landed estates and apportion them among landless tenants-farmers,
persuaded the Roxas brothers to part with their landholdings. Conferences were held with the
farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to
the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00
for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so
a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y
Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be
sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for
the same price but by installment, and contracted with the Rehabilitation Finance Corporation to
pay its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83
and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the
sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate,
Manila, which they inherited from their grandparents. After Antonio and Eduardo got married,
they resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose
paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
Manila Police Trust Fund 150.00
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment
of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for Philippines Herald's fund for Manila's neediest families 100.00
late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty
for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y
Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of 1955
the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the Contributions to Contribution to
amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the Our Lady of Fatima Chapel, FEU 50.00
corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of ANTONIO ROXAS:
securities against Roxas y Cia., on the fact that said partnership made profits from the purchase
and sale of securities.
1953
Contributions to —
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:
Pasay City Firemen Christmas Fund 25.00
1953 1955

Antonio Roxas P7,010.00 P5,813.00 Pasay City Police Dept. X'mas fund 50.00

Eduardo Roxas 7,281.00 5,828.00

1955
Contributions to —
Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the Baguio City Police Christmas fund 25.00
unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm
lands to the tenants, and the disallowance of deductions from gross income of various business
Pasay City Firemen Christmas fund 25.00
expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that
Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the
Commissioner considered the partnership as engaged in the business of real estate, hence, 100% Pasay City Police Christmas fund 50.00
of the profits derived therefrom was taxed.

The following deductions were disallowed: EDUARDO ROXAS:

ROXAS Y CIA.:
1953
Contributions to —
1953
Tickets for Banquet in honor of
P 40.00 Hijas de Jesus' Retiro de Manresa 450.00
S. Osmeña

Philippines Herald's fund for Manila's neediest families 100.00

Gifts of San Miguel beer 28.00

1955
Contributions to — Contributions to Philippines
Herald's fund for Manila's
Philippine Air Force Chapel 100.00 neediest families 120.00

JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the
appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for
the payment of the fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax
Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio
Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00,
respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1%
monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to
the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's
tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of
Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%
taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real
estate dealer because it engaged in the business of selling real estate. The business activity
alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-
occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y
Cia. as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella
en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo
aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal
Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of vendees. Although they paid for
their respective holdings in installment for a period of ten years, it would nevertheless not make
the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the landless. It was the bounden
duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell
its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms
and prices. However, the Government could not comply with its duty for lack of funds. Obligingly,
Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to
the farmers in the same way and under the same terms as would have been the case had the
Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a
resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg".
And, in order to maintain the general public's trust and confidence in the Government this power
must be used justly and not treacherously. It does not conform with Our sense of justice in the
instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to
penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the
gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in
honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses. Representation expenses are deductible
from gross income as expenditures incurred in carrying on a trade or business under Section
30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary
and necessary, and incurred in connection with his business. In the case at bar, the evidence does
not show such link between the expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City
Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's
fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio
City Police are not deductible for the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of said entities. Under Section
39(h), a contribution to a government entity is deductible when used exclusively for public
purposes. For this reason, the disallowance must be sustained. On the other hand, the
contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs
to the Manila Police, a government entity, intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed
on the ground that the Philippines Herald is not a corporation or an association contemplated in
Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made
to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines
Herald solely for charitable purposes. There is no question that the members of this group of
citizens do not receive profits, for all the funds they raised were for Manila's neediest families.
Such a group of citizens may be classified as an association organized exclusively for charitable
purposes mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima
chapel at the Far Eastern University on the ground that the said university gives dividends to its
stockholders. Located within the premises of the university, the chapel in question has not been Net income per review P315,663.26
shown to belong to the Catholic Church or any religious organization. On the other hand, the
lower court found that it belongs to the Far Eastern University, contributions to which are not
deductible under Section 30(h) of the Tax Code for the reason that the net income of said Less: Exemptions 4,200.00
university injures to the benefit of its stockholders. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because
although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from
Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers Net taxable income P311,463.26
owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any
qualification as to the persons paying the rentals. The law, which states: 1äwphï1.ñët Tax due 154,169.00
. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as principal and holding himself out as a full or Tax paid 154,060.00
part-time dealer in real estate or as an owner of rental property or properties rented or offered to
rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this
Deficiency P 109.00
point is sustained.1äwphï1.ñët
==========
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and
Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00
and P49.00, respectively, computed as follows: * EDUARDO ROXAS

ANTONIO ROXAS P
Net income per return
304,166.92

Net income per return P315,476.59

Add: 1/3 share, profits in Roxas y Cia P 153,249.15

Add: 1/3 share, profits in Roxas y Cia. P 153,249.15

Less profits declared 146,052.58
Less amount declared 146,135.46

Amount understated P 7,196.57

Amount understated P 7,113.69

Less 1/3 share in contributions amounting to P21,126.06
disallowed from partnership but allowed to partners 7,042.02 155.55
Contributions disallowed 115.00

Net income per review P304,322.47

P 7,228.69

Less: Exemptions 4,800.00

Less 1/3 share of contributions amounting to P21,126.06
disallowed from partnership but allowed to partners 7,042.02 186.67
Net taxable income P299,592.47 Deficiency P 49.00
===========

Tax Due P147,250.00

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the
sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and
Tax paid 147,159.00 Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their
individual deficiency income tax all corresponding for the year 1955. No costs. So ordered.

TANADA VS ANGARA
Deficiency P91.00 The emergence on January 1, 1995 of the World Trade Organization, abetted by the membership
=========== thereto of the vast majority of countries has revolutionized international business and economic
relations amongst states. It has irreversibly propelled the world towards trade liberalization and
economic globalization. Liberalization, globalization, deregulation and privatization, the third-
JOSE ROXAS millennium buzz words, are ushering in a new borderless world of business by sweeping away as
mere historical relics the heretofore traditional modes of promoting and protecting national
Net income per return P222,681.76 economies like tariffs, export subsidies, import quotas, quantitative restrictions, tax exemptions
and currency controls. Finding market niches and becoming the best in specific industries in a
market-driven and export-oriented global scenario are replacing age-old beggar-thy-neighbor
Add: 1/3 share, profits in Roxas y Cia. P153,429.15 policies that unilaterally protect weak and inefficient domestic producers of goods and
services. In the words of Peter Drucker, the well-known management guru, Increased
participation in the world economy has become the key to domestic economic growth and
Less amount reported 146,135.46 prosperity.

Brief Historical Background

To hasten worldwide recovery from the devastation wrought by the Second World War, plans for
Amount understated 7,113.69
the establishment of three multilateral institutions -- inspired by that grand political body, the
United Nations -- were discussed at Dumbarton Oaks and Bretton Woods. The first was the World
Less 1/3 share of contributions disallowed from partnership Bank (WB) which was to address the rehabilitation and reconstruction of war-ravaged and later
but allowed as deductions to partners 7,042.02 71.67 developing countries; the second, the International Monetary Fund (IMF) which was to deal with
currency problems; and the third, the International Trade Organization (ITO), which was to foster
order and predictability in world trade and to minimize unilateral protectionist policies that
invite challenge, even retaliation, from other states. However, for a variety of reasons, including
its non-ratification by the United States, the ITO, unlike the IMF and WB, never took off. What
Net income per review P222,753.43 remained was only GATT -- the General Agreement on Tariffs and Trade. GATT was a collection of
treaties governing access to the economies of treaty adherents with no institutionalized body
Less: Exemption 1,800.00 administering the agreements or dependable system of dispute settlement.

After half a century and several dizzying rounds of negotiations, principally the Kennedy Round,
the Tokyo Round and the Uruguay Round, the world finally gave birth to that administering body -
- the World Trade Organization -- with the signing of the Final Act in Marrakesh, Morocco and the
Net income subject to tax P220,953.43 ratification of the WTO Agreement by its members.[1]

Like many other developing countries, the Philippines joined WTO as a founding member with the
Tax due P102,763.00 goal, as articulated by President Fidel V. Ramos in two letters to the Senate (infra), of improving
Philippine access to foreign markets, especially its major trading partners, through the reduction
of tariffs on its exports, particularly agricultural and industrial products. The President also saw in
Tax paid 102,714.00 the WTO the opening of new opportunities for the services sector x x x, (the reduction of) costs
and uncertainty associated with exporting x x x, and (the attraction of) more investments into the
country. Although the Chief Executive did not expressly mention it in his letter, the Philippines - -
and this is of special interest to the legal profession - - will benefit from the WTO system of
dispute settlement by judicial adjudication through the independent WTO settlement bodies
called (1) Dispute Settlement Panels and (2) Appellate Tribunal.Heretofore, trade disputes were
settled mainly through negotiations where solutions were arrived at frequently on the basis of
relative bargaining strengths, and where naturally, weak and underdeveloped countries were at a
disadvantage.
The Petition in Brief
Arguing mainly (1) that the WTO requires the Philippines to place nationals and products of
member-countries on the same footing as Filipinos and local products and (2) that the WTO
intrudes, limits and/or impairs the constitutional powers of both Congress and the Supreme
Court, the instant petition before this Court assails the WTO Agreement for violating the mandate
of the 1987 Constitution to develop a self-reliant and independent national economy effectively
controlled by Filipinos x x x (to) give preference to qualified Filipinos (and to) promote the
preferential use of Filipino labor, domestic materials and locally produced goods.
Simply stated, does the Philippine Constitution prohibit Philippine participation in worldwide
trade liberalization and economic globalization? Does it prescribe Philippine integration into a
global economy that is liberalized, deregulated and privatized? These are the main questions
raised in this petition for certiorari, prohibition and mandamus under Rule 65 of the Rules of
Court praying (1) for the nullification, on constitutional grounds, of the concurrence of the
Philippine Senate in the ratification by the President of the Philippines of the Agreement
Establishing the World Trade Organization (WTO Agreement, for brevity) and (2) for the
prohibition of its implementation and enforcement through the release and utilization of public
funds, the assignment of public officials and employees, as well as the use of government
properties and resources by respondent-heads of various executive offices concerned
therewith. This concurrence is embodied in Senate Resolution No. 97, dated December 14, 1994.
The Facts
On April 15, 1994, Respondent Rizalino Navarro, then Secretary of
the Department of Trade and Industry (Secretary Navarro, for brevity), representing the
Government of the Republic of the Philippines, signed in Marrakesh, Morocco, the Final Act
Embodying the Results of the Uruguay Round of Multilateral Negotiations (Final Act, for brevity).
Services are hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII
of the Constitution.
On December 9, 1994, the President of the Philippines certified the necessity of the immediate
adoption of P.S. 1083, a resolution entitled Concurring in the Ratification of the Agreement
Establishing the World Trade Organization.[5]
On December 14, 1994, the Philippine Senate adopted Resolution No. 97 which Resolved, as it is
hereby resolved, that the Senate concur, as it hereby concurs, in the ratification by the President
of the Philippines of the Agreement Establishing the World Trade Organization.[6] The text of the
WTO Agreement is written on pages 137 et seq. of Volume I of the 36-volume Uruguay Round of
Multilateral Trade Negotiations and includes various agreements and associated legal
instruments (identified in the said Agreement as Annexes 1, 2 and 3 thereto and collectively
referred to as Multilateral Trade Agreements, for brevity) as follows:
ANNEX 1
Annex 1A: Multilateral Agreement on Trade in Goods
General Agreement on Tariffs and Trade 1994
Agreement on Agriculture
Agreement on the Application of Sanitary and
Phytosanitary Measures
Agreement on Textiles and Clothing
Agreement on Technical Barriers to Trade
Agreement on Trade-Related Investment Measures
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994
Agreement on Implementation of Article VII of the General on Tariffs and Trade 1994
Agreement on Pre-Shipment Inspection

By signing the Final Act,[2] Secretary Navarro on behalf of the Republic of the Philippines, agreed: Agreement on Rules of Origin

(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective Agreement on Imports Licensing Procedures
competent authorities, with a view to seeking approval of the Agreement in accordance with their
procedures; and Agreement on Subsidies and Coordinating Measures

(b) to adopt the Ministerial Declarations and Decisions. Agreement on Safeguards

On August 12, 1994, the members of the Philippine Senate received a letter dated August 11, 1994 Annex 1B: General Agreement on Trade in Services and Annexes
from the President of the Philippines,[3] stating among others that the Uruguay Round Final Act is
hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights
Constitution.
ANNEX 2
On August 13, 1994, the members of the Philippine Senate received another letter from the
Understanding on Rules and Procedures Governing the Settlement of Disputes
President of the Philippines[4] likewise dated August 11, 1994, which stated among others that
the Uruguay Round Final Act, the Agreement Establishing the World Trade Organization, the ANNEX 3
Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial
Trade Policy Review Mechanism
On December 16, 1994, the President of the Philippines signed[7] the Instrument of Ratification,
declaring:
NOW THEREFORE, be it known that I, FIDEL V. RAMOS, President of the Republic of the
Philippines, after having seen and considered the aforementioned Agreement Establishing the
World Trade Organization and the agreements and associated legal instruments included in
Annexes one (1), two (2) and three (3) of that Agreement which are integral parts thereof, signed
at Marrakesh, Morocco on 15 April 1994, do hereby ratify and confirm the same and every Article
and Clause thereof.
To emphasize, the WTO Agreement ratified by the President of the Philippines is composed of the
Agreement Proper and the associated legal instruments included in Annexes one (1), two (2) and
three (3) of that Agreement which are integral parts thereof.
On the other hand, the Final Act signed by Secretary Navarro embodies not only the WTO
Agreement (and its integral annexes aforementioned) but also (1) the Ministerial Declarations
and Decisions and (2) the Understanding on Commitments in Financial Services. In his
Memorandum dated May 13, 1996,[8] the Solicitor General describes these two latter documents
as follows:
The Ministerial Decisions and Declarations are twenty-five declarations and decisions on a wide
range of matters, such as measures in favor of least developed countries, notification procedures,
relationship of WTO with the International Monetary Fund (IMF), and agreements on technical
barriers to trade and on dispute settlement.
The Understanding on Commitments in Financial Services dwell on, among other things, standstill
or limitations and qualifications of commitments to existing non-conforming measures, market
access, national treatment, and definitions of non-resident supplier of financial services,
commercial presence and new financial service.
On December 29, 1994, the present petition was filed. After careful deliberation on respondents
comment and petitioners reply thereto, the Court resolved on December 12, 1995, to give due
course to the petition, and the parties thereafter filed their respective memoranda. The Court also
requested the Honorable Lilia R. Bautista, the Philippine Ambassador to the United Nations
stationed in Geneva, Switzerland, to submit a paper, hereafter referred to as Bautista Paper,[9] for
brevity, (1) providing a historical background of and (2) summarizing the said agreements.
During the Oral Argument held on August 27, 1996, the Court directed:
(a) the petitioners to submit the (1) Senate Committee Report on the matter in controversy and
(2) the transcript of proceedings/hearings in the Senate; and
(b) the Solicitor General, as counsel for respondents, to file (1) a list of Philippine treaties signed
prior to the Philippine adherence to the WTO Agreement, which derogate from Philippine
sovereignty and (2) copies of the multi-volume WTO Agreement and other documents mentioned
in the Final Act, as soon as possible.
After receipt of the foregoing documents, the Court said it would consider the case submitted for
resolution. In a Compliance dated September 16, 1996, the Solicitor General submitted a printed
copy of the 36-volume Uruguay Round of Multilateral Trade Negotiations, and in another
Compliance dated October 24, 1996, he listed the various bilateral or multilateral treaties or
international instruments involving derogation of Philippine sovereignty. Petitioners, on the other
hand, submitted their Compliance dated January 28, 1997, on January 30, 1997.
The Issues
In their Memorandum dated March 11, 1996, petitioners summarized the issues as follows:
A. Whether the petition presents a political question or is otherwise not justiciable.
B. Whether the petitioner members of the Senate who participated in the deliberations and voting
leading to the concurrence are estopped from impugning the validity of the Agreement
Establishing the World Trade Organization or of the validity of the concurrence.
C. Whether the provisions of the Agreement Establishing the World Trade Organization
contravene the provisions of Sec. 19, Article II, and Secs. 10 and 12, Article XII, all of the 1987
Philippine Constitution.
D. Whether provisions of the Agreement Establishing the World Trade Organization unduly limit,
restrict and impair Philippine sovereignty specifically the legislative power which, under Sec. 2,
Article VI, 1987 Philippine Constitution is vested in the Congress of the Philippines;
E. Whether provisions of the Agreement Establishing the World Trade Organization interfere with
the exercise of judicial power.
F. Whether the respondent members of the Senate acted in grave abuse of discretion amounting
to lack or excess of jurisdiction when they voted for concurrence in the ratification of the
constitutionally-infirm Agreement Establishing the World Trade Organization.
G. Whether the respondent members of the Senate acted in grave abuse of discretion amounting
to lack or excess of jurisdiction when they concurred only in the ratification of the Agreement
Establishing the World Trade Organization, and not with the Presidential submission which
included the Final Act, Ministerial Declaration and Decisions, and the Understanding on
Commitments in Financial Services.
On the other hand, the Solicitor General as counsel for respondents synthesized the several issues
raised by petitioners into the following:[10]
1. Whether or not the provisions of the Agreement Establishing the World Trade Organization and
the Agreements and Associated Legal Instruments included in Annexes one (1), two (2) and three
(3) of that agreement cited by petitioners directly contravene or undermine the letter, spirit and
intent of Section 19, Article II and Sections 10 and 12, Article XII of the 1987 Constitution.
2. Whether or not certain provisions of the Agreement unduly limit, restrict or impair the exercise
of legislative power by Congress.
3. Whether or not certain provisions of the Agreement impair the exercise of judicial power by
this Honorable Court in promulgating the rules of evidence.
4. Whether or not the concurrence of the Senate in the ratification by the President of the
Philippines of the Agreement establishing the World Trade Organization implied rejection of the
treaty embodied in the Final Act.
By raising and arguing only four issues against the seven presented by petitioners, the Solicitor
General has effectively ignored three, namely: (1) whether the petition presents a political
question or is otherwise not justiciable; (2) whether petitioner-members of the Senate (Wigberto
E. Taada and Anna Dominique Coseteng) are estopped from joining this suit; and (3) whether the
respondent-members of the Senate acted in grave abuse of discretion when they voted for
concurrence in the ratification of the WTO Agreement. The foregoing notwithstanding, this Court
resolved to deal with these three issues thus:
(1) The political question issue -- being very fundamental and vital, and being a matter that
probes into the very jurisdiction of this Court to hear and decide this case -- was deliberated upon
by the Court and will thus be ruled upon as the first issue;
(2) The matter of estoppel will not be taken up because this defense is waivable and the
respondents have effectively waived it by not pursuing it in any of their pleadings; in any event,
this issue, even if ruled in respondents favor, will not cause the petitions dismissal as there are
petitioners other than the two senators, who are not vulnerable to the defense of estoppel; and
(3) The issue of alleged grave abuse of discretion on the part of the respondent senators will be
taken up as an integral part of the disposition of the four issues raised by the Solicitor General.
During its deliberations on the case, the Court noted that the respondents did not question
the locus standi of petitioners. Hence, they are also deemed to have waived the benefit of such
issue. They probably realized that grave constitutional issues, expenditures of public funds and
serious international commitments of the nation are involved here, and that transcendental public
interest requires that the substantive issues be met head on and decided on the merits, rather
than skirted or deflected by procedural matters.[11]
To recapitulate, the issues that will be ruled upon shortly are:
(1) DOES THE PETITION PRESENT A JUSTICIABLE CONTROVERSY? OTHERWISE STATED, DOES
THE PETITION INVOLVE A POLITICAL QUESTION OVER WHICH THIS COURT HAS NO
JURISDICTION?
(2) DO THE PROVISIONS OF THE WTO AGREEMENT AND ITS THREE ANNEXES CONTRAVENE
SEC. 19, ARTICLE II, AND SECS. 10 AND 12, ARTICLE XII, OF THE PHILIPPINE CONSTITUTION?
(3) DO THE PROVISIONS OF SAID AGREEMENT AND ITS ANNEXES LIMIT, RESTRICT, OR IMPAIR
THE EXERCISE OF LEGISLATIVE POWER BY CONGRESS?
(4) DO SAID PROVISIONS UNDULY IMPAIR OR INTERFERE WITH THE EXERCISE OF JUDICIAL
POWER BY THIS COURT IN PROMULGATING RULES ON EVIDENCE?
(5) WAS THE CONCURRENCE OF THE SENATE IN THE WTO AGREEMENT AND ITS ANNEXES
SUFFICIENT AND/OR VALID, CONSIDERING THAT IT DID NOT INCLUDE THE FINAL ACT,
MINISTERIAL DECLARATIONS AND DECISIONS, AND THE UNDERSTANDING ON COMMITMENTS
IN FINANCIAL SERVICES?
The First Issue: Does the Court Have Jurisdiction Over the Controversy?
In seeking to nullify an act of the Philippine Senate on the ground that it contravenes the
Constitution, the petition no doubt raises a justiciable controversy. Where an action of the
legislative branch is seriously alleged to have infringed the Constitution, it becomes not only the
right but in fact the duty of the judiciary to settle the dispute. The question thus posed is judicial
rather than political. The duty (to adjudicate) remains to assure that the supremacy of the
Constitution is upheld.[12] Once a controversy as to the application or interpretation of a
constitutional provision is raised before this Court (as in the instant case), it becomes a legal issue
which the Court is bound by constitutional mandate to decide.[13]
The jurisdiction of this Court to adjudicate the matters[14] raised in the petition is clearly set out
in the 1987 Constitution,[15] as follows:
Judicial power includes the duty of the courts of justice to settle actual controversies involving
rights which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the government.
The foregoing text emphasizes the judicial departments duty and power to strike down grave
abuse of discretion on the part of any branch or instrumentality of government including
Congress. It is an innovation in our political law.[16] As explained by former Chief Justice Roberto
Concepcion,[17] the judiciary is the final arbiter on the question of whether or not a branch of
government or any of its officials has acted without jurisdiction or in excess of jurisdiction or so
capriciously as to constitute an abuse of discretion amounting to excess of jurisdiction. This is not
only a judicial power but a duty to pass judgment on matters of this nature.
As this Court has repeatedly and firmly emphasized in many cases,[18] it will not shirk, digress
from or abandon its sacred duty and authority to uphold the Constitution in matters that involve
grave abuse of discretion brought before it in appropriate cases, committed by any officer, agency,
instrumentality or department of the government.
As the petition alleges grave abuse of discretion and as there is no other plain, speedy or adequate
remedy in the ordinary course of law, we have no hesitation at all in holding that this petition
should be given due course and the vital questions raised therein ruled upon under Rule 65 of the
Rules of Court. Indeed, certiorari, prohibition and mandamus are appropriate remedies to raise
constitutional issues and to review and/or prohibit/nullify, when proper, acts of legislative and
executive officials. On this, we have no equivocation.
We should stress that, in deciding to take jurisdiction over this petition, this Court will not review
the wisdom of the decision of the President and the Senate in enlisting the country into the WTO,
or pass upon the merits of trade liberalization as a policy espoused by said international
body. Neither will it rule on the propriety of the governments economic policy of
reducing/removing tariffs, taxes, subsidies, quantitative restrictions, and other import/trade
barriers. Rather, it will only exercise its constitutional duty to determine whether or not there had
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the
Senate in ratifying the WTO Agreement and its three annexes.
Second Issue: The WTO Agreement and Economic Nationalism
This is the lis mota, the main issue, raised by the petition.
Petitioners vigorously argue that the letter, spirit and intent of the Constitution mandating
economic nationalism are violated by the so-called parity provisions and national treatment
clauses scattered in various parts not only of the WTO Agreement and its annexes but also in the
Ministerial Decisions and Declarations and in the Understanding on Commitments in Financial
Services.
Specifically, the flagship constitutional provisions referred to are Sec. 19, Article II, and Secs. 10
and 12, Article XII, of the Constitution, which are worded as follows:
Article II
DECLARATION OF PRINCIPLES AND STATE POLICIES
xx xx xx xx
Sec. 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.
xx xx xx xx
Article XII
NATIONAL ECONOMY AND PATRIMONY
xx xx xx xx
Sec. 10. x x x. The Congress shall enact measures that will encourage the formation and operation
of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony,
the State shall give preference to qualified Filipinos.
xx xx xx xx
Sec. 12. The State shall promote the preferential use of Filipino labor, domestic materials and
locally produced goods, and adopt measures that help make them competitive.
Petitioners aver that these sacred constitutional principles are desecrated by the following WTO
provisions quoted in their memorandum:[19]
a) In the area of investment measures related to trade in goods (TRIMS, for brevity):
Article 2
National Treatment and Quantitative Restrictions.
1. Without prejudice to other rights and obligations under GATT 1994. no Member shall apply any
TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.
2. An Illustrative list of TRIMS that are inconsistent with the obligations of general elimination of
quantitative restrictions provided for in paragraph I of Article XI of GATT 1994 is contained in the
Annex to this Agreement. (Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay
Round, Legal Instruments, p.22121, emphasis supplied).
The Annex referred to reads as follows:
ANNEX
Illustrative List
1. TRIMS that are inconsistent with the obligation of national treatment provided for in paragraph
4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic
law or under administrative rulings, or compliance with which is necessary to obtain an
advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from any domestic
source, whether specified in terms of particular products, in terms of volume or value of products,
or in terms of proportion of volume or value of its local production; or
(b) that an enterprises purchases or use of imported products be limited to an amount related to
the volume or value of local products that it exports.
2. TRIMS that are inconsistent with the obligations of general elimination of quantitative
restrictions provided for in paragraph 1 of Article XI of GATT 1994 include those which are
mandatory or enforceable under domestic laws or under administrative rulings, or compliance
with which is necessary to obtain an advantage, and which restrict:
(a) the importation by an enterprise of products used in or related to the local production that it
exports;
(b) the importation by an enterprise of products used in or related to its local production by
restricting its access to foreign exchange inflows attributable to the enterprise; or
(c) the exportation or sale for export specified in terms of particular products, in terms of volume
or value of products, or in terms of a preparation of volume or value of its local
production. (Annex to the Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay
Round Legal Documents, p.22125, emphasis supplied).
The paragraph 4 of Article III of GATT 1994 referred to is quoted as follows:
The products of the territory of any contracting party imported into the territory of any other
contracting party shall be accorded treatment no less favorable than that accorded to like
products of national origin in respect of laws, regulations and requirements affecting their
internal sale, offering for sale, purchase, transportation, distribution or use. the provisions of this
paragraph shall not prevent the application of differential internal transportation charges which
are based exclusively on the economic operation of the means of transport and not on the
nationality of the product. (Article III, GATT 1947, as amended by the Protocol Modifying Part II,
and Article XXVI of GATT, 14 September 1948, 62 UMTS 82-84 in relation to paragraph 1(a) of the
General Agreement on Tariffs and Trade 1994, Vol. 1, Uruguay Round, Legal Instruments p.177,
emphasis supplied).
b) In the area of trade related aspects of intellectual property rights (TRIPS, for brevity):
Each Member shall accord to the nationals of other Members treatment no less favourable than
that it accords to its own nationals with regard to the protection of intellectual property... (par. 1,
Article 3, Agreement on Trade-Related Aspect of Intellectual Property rights, Vol. 31, Uruguay
Round, Legal Instruments, p.25432 (emphasis supplied)
(c) In the area of the General Agreement on Trade in Services:
National Treatment
1. In the sectors inscribed in its schedule, and subject to any conditions and qualifications set out
therein, each Member shall accord to services and service suppliers of any other Member, in
respect of all measures affecting the supply of services, treatment no less favourable than it
accords to its own like services and service suppliers.
2. A Member may meet the requirement of paragraph I by according to services and service
suppliers of any other Member, either formally identical treatment or formally different treatment
to that it accords to its own like services and service suppliers.
3. Formally identical or formally different treatment shall be considered to be less favourable if it
modifies the conditions of completion in favour of services or service suppliers of the Member
compared to like services or service suppliers of any other Member. (Article XVII, General
Agreement on Trade in Services, Vol. 28, Uruguay Round Legal Instruments, p.22610 emphasis
supplied).
It is petitioners position that the foregoing national treatment and parity provisions of the WTO
Agreement place nationals and products of member countries on the same footing as Filipinos and
local products, in contravention of the Filipino First policy of the Constitution. They allegedly
render meaningless the phrase effectively controlled by Filipinos. The constitutional conflict
becomes more manifest when viewed in the context of the clear duty imposed on the Philippines
as a WTO member to ensure the conformity of its laws, regulations and administrative procedures
with its obligations as provided in the annexed agreements.[20] Petitioners further argue that
these provisions contravene constitutional limitations on the role exports play in national
development and negate the preferential treatment accorded to Filipino labor, domestic materials
and locally produced goods.
On the other hand, respondents through the Solicitor General counter (1) that such
Charter provisions are not self-executing and merely set out general policies; (2) that these
nationalistic portions of the Constitution invoked by petitioners should not be read in isolation
but should be related to other relevant provisions of Art. XII, particularly Secs. 1 and 13 thereof;
(3) that read properly, the cited WTO clauses do not conflict with the Constitution; and (4) that
the WTO Agreement contains sufficient provisions to protect developing countries like the
Philippines from the harshness of sudden trade liberalization.
We shall now discuss and rule on these arguments.
Declaration of Principles Not Self-Executing
By its very title, Article II of the Constitution is a declaration of principles and state policies. The
counterpart of this article in the 1935 Constitution[21] is called the basic political creed of the
nation by Dean Vicente Sinco.[22] These principles in Article II are not intended to be self-
executing principles ready for enforcement through the courts.[23] They are used by the judiciary
as aids or as guides in the exercise of its power of judicial review, and by the legislature in its
enactment of laws. As held in the leading case of Kilosbayan, Incorporated vs. Morato,[24] the
principles and state policies enumerated in Article II and some sections of Article XII are not self-
executing provisions, the disregard of which can give rise to a cause of action in the courts.They
do not embody judicially enforceable constitutional rights but guidelines for legislation.
In the same light, we held in Basco vs. Pagcor[25] that broad constitutional principles need
legislative enactments to implement them, thus:
On petitioners allegation that P.D. 1869 violates Sections 11 (Personal Dignity) 12 (Family) and
13 (Role of Youth) of Article II; Section 13 (Social Justice) of Article XIII and Section 2 (Educational
Values) of Article XIV of the 1987 Constitution, suffice it to state also that these are merely
statements of principles and policies. As such, they are basically not self-executing, meaning a law
should be passed by Congress to clearly define and effectuate such principles.
In general, therefore, the 1935 provisions were not intended to be self-executing principles ready
for enforcement through the courts. They were rather directives addressed to the executive and
to the legislature. If the executive and the legislature failed to heed the directives of the article, the
available remedy was not judicial but political. The electorate could express their displeasure with
the failure of the executive and the legislature through the language of the ballot. (Bernas, Vol. II,
p. 2).
The reasons for denying a cause of action to an alleged infringement of broad constitutional
principles are sourced from basic considerations of due process and the lack of judicial authority
to wade into the uncharted ocean of social and economic policy making. Mr. Justice Florentino P.
Feliciano in his concurring opinion in Oposa vs. Factoran, Jr.,[26] explained these reasons as
follows:
My suggestion is simply that petitioners must, before the trial court, show a more specific legal
right -- a right cast in language of a significantly lower order of generality than Article II (15) of
the Constitution -- that is or may be violated by the actions, or failures to act, imputed to the
public respondent by petitioners so that the trial court can validly render judgment granting all or
part of the relief prayed for. To my mind, the court should be understood as simply saying that
such a more specific legal right or rights may well exist in our corpus of law, considering the
general policy principles found in the Constitution and the existence of the Philippine
Environment Code, and that the trial court should have given petitioners an effective opportunity
so to demonstrate, instead of aborting the proceedings on a motion to dismiss.
It seems to me important that the legal right which is an essential component of a cause of action
be a specific, operable legal right, rather than a constitutional or statutory policy, for at least two
(2) reasons.One is that unless the legal right claimed to have been violated or disregarded is given
specification in operational terms, defendants may well be unable to defend themselves
intelligently and effectively; in other words, there are due process dimensions to this matter.
The second is a broader-gauge consideration -- where a specific violation of law or applicable
regulation is not alleged or proved, petitioners can be expected to fall back on the expanded
conception of judicial power in the second paragraph of Section 1 of Article VIII of the
Constitution which reads:
Section 1. x x x
Judicial power includes the duty of the courts of justice to settle actual controversies involving
rights which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government. (Emphases supplied)
When substantive standards as general as the right to a balanced and healthy ecology and the
right to health are combined with remedial standards as broad ranging as a grave abuse of
discretion amounting to lack or excess of jurisdiction, the result will be, it is respectfully
submitted, to propel courts into the uncharted ocean of social and economic policy making. At
least in respect of the vast area of environmental protection and management, our courts have no
claim to special technical competence and experience and professional qualification. Where no
specific, operable norms and standards are shown to exist, then the policy making departments --
the legislative and executive departments -- must be given a real and effective opportunity to
fashion and promulgate those norms and standards, and to implement them before the courts
should intervene.
Economic Nationalism Should Be Read with Other Constitutional Mandates to Attain Balanced
Development of Economy
On the other hand, Secs. 10 and 12 of Article XII, apart from merely laying down general principles
relating to the national economy and patrimony, should be read and understood in relation to the
other sections in said article, especially Secs. 1 and 13 thereof which read:
Section 1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity as the key to raising the
quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human
and natural resources, and which are competitive in both domestic and foreign markets. However,
the State shall protect Filipino enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be
given optimum opportunity to develop. x x x
xxxxxxxxx
Sec. 13. The State shall pursue a trade policy that serves the general welfare and utilizes all forms
and arrangements of exchange on the basis of equality and reciprocity.
As pointed out by the Solicitor General, Sec. 1 lays down the basic goals of national economic
development, as follows:
1. A more equitable distribution of opportunities, income and wealth;
2. A sustained increase in the amount of goods and services provided by the nation for the benefit
of the people; and
3. An expanding productivity as the key to raising the quality of life for all especially the
underprivileged.
With these goals in context, the Constitution then ordains the ideals of economic nationalism (1)
by expressing preference in favor of qualified Filipinos in the grant of rights, privileges and
concessions covering the national economy and patrimony[27] and in the use of Filipino labor,
domestic materials and locally-produced goods; (2) by mandating the State to adopt measures
that help make them competitive;[28] and (3) by requiring the State to develop a self-reliant and
independent national economy effectively controlled by Filipinos.[29] In similar language, the
Constitution takes into account the realities of the outside world as it requires the pursuit of a
trade policy that serves the general welfare and utilizes all forms and arrangements of exchange
on the basis of equality and reciprocity;[30] and speaks of industries which are competitive in
both domestic and foreign markets as well as of the protection of Filipino enterprises against
unfair foreign competition and trade practices.
It is true that in the recent case of Manila Prince Hotel vs. Government Service Insurance System,
et al.,[31] this Court held that Sec. 10, second par., Art. XII of the 1987 Constitution is a mandatory,
positive command which is complete in itself and which needs no further guidelines or
implementing laws or rules for its enforcement. From its very words the provision does not
require any legislation to put it in operation. It is per se judicially enforceable. However, as the
constitutional provision itself states, it is enforceable only in regard to the grants of rights,
privileges and concessions covering national economy and patrimony and not to every aspect of
trade and commerce. It refers to exceptions rather than the rule. The issue here is not whether
this paragraph of Sec. 10 of Art. XII is self-executing or not. Rather, the issue is whether, as a rule,
there are enough balancing provisions in the Constitution to allow the Senate to ratify the
Philippine concurrence in the WTO Agreement. And we hold that there are.
All told, while the Constitution indeed mandates a bias in favor of Filipino goods, services, labor
and enterprises, at the same time, it recognizes the need for business exchange with the rest of the
world on the bases of equality and reciprocity and limits protection of Filipino enterprises only
against foreign competition and trade practices that are unfair.[32] In other words, the
Constitution did not intend to pursue an isolationist policy. It did not shut out foreign
investments, goods and services in the development of the Philippine economy. While the
Constitution does not encourage the unlimited entry of foreign goods, services and investments
into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of
equality and reciprocity, frowning only on foreign competition that is unfair.
WTO Recognizes Need to Protect Weak Economies
Upon the other hand, respondents maintain that the WTO itself has some built-in advantages to
protect weak and developing economies, which comprise the vast majority of its members. Unlike
in the UN where major states have permanent seats and veto powers in the Security Council, in
the WTO, decisions are made on the basis of sovereign equality, with each members vote equal in
weight to that of any other. There is no WTO equivalent of the UN Security Council.
WTO decides by consensus whenever possible, otherwise, decisions of the Ministerial Conference
and the General Council shall be taken by the majority of the votes cast, except in cases of
interpretation of the Agreement or waiver of the obligation of a member which would require
three fourths vote. Amendments would require two thirds vote in general. Amendments to MFN
provisions and the Amendments provision will require assent of all members. Any member may
withdraw from the Agreement upon the expiration of six months from the date of notice of
withdrawals.[33]
Hence, poor countries can protect their common interests more effectively through the WTO than
through one-on-one negotiations with developed countries. Within the WTO, developing
countries can form powerful blocs to push their economic agenda more decisively than outside
the Organization. This is not merely a matter of practical alliances but a negotiating strategy
rooted in law. Thus, the basic principles underlying the WTO Agreement recognize the need of
developing countries like the Philippines to share in the growth in international
trade commensurate with the needs of their economic development. These basic principles are
found in the preamble[34] of the WTO Agreement as follows:
The Parties to this Agreement,
Recognizing that their relations in the field of trade and economic endeavour should be conducted
with a view to raising standards of living, ensuring full employment and a large and steadily
growing volume of real income and effective demand, and expanding the production of and trade
in goods and services, while allowing for the optimal use of the worlds resources in accordance
with the objective of sustainable development, seeking both to protect and preserve the
environment and to enhance the means for doing so in a manner consistent with their respective
needs and concerns at different levels of economic development,
Recognizing further that there is need for positive efforts designed to ensure that developing
countries, and especially the least developed among them, secure a share in the growth in
international trade commensurate with the needs of their economic development,
Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to
trade and to the elimination of discriminatory treatment in international trade relations,
Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system
encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization
efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations,
Determined to preserve the basic principles and to further the objectives underlying this
multilateral trading system, x x x. (underscoring supplied.)
Specific WTO Provisos Protect Developing Countries
So too, the Solicitor General points out that pursuant to and consistent with the foregoing basic
principles, the WTO Agreement grants developing countries a more lenient treatment, giving their
domestic industries some protection from the rush of foreign competition. Thus, with respect to
tariffs in general, preferential treatment is given to developing countries in terms of the amount of
tariff reduction and the period within which the reduction is to be spread out. Specifically, GATT
requires an average tariff reduction rate of 36% for developed countries to be effected within
a period of six (6) years while developing countries -- including the Philippines -- are required to
effect an average tariff reduction of only 24% within ten (10) years.
In respect to domestic subsidy, GATT requires developed countries to reduce domestic support to
agricultural products by 20% over six (6) years, as compared to only 13% for developing
countries to be effected within ten (10) years.
In regard to export subsidy for agricultural products, GATT requires developed countries to
reduce their budgetary outlays for export subsidy by 36% and export volumes receiving export
subsidy by 21% within a period of six (6) years. For developing countries, however, the reduction
rate is only two-thirds of that prescribed for developed countries and a longer period of ten (10)
years within which to effect such reduction.
Moreover, GATT itself has provided built-in protection from unfair foreign competition and trade
practices including anti-dumping measures, countervailing measures and safeguards against
import surges. Where local businesses are jeopardized by unfair foreign competition, the
Philippines can avail of these measures. There is hardly therefore any basis for the statement that
under the WTO, local industries and enterprises will all be wiped out and that Filipinos will be
deprived of control of the economy. Quite the contrary, the weaker situations of developing
nations like the Philippines have been taken into account; thus, there would be no basis to say that
in joining the WTO, the respondents have gravely abused their discretion.True, they have made a
bold decision to steer the ship of state into the yet uncharted sea of economic liberalization. But
such decision cannot be set aside on the ground of grave abuse of discretion, simply because we
disagree with it or simply because we believe only in other economic policies. As earlier stated,
the Court in taking jurisdiction of this case will not pass upon the advantages and disadvantages
of trade liberalization as an economic policy. It will only perform its constitutional duty of
determining whether the Senate committed grave abuse of discretion.
Constitution Does Not Rule Out Foreign Competition
Furthermore, the constitutional policy of a self-reliant and independent national
economy[35] does not necessarily rule out the entry of foreign investments, goods and services. It
contemplates neither economic seclusion nor mendicancy in the international community. As
explained by Constitutional Commissioner Bernardo Villegas, sponsor of this constitutional
policy:
Economic self-reliance is a primary objective of a developing country that is keenly aware of
overdependence on external assistance for even its most basic needs. It does not mean autarky or
economic seclusion; rather, it means avoiding mendicancy in the international
community. Independence refers to the freedom from undue foreign control of the national
economy, especially in such strategic industries as in the development of natural resources and
public utilities.[36]
The WTO reliance on most favored nation, national treatment, and trade without discrimination
cannot be struck down as unconstitutional as in fact they are rules of equality and reciprocity that
apply to all WTO members. Aside from envisioning a trade policy based on equality and
reciprocity,[37] the fundamental law encourages industries that are competitive in both domestic
and foreign markets, thereby demonstrating a clear policy against a sheltered domestic trade
environment, but one in favor of the gradual development of robust industries that can compete
with the best in the foreign markets. Indeed, Filipino managers and Filipino enterprises have
shown capability and tenacity to compete internationally. And given a free trade environment,
Filipino entrepreneurs and managers in Hongkong have demonstrated the Filipino capacity to
grow and to prosper against the best offered under a policy of laissez faire.
Constitution Favors Consumers, Not Industries or Enterprises
The Constitution has not really shown any unbalanced bias in favor of any business or enterprise,
nor does it contain any specific pronouncement that Filipino companies should be pampered with
a total proscription of foreign competition. On the other hand, respondents claim that WTO/GATT
aims to make available to the Filipino consumer the best goods and services obtainable anywhere
in the world at the most reasonable prices. Consequently, the question boils down to whether
WTO/GATT will favor the general welfare of the public at large.
Will adherence to the WTO treaty bring this ideal (of favoring the general welfare) to reality?
Will WTO/GATT succeed in promoting the Filipinos general welfare because it will -- as promised
by its promoters -- expand the countrys exports and generate more employment?
Will it bring more prosperity, employment, purchasing power and quality products at the most
reasonable rates to the Filipino public?
The responses to these questions involve judgment calls by our policy makers, for which they are
answerable to our people during appropriate electoral exercises. Such questions and the answers
thereto are not subject to judicial pronouncements based on grave abuse of discretion.
Constitution Designed to Meet Future Events and Contingencies
No doubt, the WTO Agreement was not yet in existence when the Constitution was drafted and
ratified in 1987. That does not mean however that the Charter is necessarily flawed in the sense
that its framers might not have anticipated the advent of a borderless world of business. By the
same token, the United Nations was not yet in existence when the 1935 Constitution became
effective. Did that necessarily mean that the then Constitution might not have contemplated a
diminution of the absoluteness of sovereignty when the Philippines signed the UN Charter,
thereby effectively surrendering part of its control over its foreign relations to the decisions of
various UN organs like the Security Council?
It is not difficult to answer this question. Constitutions are designed to meet not only the vagaries
of contemporary events. They should be interpreted to cover even future and unknown
circumstances. It is to the credit of its drafters that a Constitution can withstand the assaults of
bigots and infidels but at the same time bend with the refreshing winds of change necessitated by
unfolding events. As one eminent political law writer and respected jurist[38] explains:
The Constitution must be quintessential rather than superficial, the root and not the blossom, the
base and framework only of the edifice that is yet to rise. It is but the core of the dream that must
take shape, not in a twinkling by mandate of our delegates, but slowly in the crucible of Filipino
minds and hearts, where it will in time develop its sinews and gradually gather its strength and
finally achieve its substance. In fine, the Constitution cannot, like the goddess Athena, rise full-
grown from the brow of the Constitutional Convention, nor can it conjure by mere fiat an instant
Utopia. It must grow with the society it seeks to re-structure and march apace with the progress
of the race, drawing from the vicissitudes of history the dynamism and vitality that will keep it, far
from becoming a petrified rule, a pulsing, living law attuned to the heartbeat of the nation.
Third Issue: The WTO Agreement and Legislative Power
The WTO Agreement provides that (e)ach Member shall ensure the conformity of its laws,
regulations and administrative procedures with its obligations as provided in the annexed
Agreements.[39] Petitioners maintain that this undertaking unduly limits, restricts and impairs
Philippine sovereignty, specifically the legislative power which under Sec. 2, Article VI of the 1987
Philippine Constitution is vested in the Congress of the Philippines. It is an assault on the
sovereign powers of the Philippines because this means that Congress could not pass legislation
that will be good for our national interest and general welfare if such legislation will not conform
with the WTO Agreement, which not only relates to the trade in goods x x x but also to the flow of
investments and money x x x as well as to a whole slew of agreements on socio-cultural matters x
x x.[40]
More specifically, petitioners claim that said WTO proviso derogates from the power to tax, which
is lodged in the Congress.[41] And while the Constitution allows Congress to authorize the
President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts, such authority is subject to specified limits and x x x such limitations and
restrictions as Congress may provide,[42] as in fact it did under Sec. 401 of the Tariff and Customs
Code.
Sovereignty Limited by International Law and Treaties
This Court notes and appreciates the ferocity and passion by which petitioners stressed their
arguments on this issue. However, while sovereignty has traditionally been deemed absolute and
all-encompassing on the domestic level, it is however subject to restrictions and limitations
voluntarily agreed to by the Philippines, expressly or impliedly, as a member of the family of
nations. Unquestionably, the Constitution did not envision a hermit-type isolation of the country
from the rest of the world. In its Declaration of Principles and State Policies, the Constitution
adopts the generally accepted principles of international law as part of the law of the land, and
adheres to the policy of peace, equality, justice, freedom, cooperation and amity, with all
nations."[43] By the doctrine of incorporation, the country is bound by generally accepted
principles of international law, which are considered to be automatically part of our own
laws.[44] One of the oldest and most fundamental rules in international law is pacta sunt
servanda -- international agreements must be performed in good faith. A treaty engagement is not
a mere moral obligation but creates a legally binding obligation on the parties x x x. A state which
has contracted valid international obligations is bound to make in its legislations such
modifications as may be necessary to ensure the fulfillment of the obligations undertaken.[45]
By their inherent nature, treaties really limit or restrict the absoluteness of sovereignty. By their
voluntary act, nations may surrender some aspects of their state power in exchange for greater
benefits granted by or derived from a convention or pact. After all, states, like individuals, live
with coequals, and in pursuit of mutually covenanted objectives and benefits, they also commonly
agree to limit the exercise of their otherwise absolute rights. Thus, treaties have been used to
record agreements between States concerning such widely diverse matters as, for example, the
lease of naval bases, the sale or cession of territory, the termination of war, the regulation of
conduct of hostilities, the formation of alliances, the regulation of commercial relations, the
settling of claims, the laying down of rules governing conduct in peace and the establishment of
international organizations.[46] The sovereignty of a state therefore cannot in fact and in reality
be considered absolute. Certain restrictions enter into the picture: (1) limitations imposed by the
very nature of membership in the family of nations and (2) limitations imposed by treaty
stipulations. As aptly put by John F. Kennedy, Today, no nation can build its destiny alone. The age
of self-sufficient nationalism is over. The age of interdependence is here.[47]
UN Charter and Other Treaties Limit Sovereignty
Thus, when the Philippines joined the United Nations as one of its 51 charter members, it
consented to restrict its sovereign rights under the concept of sovereignty as auto-limitation.47-
A Under Article 2 of the UN Charter, (a)ll members shall give the United Nations every assistance
in any action it takes in accordance with the present Charter, and shall refrain from giving
assistance to any state against which the United Nations is taking preventive or enforcement
action. Such assistance includes payment of its corresponding share not merely in administrative
expenses but also in expenditures for the peace-keeping operations of the organization. In its
advisory opinion of July 20, 1961, the International Court of Justice held that money used by the
United Nations Emergency Force in the Middle East and in the Congo were expenses of the United
Nations under Article 17, paragraph 2, of the UN Charter. Hence, all its members must bear their
corresponding share in such expenses. In this sense, the Philippine Congress is restricted in its
power to appropriate. It is compelled to appropriate funds whether it agrees with such peace-
keeping expenses or not. So too, under Article 105 of the said Charter, the UN and its
representatives enjoy diplomatic privileges and immunities, thereby limiting again the exercise of
sovereignty of members within their own territory. Another example: although sovereign equality
and domestic jurisdiction of all members are set forth as underlying principles in the UN Charter,
such provisos are however subject to enforcement measures decided by the Security Council for
the maintenance of international peace and security under Chapter VII of the Charter. A final
example: under Article 103, (i)n the event of a conflict between the obligations of the Members of
the United Nations under the present Charter and their obligations under any other international
agreement, their obligation under the present charter shall prevail, thus unquestionably denying
the Philippines -- as a member -- the sovereign power to make a choice as to which of conflicting
obligations, if any, to honor.
Apart from the UN Treaty, the Philippines has entered into many other international pacts -- both
bilateral and multilateral -- that involve limitations on Philippine sovereignty. These are
enumerated by the Solicitor General in his Compliance dated October 24, 1996, as follows:
(a) Bilateral convention with the United States regarding taxes on income, where the Philippines
agreed, among others, to exempt from tax, income received in the Philippines by, among others,
the Federal Reserve Bank of the United States, the Export/Import Bank of the United States, the
Overseas Private Investment Corporation of the United States. Likewise, in said convention,
wages, salaries and similar remunerations paid by the United States to its citizens for labor and
personal services performed by them as employees or officials of the United States are exempt
from income tax by the Philippines.
(b) Bilateral agreement with Belgium, providing, among others, for the avoidance of double
taxation with respect to taxes on income.
(c) Bilateral convention with the Kingdom of Sweden for the avoidance of double taxation.
(d) Bilateral convention with the French Republic for the avoidance of double taxation.
(e) Bilateral air transport agreement with Korea where the Philippines agreed to exempt from all
customs duties, inspection fees and other duties or taxes aircrafts of South Korea and the regular
equipment, spare parts and supplies arriving with said aircrafts.
(f) Bilateral air service agreement with Japan, where the Philippines agreed to exempt from
customs duties, excise taxes, inspection fees and other similar duties, taxes or charges fuel,
lubricating oils, spare parts, regular equipment, stores on board Japanese aircrafts while on
Philippine soil.
(g) Bilateral air service agreement with Belgium where the Philippines granted Belgian air
carriers the same privileges as those granted to Japanese and Korean air carriers under separate
air service agreements.
(h) Bilateral notes with Israel for the abolition of transit and visitor visas where the Philippines
exempted Israeli nationals from the requirement of obtaining transit or visitor visas for a sojourn
in the Philippines not exceeding 59 days.
(I) Bilateral agreement with France exempting French nationals from the requirement of
obtaining transit and visitor visa for a sojourn not exceeding 59 days.
(j) Multilateral Convention on Special Missions, where the Philippines agreed that premises of
Special Missions in the Philippines are inviolable and its agents can not enter said premises
without consent of the Head of Mission concerned. Special Missions are also exempted from
customs duties, taxes and related charges.
(k) Multilateral Convention on the Law of Treaties. In this convention, the Philippines agreed to be
governed by the Vienna Convention on the Law of Treaties.
(l) Declaration of the President of the Philippines accepting compulsory jurisdiction of the
International Court of Justice. The International Court of Justice has jurisdiction in all legal
disputes concerning the interpretation of a treaty, any question of international law, the existence
of any fact which, if established, would constitute a breach of international obligation.
In the foregoing treaties, the Philippines has effectively agreed to limit the exercise of its
sovereign powers of taxation, eminent domain and police power. The underlying consideration in
this partial surrender of sovereignty is the reciprocal commitment of the other contracting states
in granting the same privilege and immunities to the Philippines, its officials and its citizens. The
same reciprocity characterizes the Philippine commitments under WTO-GATT.
International treaties, whether relating to nuclear disarmament, human rights, the environment,
the law of the sea, or trade, constrain domestic political sovereignty through the assumption of
external obligations. But unless anarchy in international relations is preferred as an alternative, in
most cases we accept that the benefits of the reciprocal obligations involved outweigh the costs
associated with any loss of political sovereignty. (T)rade treaties that structure relations by
reference to durable, well-defined substantive norms and objective dispute resolution procedures
reduce the risks of larger countries exploiting raw economic power to bully smaller countries, by
subjecting power relations to some form of legal ordering. In addition, smaller countries typically
stand to gain disproportionately from trade liberalization. This is due to the simple fact that
liberalization will provide access to a larger set of potential new trading relationship than in case
of the larger country gaining enhanced success to the smaller countrys market.[48]
The point is that, as shown by the foregoing treaties, a portion of sovereignty may be waived
without violating the Constitution, based on the rationale that the Philippines adopts the generally
accepted principles of international law as part of the law of the land and adheres to the policy of
x x x cooperation and amity with all nations.
Fourth Issue: The WTO Agreement and Judicial Power
Petitioners aver that paragraph 1, Article 34 of the General Provisions and Basic Principles of the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)[49]intrudes on the
power of the Supreme Court to promulgate rules concerning pleading, practice and
procedures.[50]
To understand the scope and meaning of Article 34, TRIPS,[51] it will be fruitful to restate its full
text as follows:
Article 34
Process Patents: Burden of Proof
1. For the purposes of civil proceedings in respect of the infringement of the rights of the owner
referred to in paragraph 1(b) of Article 28, if the subject matter of a patent is a process for
obtaining a product, the judicial authorities shall have the authority to order the defendant to
prove that the process to obtain an identical product is different from the patented
process. Therefore, Members shall provide, in at least one of the following circumstances, that any
identical product when produced without the consent of the patent owner shall, in the absence of
proof to the contrary, be deemed to have been obtained by the patented process:
(a) if the product obtained by the patented process is new;
(b) if there is a substantial likelihood that the identical product was made by the process and the
owner of the patent has been unable through reasonable efforts to determine the process actually
used.
2. Any Member shall be free to provide that the burden of proof indicated in paragraph 1 shall be
on the alleged infringer only if the condition referred to in subparagraph (a) is fulfilled or only if
the condition referred to in subparagraph (b) is fulfilled.
3. In the adduction of proof to the contrary, the legitimate interests of defendants in protecting
their manufacturing and business secrets shall be taken into account.
From the above, a WTO Member is required to provide a rule of disputable (note the words in the
absence of proof to the contrary) presumption that a product shown to be identical to one
produced with the use of a patented process shall be deemed to have been obtained by the
(illegal) use of the said patented process, (1) where such product obtained by the patented
product is new, or (2) where there is substantial likelihood that the identical product was made
with the use of the said patented process but the owner of the patent could not determine the
exact process used in obtaining such identical product. Hence, the burden of proof contemplated
by Article 34 should actually be understood as the duty of the alleged patent infringer to
overthrow such presumption. Such burden, properly understood, actually refers to the burden of
evidence (burden of going forward) placed on the producer of the identical (or fake) product to
show that his product was produced without the use of the patented process.
The foregoing notwithstanding, the patent owner still has the burden of proof since, regardless of
the presumption provided under paragraph 1 of Article 34, such owner still has to introduce
evidence of the existence of the alleged identical product, the fact that it is identical to the genuine
one produced by the patented process and the fact of newness of the genuine product or the fact
of substantial likelihood that the identical product was made by the patented process.
The foregoing should really present no problem in changing the rules of evidence as the present
law on the subject, Republic Act No. 165, as amended, otherwise known as the Patent Law,
provides a similar presumption in cases of infringement of patented design or utility model, thus:
SEC. 60. Infringement. - Infringement of a design patent or of a patent for utility model shall
consist in unauthorized copying of the patented design or utility model for the purpose of trade or
industry in the article or product and in the making, using or selling of the article or product
copying the patented design or utility model. Identity or substantial identity with the patented
design or utility model shall constitute evidence of copying. (underscoring supplied)
Moreover, it should be noted that the requirement of Article 34 to provide a disputable
presumption applies only if (1) the product obtained by the patented process is NEW or (2) there
is a substantial likelihood that the identical product was made by the process and the process
owner has not been able through reasonable effort to determine the process used. Where either of
these two provisos does not obtain, members shall be free to determine the appropriate method
of implementing the provisions of TRIPS within their own internal systems and processes.
By and large, the arguments adduced in connection with our disposition of the third issue --
derogation of legislative power - will apply to this fourth issue also. Suffice it to say that the
reciprocity clause more than justifies such intrusion, if any actually exists. Besides, Article 34 does
not contain an unreasonable burden, consistent as it is with due process and the concept of
adversarial dispute settlement inherent in our judicial system.
So too, since the Philippine is a signatory to most international conventions on patents,
trademarks and copyrights, the adjustment in legislation and rules of procedure will not be
substantial.[52]
Fifth Issue: Concurrence Only in the WTO Agreement and Not in Other Documents Contained in
the Final Act
Petitioners allege that the Senate concurrence in the WTO Agreement and its annexes -- but not in
the other documents referred to in the Final Act, namely the Ministerial Declaration and Decisions
and the Understanding on Commitments in Financial Services -- is defective and insufficient and
thus constitutes abuse of discretion. They submit that such concurrence in the WTO
Agreement alone is flawed because it is in effect a rejection of the Final Act, which in turn was the
document signed by Secretary Navarro, in representation of the Republic upon authority of the
President. They contend that the second letter of the President to the Senate[53] which
enumerated what constitutes the Final Act should have been the subject of concurrence of the
Senate.
A final act, sometimes called protocol de clture, is an instrument which records the winding up of
the proceedings of a diplomatic conference and usually includes a reproduction of the texts of
treaties, conventions, recommendations and other acts agreed upon and signed by the
plenipotentiaries attending the conference.[54] It is not the treaty itself. It is rather a summary of
the proceedings of a protracted conference which may have taken place over several years. The
text of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade
Negotiations is contained in just one page[55] in Vol. I of the 36-volume Uruguay Round of
Multilateral Trade Negotiations. By signing said Final Act, Secretary Navarro as representative of
the Republic of the Philippines undertook:
"(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective
competent authorities with a view to seeking approval of the Agreement in accordance with their
procedures; and
(b) to adopt the Ministerial Declarations and Decisions."
The assailed Senate Resolution No. 97 expressed concurrence in exactly what the Final Act
required from its signatories, namely, concurrence of the Senate in the WTO Agreement.
The Ministerial Declarations and Decisions were deemed adopted without need for
ratification. They were approved by the ministers by virtue of Article XXV: 1 of GATT which
provides that representatives of the members can meet to give effect to those provisions of this
Agreement which invoke joint action, and generally with a view to facilitating the operation and
furthering the objectives of this Agreement.[56]
The Understanding on Commitments in Financial Services also approved in Marrakesh does not
apply to the Philippines. It applies only to those 27 Members which have indicated in their
respective schedules of commitments on standstill, elimination of monopoly, expansion of
operation of existing financial service suppliers, temporary entry of personnel, free transfer and
processing of information, and national treatment with respect to access to payment, clearing
systems and refinancing available in the normal course of business.[57]
On the other hand, the WTO Agreement itself expresses what multilateral agreements are deemed
included as its integral parts,[58] as follows:
Article II
Scope of the WTO
1. The WTO shall provide the common institutional framework for the conduct of trade relations
among its Members in matters to the agreements and associated legal instruments included in the
Annexes to this Agreement.
2. The Agreements and associated legal instruments included in Annexes 1, 2, and 3 (hereinafter
referred to as Multilateral Agreements) are integral parts of this Agreement, binding on all
Members.
3. The Agreements and associated legal instruments included in Annex 4 (hereinafter referred to
as Plurilateral Trade Agreements) are also part of this Agreement for those Members that have
accepted them, and are binding on those Members. The Plurilateral Trade Agreements do not
create either obligation or rights for Members that have not accepted them.
4. The General Agreement on Tariffs and Trade 1994 as specified in annex 1A (hereinafter
referred to as GATT 1994) is legally distinct from the General Agreement on Tariffs and Trade,
dated 30 October 1947, annexed to the Final Act adopted at the conclusion of the Second Session
of the Preparatory Committee of the United Nations Conference on Trade and Employment, as
subsequently rectified, amended or modified (hereinafter referred to as GATT 1947).
It should be added that the Senate was well-aware of what it was concurring in as shown by the
members deliberation on August 25, 1994. After reading the letter of President Ramos dated
August 11, 1994,[59] the senators of the Republic minutely dissected what the Senate was
concurring in, as follows: [60]
THE CHAIRMAN: Yes. Now, the question of the validity of the submission came up in the first day
hearing of this Committee yesterday. Was the observation made by Senator Taada that what was
submitted to the Senate was not the agreement on establishing the World Trade Organization by
the final act of the Uruguay Round which is not the same as the agreement establishing the World
Trade Organization?And on that basis, Senator Tolentino raised a point of order which, however,
he agreed to withdraw upon understanding that his suggestion for an alternative solution at that
time was acceptable. That suggestion was to treat the proceedings of the Committee as being in
the nature of briefings for Senators until the question of the submission could be clarified.
And so, Secretary Romulo, in effect, is the President submitting a new... is he making a new
submission which improves on the clarity of the first submission?
MR. ROMULO: Mr. Chairman, to make sure that it is clear cut and there should be no
misunderstanding, it was his intention to clarify all matters by giving this letter.
THE CHAIRMAN: Thank you.
Can this Committee hear from Senator Taada and later on Senator Tolentino since they were the
ones that raised this question yesterday?
Senator Taada, please.
SEN. TAADA: Thank you, Mr. Chairman.
Based on what Secretary Romulo has read, it would now clearly appear that what is being
submitted to the Senate for ratification is not the Final Act of the Uruguay Round, but rather the
Agreement on the World Trade Organization as well as the Ministerial Declarations and Decisions,
and the Understanding and Commitments in Financial Services.
I am now satisfied with the wording of the new submission of President Ramos.
SEN. TAADA. . . . of President Ramos, Mr. Chairman.
THE CHAIRMAN. Thank you, Senator Taada. Can we hear from Senator Tolentino? And after him
Senator Neptali Gonzales and Senator Lina.
SEN TOLENTINO, Mr. Chairman, I have not seen the new submission actually transmitted to us
but I saw the draft of his earlier, and I think it now complies with the provisions of the
Constitution, and with the Final Act itself. The Constitution does not require us to ratify the Final
Act. It requires us to ratify the Agreement which is now being submitted. The Final Act itself
specifies what is going to be submitted to with the governments of the participants.
In paragraph 2 of the Final Act, we read and I quote:
By signing the present Final Act, the representatives agree: (a) to submit as appropriate the WTO
Agreement for the consideration of the respective competent authorities with a view to seeking
approval of the Agreement in accordance with their procedures.
In other words, it is not the Final Act that was agreed to be submitted to the governments for
ratification or acceptance as whatever their constitutional procedures may provide but it is the
World Trade Organization Agreement. And if that is the one that is being submitted now, I think it
satisfies both the Constitution and the Final Act itself.
Thank you, Mr. Chairman.
THE CHAIRMAN. Thank you, Senator Tolentino, May I call on Senator Gonzales.
SEN. GONZALES. Mr. Chairman, my views on this matter are already a matter of record. And they
had been adequately reflected in the journal of yesterdays session and I dont see any need for
repeating the same.
Now, I would consider the new submission as an act ex abudante cautela.
THE CHAIRMAN. Thank you, Senator Gonzales. Senator Lina, do you want to make any comment
on this?
SEN. LINA. Mr. President, I agree with the observation just made by Senator Gonzales out of the
abundance of question. Then the new submission is, I believe, stating the obvious and therefore I
have no further comment to make.
Epilogue
In praying for the nullification of the Philippine ratification of the WTO Agreement, petitioners are
invoking this Courts constitutionally imposed duty to determine whether or not there has been
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the Senate in
giving its concurrence therein via Senate Resolution No. 97. Procedurally, a writ
of certiorari grounded on grave abuse of discretion may be issued by the Court under Rule 65 of
the Rules of Court when it is amply shown that petitioners have no other plain, speedy and
adequate remedy in the ordinary course of law.
By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction.[61] Mere abuse of discretion is not enough. It must
be grave abuse of discretion as when the power is exercised in an arbitrary or despotic manner by
reason of passion or personal hostility, and must be so patent and so gross as to amount to an
evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law.[62] Failure on the part of the petitioner to show grave abuse of discretion
will result in the dismissal of the petition.[63]
In rendering this Decision, this Court never forgets that the Senate, whose act is under review, is
one of two sovereign houses of Congress and is thus entitled to great respect in its actions. It is
itself a constitutional body independent and coordinate, and thus its actions are presumed regular
and done in good faith. Unless convincing proof and persuasive arguments are presented to
overthrow such presumptions, this Court will resolve every doubt in its favor. Using the foregoing
well-accepted definition of grave abuse of discretion and the presumption of regularity in the
Senates processes, this Court cannot find any cogent reason to impute grave abuse of discretion to
the Senates exercise of its power of concurrence in the WTO Agreement granted it by Sec. 21 of
Article VII of the Constitution.[64]
It is true, as alleged by petitioners, that broad constitutional principles require the State to
develop an independent national economy effectively controlled by Filipinos; and to protect
and/or prefer Filipino labor, products, domestic materials and locally produced goods. But it is
equally true that such principles -- while serving as judicial and legislative guides -- are not in
themselves sources of causes of action. Moreover, there are other equally fundamental
constitutional principles relied upon by the Senate which mandate the pursuit of a trade policy
that serves the general welfare and utilizes all forms and arrangements of exchange on the basis
of equality and reciprocity and the promotion of industries which are competitive in both
domestic and foreign markets, thereby justifying its acceptance of said treaty. So too, the alleged
impairment of sovereignty in the exercise of legislative and judicial powers is balanced by the
adoption of the generally accepted principles of international law as part of the law of the land
and the adherence of the Constitution to the policy of cooperation and amity with all nations.
That the Senate, after deliberation and voting, voluntarily and overwhelmingly gave its consent to
the WTO Agreement thereby making it a part of the law of the land is a legitimate exercise of its
sovereign duty and power. We find no patent and gross arbitrariness or despotism by reason of
passion or personal hostility in such exercise. It is not impossible to surmise that this Court, or at
least some of its members, may even agree with petitioners that it is more advantageous to the
national interest to strike down Senate Resolution No. 97. But that is not a legal reason to
attribute grave abuse of discretion to the Senate and to nullify its decision. To do so would
constitute grave abuse in the exercise of our own judicial power and duty.Ineludably, what the
Senate did was a valid exercise of its authority. As to whether such exercise was wise, beneficial or
viable is outside the realm of judicial inquiry and review. That is a matter between the elected
policy makers and the people. As to whether the nation should join the worldwide march toward
trade liberalization and economic globalization is a matter that our people should determine in
electing their policy makers. After all, the WTO Agreement allows withdrawal of membership,
should this be the political desire of a member.
The eminent futurist John Naisbitt, author of the best seller Megatrends, predicts an Asian
Renaissance[65] where the East will become the dominant region of the world economically,
politically and culturally in the next century. He refers to the free market espoused by WTO as the
catalyst in this coming Asian ascendancy. There are at present about 31 countries including China,
Russia and Saudi Arabia negotiating for membership in the WTO. Notwithstanding objections
against possible limitations on national sovereignty, the WTO remains as the only viable structure
for multilateral trading and the veritable forum for the development of international trade
law. The alternative to WTO is isolation, stagnation, if not economic self-destruction. Duly
enriched with original membership, keenly aware of the advantages and disadvantages of
globalization with its on-line experience, and endowed with a vision of the future, the Philippines
now straddles the crossroads of an international strategy for economic prosperity and stability in
the new millennium. Let the people, through their duly authorized elected officers, make their free
choice. WHEREFORE, the petition is DISMISSED for lack of merit.
LAND TRANSPORTATION OFFICE [LTO] vs. CITY OF BUTUAN
The 1987 Constitution enunciates the policy that the territorial and political subdivisions shall
enjoy local autonomy.[1] In obedience to that, mandate of the fundamental law, Republic Act
("R.A.") No.7160, otherwise known as the Local Government Code,[2] expresses that the
territorial and political subdivisions of the State shall enjoy genuine and meaningful local
autonomy in order to enable them to attain their fullest development as self-reliant communities
and make them more effective partners in the attainment of national goals, and that it is a basic
aim of the State to provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units shall be given
more powers, authority, responsibilities and resources.
While the Constitution seeks to strengthen local units and ensure their viability, clearly, however,
it has never been the intention of that organic law to create an imperium in imperio and install
an intra sovereign political subdivision independent of a single sovereign state.
The Court is asked in this instance to resolve the issue of whether under the present set up the
power of the Land Registration Office ("LTO") to register, tricycles in particular, as well as to issue
licenses for the driving thereof, has likewise devolved to local government units.
The Regional Trial Court (Branch 2) of Butuan City held:[3] that the authority to register tricycles,
the grant of the corresponding franchise, the issuance of tricycle drivers' license, and the
collection of fees therefor had all been vested in the Local Government Units ("LGUs").
Accordingly, it decreed the issuance of a permanent writ of injunction against LTO, prohibiting
and enjoining LTO, as well as its employees and other persons acting in its behalf, from (a)
registering tricycles and (b) issuing licenses to drivers of tricycles. The Court of Appeals, on
appeal to it, sustained the trial court.
The adverse rulings of both the court a quo and the appellate court prompted the LTO to file the
instant petition for review on certiorari to annul and set aside the decision,[4] dated 17 November
1997, of the Court of Appeals affirming the permanent injunctive writ order of the Regional Trial
Court (Branch 2) of Butuan City.
Respondent City of Butuan asserts that one of the salient provisions introduced by the Local
Government Code is in the area of local taxation which allows LGUs to collect registration fees or
charges along with, in its view, the corresponding issuance of all kinds of licenses or permits for
the driving of tricycles.
The 1987 Constitution provides:
"Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments."[5]
Section 129 and Section 133 of the Local Government Code read:
"SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its
power to create its own sources of revenue and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government units."
"SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
"xxx.......xxx.......xxx.
"(I) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof, except tricycles."
Relying on the foregoing provisions of the law, the Sangguniang Panglungsod ("SP") of Butuan, on
16 August 1992, passed SP Ordinance No.916-92 entitled "An Ordinance Regulating the Operation
of Tricycles-for-Hire, providing mechanism for the issuance of Franchise, Registration and Permit,
and Imposing Penalties for Violations thereof and for other Purposes." The ordinance provided
for, among other things, the payment of franchise fees for the grant of the franchise of tricycles-
for-hire, fees for the registration of the vehicle, and fees for the issuance of a permit for the driving
thereof.
Petitioner LTO explains that one of the functions of the national government that, indeed, has
been transferred to local government units is the franchising authority over tricycles-for-hire of
the Land Transportation Franchising and Regulatory Board ("LTFRB") but not, it asseverates, the
authority of LTO to register all motor vehicles and to issue to qualified persons of licenses to drive
such vehicles.
In order to settle the variant positions of the parties, the City of Butuan, represented by its City
Mayor Democrito D. Plaza, filed on 28 June 1994 with the trial court a petition for
"prohibition, mandamus, injunction with a prayer for preliminary restraining order ex-
parte" seeking the declaration of the validity of SP Ordinance No.962-93 and the prohibition of the
registration of tricycles-for-hire and the issuance of licenses for the driving thereof by the LTO.
LTO opposed the prayer in the petition.
On 20 March 1995, the trial court rendered a resolution; the dispositive portion read:
"In view of the foregoing, let a permanent injunctive writ be issued against the respondent Land
Transportation Office and the other respondents, prohibiting and enjoining them, their
employees, officers, attorney's or other persons acting in their behalf from forcing or compelling
Tricycles to be registered with, and drivers to secure their licenses from respondent LTO or
secure franchise from LTFRB and from collecting fees thereon. It should be understood that the
registration, franchise of tricycles and driver's license/permit granted or issued by the City of
Butuan are valid only within the territorial limits of Butuan City.
"No pronouncement as to costs."[6]
Petitioners timely moved for a reconsideration of the above resolution but it was to no avail.
Petitioners then appealed to the Court of Appeals. In its now assailed decision, the appellate court,
on 17 November 1997, sustained the trial court. It ruled:
"WHEREFORE, the petition is hereby DISMISSED and the questioned permanent injunctive writ
issued by the court a quo dated March 20, 1995 AFFIRMED."[7]
Coming up to this Court, petitioners raise this sole assignment of error, to wit:
"The Court of Appeals [has] erred in sustaining the validity of the writ of injunction issued by the
trial court which enjoined LTO from (1) registering tricycles-for-hire and (2) issuing licenses for
the driving thereof since the Local Government Code devolved only the franchising authority of
the LTFRB. Functions of the LTO were not devolved to the LGU's."[8]
The petition is impressed with merit.
The Department of Transportation and Communications[9] ("DOTC"), through the LTO and the
LTFRB, has since been tasked with implementing laws pertaining to land transportation. The LTO
is a line agency under the DOTC whose powers and functions, pursuant to Article III, Section 4 (d)
(1),[10] of R.A. No.4136, otherwise known as Land Transportation and Traffic Code, as amended,
deal primarily with the registration of all motor vehicles and the licensing of drivers thereof. The
LTFRB, upon the other hand, is the governing body tasked by E.O. No. 202, dated 19 June 1987, to
regulate the operation of public utility or "for hire" vehicles and to grant franchises or certificates
of public convenience ("CPC").[11] Finely put, registration and licensing functions are vested in
the LTO while franchising and regulatory responsibilities had been vested in the LTFRB.
Under the Local Government Code, certain functions of the DOTC were transferred to the LGUs,
thusly:
"SEC. 458. Powers, Duties, Functions and Compensation. -
"xxx.......xxx.......xxx
"(3) Subject to the provisions of Book II of this Code, enact ordinances granting franchises and
authorizing the issuance of permits or licenses, upon such conditions and for such purposes
intended to promote the general welfare of the inhabitants of the city and pursuant to this
legislative authority shall:
"xxx.......xxx.......xxx.
"(VI) Subject to the guidelines prescribed by the Department of Transportation and
Communications, regulate the operation of tricycles and grant franchises for the operation thereof
within the territorial jurisdiction of the city." (Emphasis supplied)
LGUs indubitably now have the power to regulate the operation of tricycles-for-hire and to grant
franchises for the operation thereof. "To regulate" means to fix, establish, or control; to adjust by
rule, method, or established mode; to direct by rule or restriction; or to subject to governing
principles or laws.[12] A franchise is defined to be a special privilege to do certain things
conferred by government on an individual or corporation, and which does not belong to citizens
generally of common right.[13] On the other hand, "to register" means to record formally and
exactly, to enroll, or to enter precisely in a list or the like,[14] and a "driver's license" is the
certificate or license issued by the government which authorizes a person to operate a motor
vehicle.[15] The devolution of the functions of the DOTC, performed by the LTFRB, to the LGUs, as
so aptly observed by the Solicitor General, is aimed at curbing the alarming increase of accidents
in national highways involving tricycles. It has been the perception that local governments are in
good position to achieve the end desired by the law-making body because of their proximity to the
situation that can enable them to address that serious concern better than the national
government.
It may not be amiss to state, nevertheless, that under Article 458 (a)[3-VI] of the Local
Government Code, the power of LGUs to regulate the operation of tricycles and to grant franchises
for the operation thereof is still subject to the guidelines prescribed by the DOTC. In compliance
therewith, the Department of Transportation and Communications ("DOTC") issued "Guidelines
to Implement the Devolution of LTFRBs Franchising Authority over Tricycles-For-Hire to Local
Government units pursuant to the Local Government Code." Pertinent provisions of the guidelines
state:
"In lieu of the Land Transportation Franchising and Regulatory Board (LTFRB) in the DOTC, the
Sangguniang Bayan/Sangguniang Panglungsod (SB/SP) shall perform the following:
"(a) Issue, amend, revise, renew, suspend, or cancel MTOP and prescribe the appropriate terms
and conditions therefor;
"xxx.......xxx.......xxx.
"Operating Conditions:
"1. For safety reasons, no tricycles should operate on national highways utilized by 4 wheel
vehicles greater than 4 tons and where normal speed exceed 40 KPH. However, the SB/SP may
provide exceptions if there is no alternative routs.
"2. Zones must be within the boundaries of the municipality/city. However, existing zones within
more than one municipality/city shall be maintained, provided that operators serving said zone
shall secure MTOP's from each of the municipalities/cities having jurisdiction over the areas
covered by the zone.
"3. A common color for tricycles-for-hire operating in the same zone may be imposed. Each unit
shall be assigned and bear an identification number, aside from its LTO license plate number.
"4. An operator wishing to stop service completely, or to suspend service for more than one
month, should report in writing such termination or suspension to the SB/SP which originally
granted the MTOP prior thereto. Transfer to another zone may be permitted upon application.
"5. The MTOP shall be valid for three (3) years, renewable for the same period. Transfer to
another zone, change of ownership of unit or transfer of MTOP shall be construed as an
amendment to an MTOP and shall require appropriate approval of the SB/SP.
"6. Operators shall employ only drivers duly licensed by LTO for tricycles-for-hire.
"7. No tricycle-for-hire shall be allowed to carry more passengers and/or goods than it is designed
for.
"8. A tricycle-for-hire shall be allowed to operate like a taxi service, i.e., service is rendered upon
demand and without a fixed route within a zone."[16]
Such as can be gleaned from the explicit language of the statute, as well as the corresponding
guidelines issued by DOTC, the newly delegated powers pertain to the franchising and regulatory
powers theretofore exercised by the LTFRB and not to the functions of the LTO relative to the
registration of motor vehicles and issuance of licenses for the driving thereof. Clearly unaffected
by the Local Government Code are the powers of LTO under R.A. No.4136 requiring the
registration of all kinds of motor vehicles "used or operated on or upon any public highway" in the
country. Thus -
"SEC. 5. All motor vehicles and other vehicles must be registered. - (a) No motor vehicle shall be
used or operated on or upon any public highway of the Philippines unless the same is properly
registered for the current year in accordance with the provisions of this Act (Article 1, Chapter II,
R.A. No. 4136).
The Commissioner of Land Transportation and his deputies are empowered at anytime to
examine and inspect such motor vehicles to determine whether said vehicles are registered, or
are unsightly, unsafe, improperly marked or equipped, or otherwise unfit to be operated on
because of possible excessive damage to highways, bridges and other infrastructures.[17] The
LTO is additionally charged with being the central repository and custodian of all records of all
motor vehicles.[18]
The Court shares the apprehension of the Solicitor General if the above functions were to likewise
devolve to local government units; he states:
"If the tricycle registration function of respondent LTO is decentralized, the incidence of theft of
tricycles will most certainly go up, and stolen tricycles registered in one local government could
be registered in another with ease. The determination of ownership thereof will also become very
difficult.
"Fake driver's licenses will likewise proliferate. This likely scenario unfolds where a tricycle
driver, not qualified by petitioner LTO's testing, could secure a license from one municipality, and
when the same is confiscated, could just go another municipality to secure another license.
"Devolution will entail the hiring of additional personnel charged with inspecting tricycles for
road worthiness, testing drivers, and documentation. Revenues raised from tricycle registration
may not be enough to meet salaries of additional personnel and incidental costs for tools and
equipment."[19]
The reliance made by respondents on the broad taxing power of local government units,
specifically under Section 133 of the Local Government Code, is tangential. Police power and
taxation, along with eminent domain, are inherent powers of sovereignty which the State might
share with local government units by delegation given under a constitutional or a statutory fiat.
All these inherent powers are for a public purpose and legislative in nature but the similarities
just about end there. The basic aim of police power is public good and welfare. Taxation, in its
case, focuses on the power of government to raise revenue in order to support its existence and
carry out its legitimate objectives. Although correlative to each other in many respects, the grant
of one does not necessarily carry with it the grant of the other. The two powers are, by tradition
and jurisprudence, separate and distinct powers, varying in their respective concepts, character,
scopes and limitations. To construe the tax provisions of Section 133(1) indistinctively would
result in the repeal to that extent of LTO's regulatory power which evidently has not been
intended. If it were otherwise, the law could have just said so in Section 447 and 458 of Book III of
the Local Government Code in the same manner that the specific devolution of LTFRB's power on
franchising of tricycles has been provided. Repeal by implication is not favored.[20] The power
over tricycles granted under Section 458(a)(3)(VI) of the Local Government Code to LGUs is the
power to regulate their operation and to grant franchises for the operation thereof. The
exclusionary clause contained in the tax provisions of Section 133(1) of the Local Government
Code must not be held to have had the effect of withdrawing the express power of LTO to cause
the registration of all motor vehicles and the issuance of licenses for the driving thereof. These
functions of the LTO are essentially regulatory in nature, exercised pursuant to the police power
of the State, whose basic objectives are to achieve road safety by insuring the road worthiness of
these motor vehicles and the competence of drivers prescribed by R. A. 4136. Not insignificant is
the rule that a statute must not be construed in isolation but must be taken in harmony with the
extant body of laws.[21]
The Court cannot end this decision without expressing its own serious concern over the seeming
laxity in the grant of franchises for the operation of tricycles-for-hire and in allowing the
indiscriminate use by such vehicles on public highways and principal thoroughfares. Senator
Aquilino C. Pimentel, Jr., the principal author, and sponsor of the bill that eventually has become
to be known as the Local Government Code, has aptly remarked:
"Tricycles are a popular means of transportation, specially in the countryside. They are,
unfortunately, being allowed to drive along highways and principal thoroughfares where they
pose hazards to their passengers arising from potential collisions with buses, cars and jeepneys.
"The operation of tricycles within a municipality may be regulated by the Sangguniang Bayan. In
this connection, the Sangguniang concerned would do well to consider prohibiting the operation
of tricycles along or across highways invite collisions with faster and bigger vehicles and impede
the flow of traffic."[22]
The need for ensuring public safety and convenience to commuters and pedestrians alike is
paramount. It might be well, indeed, for public officials concerned to pay heed to a number of
provisions in our laws that can warrant in appropriate cases an incurrence of criminal and civil
liabilities. Thus -
The Revised Penal Code -
"Art. 208. Prosecution of offenses; negligence and tolerance. - The penalty of prision correccional
in its minimum period and suspension shall be imposed upon any public officer, or officer of the
law, who, in dereliction of the duties of his office, shall maliciously refrain from instituting
prosecution for the punishment of violators of the law, or shall tolerate the commission of
offenses."
The Civil Code -
"Art. 27. Any person suffering material or moral loss because a public servant or employee refuses
or neglects, without just cause, to perform his official duty may file an action for damages and
other relief against the latter, without prejudice to any disciplinary administrative action that may
be taken."
"Art. 34. When a member of a city or municipal police force refuses or fails to render aid or
protection to any person in case of danger to life or property, such peace officer shall be primarily
liable for damages, and the city or municipality shall be subsidiarily responsible therefor. The civil
action herein recognized shall be independent of any criminal, proceedings, and a preponderance
of evidence shall suffice to support such action."
"Art. 2189. Provinces, cities and municipalities shall be liable for damages for the death of, or
injuries suffered by, any person by reason of the defective condition of roads, streets, bridges,
public buildings, and other public works under their control or supervision."
The Local Government Code -
"Sec. 24. Liability for Damages. - Local government units and their officials are not exempt from
liability for death or injury to persons or damage to property."
WHEREFORE, the assailed decision which enjoins the Land Transportation Office from requiring
the due registration of tricycles and a license for the driving thereof is REVERSED and SET ASIDE.
PHILIPPINE MATCH CO., LTD. vs. CITY OF CEBU and JESUS E. ZABATE, Acting City Treasurer,
This case is about the legality of the tax collected by the City of Cebu on sales of matches stored by
the Philippine Match Co., Ltd. in Cebu City but delivered to customers outside of the City.
Ordinance No. 279 of Cebu City (approved by the mayor on March 10, 1960 and also approved by
the provincial board) is "an ordinance imposing a quarterly tax on gross sales or receipts of
merchants, dealers, importers and manufacturers of any commodity doing business" in Cebu City.
It imposes a sales tax of one percent (1%) on the gross sales, receipts or value of commodities
sold, bartered, exchanged or manufactured in the city in excess of P2,000 a quarter.
Section 9 of the ordinance provides that, for purposes of the tax, "all deliveries of goods or
commodities stored in the City of Cebu, or if not stored are sold" in that city, "shall be considered
as sales" in the city and shall be taxable.
Thus, it would seem that under the tax ordinance sales of matches consummated outside of the
city are taxable as long as the matches sold are taken from the company's stock stored in Cebu
City.
The Philippine Match Co., Ltd., whose principal office is in Manila, is engaged in the manufacture
of matches. Its factory is located at Punta, Sta. Ana, Manila. It ships cases or cartons of matches
from Manila to its branch office in Cebu City for storage, sale and distribution within the
territories and districts under its Cebu branch or the whole Visayas-Mindanao region. Cebu City
itself is just one of the eleven districts under the company's Cebu City branch office.
The company does not question the tax on the matches of matches consummated in Cebu City,
meaning matches sold and delivered within the city.
It assails the legality of the tax which the city treasurer collected on out-of- town deliveries of
matches, to wit: (1) sales of matches booked and paid for in Cebu City but shipped directly to
customers outside of the city; (2) transfers of matches to newsmen assigned to different agencies
outside of the city and (3) shipments of matches to provincial customers pursuant to salesmen's
instructions.
The company paid under protest to the city t the sum of P12,844.61 as one percent sales tax on
those three classes of out-of-town deliveries of matches for the second quarter of 1961 to the
second quarter of 1963.
In paying the tax the company accomplished the verified forms furnished by the city treasurers
office. It submitted a statement indicating the four kinds of transactions enumerated above, the
total sales, and a summary of the deliveries to the different agencies, as well as the invoice
numbers, names of customers, the value of the sales, the transfers of matches to salesmen outside
of Cebu City, and the computation of taxes.
Sales of matches booked and paid for in Cebu City but shipped directly to customers outside of the
city refer to orders for matches made in the city by the company's customers, by means of
personal or phone calls, for which sales invoices are issued, and then the matches are shipped
from the bodega in the city, where the matches had been stored, to the place of business or
residences of the customers outside of the city, duly covered by bills of lading The matches are
used and consumed outside of the city.
Transfers of matches to salesmen assigned to different agencies outside of the city embrace
equipments of matches from the branch office in the city to the salesmen (provided with panel
cars) assigned within the province of Cebu and in the different districts in the Visayas and
Mindanao under the jurisdiction or supervision of the Cebu City branch office. The shipments are
covered by bills of lading. No sales invoices whatever are issued. The matches received by the
salesmen constitute their direct cash accountability to the company. The salesmen sell the
matches within their respective territories. They issue cash sales invoices and remit the proceeds
of the sales to the company's Cebu branch office. The value of the unsold matches constitutes their
stock liability. The matches are used and consumed outside of the city.
Shipments of matches to provincial customers pursuant to newsmens instructions embrace
orders, by letter or telegram sent to the branch office by the company's salesmen assigned outside
of the city. The matches are shipped from the company's bodega in the city to the customers
residing outside of the city. The salesmen issue the sales invoices. The proceeds of the sale, for
which the salesmen are accountable are remitted to the branch office. As in the first and seconds
of transactions above-mentioned, the matches are consumed and used outside of the city.
The company in its letter of April 15, 1961 to the city treasurer sought the refund of the sales tax
paid for out-of-town deliveries of matches. It invoked Shell Company of the Philippines, Ltd. vs.
Municipality of Sipocot, Camarines Sur, 105 Phil. 1263. In that case sales of oil and petroleum
products effected outside the territorial limits of Sipocot, were held not to be subject to the tax
imposed by an ordinance of that municipality.
The city treasurer denied the request. His stand is that under section 9 of the ordinance all out-of-
town deliveries of latches stored in the city are subject to the sales tax imposed by the ordinance.
On August 12, 1963 the company filed the complaint herein, praying that the ordinance be d void
insofar as it taxed the deliveries of matches outside of Cebu City, that the city be ordered to refund
to the company the said sum of P12,844.61 as excess sales tax paid, and that the city treasurer be
ordered to pay damages.
After hearing, the trial court sustained the tax on the sales of matches booked and paid for in Cebu
City although the matches were shipped directly to customers outside of the city. The lower court
held that the said sales were consummated in Cebu City because delivery to the carrier in the city
is deemed to be a delivery to the customers outside of the city.
But the trial court invalidated the tax on transfers of matches to salesmen assigned to different
agencies outside of the city and on shipments of matches to provincial customers pursuant to the
instructions of the newsmen It ordered the defendants to refund to the plaintiff the sum of
P8,923.55 as taxes paid out the said out-of-town deliveries with legal rate of interest from the
respective dates of payment.
The trial court characterized the tax on the other two transactions as a "storage tax" and not a
sales tax. It assumed that the sales were consummated outside of the city and, hence, beyond the
city's taxing power.
The city did not appeal from that decision. The company appealed from that portion of the
decision upholding the tax on sales of matches to customers outside of the city but which sales
were booked and paid for in Cebu City, and also from the dismissal of its claim for damages
against the city treasurer.
The issue is whether the City of Cebu can tax sales of matches which were perfected and paid for
in Cebu City but the matches were delivered to customers outside of the City.
We hold that the appeal is devoid of merit bemuse the city can validly tax the sales of matches to
customers outside of the city as long as the orders were booked and paid for in the company's
branch office in the city. Those matches can be regarded as sold in the city, as contemplated in the
ordinance, because the matches were delivered to the carrier in Cebu City. Generally, delivery to
the carrier is delivery to the buyer (Art. 1523, Civil Code; Behn, Meyer & Co. vs. Yangco, 38 Phil.
602).
A different interpretation would defeat the tax ordinance in question or encourage tax evasion
through the simple expedient of arranging for the delivery of the matches at the out. skirts of the
city through the purchase were effected and paid for in the company's branch office in the city.
The municipal board of Cebu City is empowered "to provide for the levy and collection of taxes for
general and purposes in accordance with law" (Sec. 17[a], Commonwealth Act No. 58; Sec. 31[l],
Rep. Act No. 3857, Revised Charter of Cebu city).
The taxing power validly delegated to cities and municipalities is defined in the Local Autonomy
Act, Republic Act No. 2264 (Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. Municipality of
Tanauan, Leyte, L-31156, February 27, 1976, 69 SCRA 460), which took effect on June 19, 1959
and which provides:
SEC. 2. Taxation. — Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal license taxes or
fees upon persons engaged in any occupation or business, or exercising privileges in chartered
cities,. municipalities or municipal districts by requiring them to secure licenses at rates fixed by
the municipal board or city council of the city, the municipal council of the municipality, or the
municipal district council of the municipal district; to collect fees and charges for services
rendered by the city, municipality or municipal district; to regulate and impose reasonable fees
for services rendered in connection with any business, profession or occupation being conducted
within the city, municipality or municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees;
Provided, That municipalities and municipal districts shall, in no case, impose any percentage tax
on sales or other taxes in any form based thereon nor impose taxes on articles subject to specific
tax, except gasoline, under the provisions of the National International Revenue Code;
Provided, however, That no city, municipality or municipal districts may levy or impose any of the
following: (here follows an enumeration of internal revenue taxes)
xxx xxx xxx *
Note that the prohibition against the imposition of percentage taxes (formerly provided for in
section 1 of Commonwealth Act No. 472) refers to municipalities and municipal districts but not
to chartered cities. (See Local Tax Code, P.D. No. 231. Marinduque Iron Mines Agents, Inc. vs.
Municipal Council of Hinabangan Samar, 120 Phil. 413; Ormoc Sugar Co., Inc. vs. Treasurer of
Ormoc City, L-23794, February 17, 1968, 22 SCRA 603).
Note further that the taxing power of cities, municipalities and municipal districts may be used (1)
"upon any person engaged in any occupation or business, or exercising any privilege" therein; (2)
for services rendered by those political subdivisions or rendered in connection with any business,
profession or occupation being conducted therein, and (3) to levy, for public purposes, just and
uniform taxes, licenses or fees (C. N. Hodges vs. Municipal Board of the City of Iloilo, 117 Phil. 164,
167. See sec. 31[251, Revised Charter of Cebu City).
Applying that jurisdictional test to the instant case, it is at once obvious that sales of matches to
customers outside oil Cebu City, which sales were booked and paid for in the company's branch
office in the city, are subject to the city's taxing power. The instant case is easily distinguishable
from the Shell Company case where the price of the oil sold was paid outside of the municipality
of Sipocot, the entity imposing the tax.
On the other hand, the ruling in Municipality of Jose Panganiban, Province of Camarines Norte vs.
Shell Company of the Philippines, Ltd., L-18349, July 30, 1966, 17 SCRA 778 that the place of
delivery determines the taxable situs of the property to be taxed cannot properly be invoked in
this case. Republic Act No. 1435, the law which enabled the Municipality of Jose Panganiban to
levy the sales tax involved in that case, specifies that the tax may be levied upon oils "distributed
within the limits of the city or municipality", meaning the place where the oils were delivered.
That feature of the Jose Panganiban case distinguished it from this case.
The sales in the instant case were in the city and the matches sold were stored in the city. The fact
that the matches were delivered to customers, whose places of business were outside of the city,
would not place those sales beyond the city's taxing power. Those sales formed part of the
merchandising business being assigned on by the company in the city. In essence, they are the
same as sales of matches fully consummated in the city.
Furthermore, because the sellers place of business is in Cebu City, it cannot be sensibly argued
that such sales should be considered as transactions subject to the taxing power of the political
subdivisions where the customers resided and accepted delivery of the matches sold.
The company in its second assignment of error contends that the trial court erred in not ordering
defendant acting city treasurer to pay exemplary damages of P20,000 and attorney's fees.
The claim for damages is predicated on articles 19, 20, 21, 27 and 2229 of the Civil Code. It is
argued that the city treasurer refused and neglected without just cause to perform his duty and to
act with justice and good faith. The company faults the city treasurer for not following the opinion
of the city fiscals, as legal adviser of the city, that all out-of-town deliveries of matches are not
subject to sales tax because such transactions were effected outside of the city's territorial limits.
In reply, it is argued for defendant city treasurer that in enforcing the tax ordinance in question he
was simply complying with his duty as collector of taxes (Sec. 50, Revised Charter of Cebu City).
Moreover, he had no choice but to enforce the ordinance because according to section 357 of the
Revised Manual of Instruction to Treasurer's "a tax ordinance win be enforced in accordance with
its provisions" until d illegal or void by a competent court, or otherwise revoked by the council or
board from which it originated.
Furthermore, the Secretary of Finance had reminded the city treasurer that a tax ordinance
approved by the provincial board is operative and must be enforced without prejudice to the right
of any affected taxpayer to assail its legality in the judicial forum. The fiscals opinion on the
legality of an ordinance is merely advisory and has no binding effect.
Article 27 of the Civil Code provides that "any person suffering material or moral lose because a
public servant or employee refuses or neglects, without just cause, to perform his official duty
may file an action for damages and other relief against the latter, without prejudice to any
disciplinary administrative action that may be taken."
Article 27 presupposes that the refuse or omission of a public official is attributable to malice or
inexcusable negligence. In this case, it cannot be said that the city treasurer acted wilfully or was
grossly t in not refunding to the plaintiff the taxes which it paid under protest on out-of-town
sales of matches.
The record clearly reveals that the city treasurer honestly believed that he was justified under
section 9 of the tax ordinance in collecting the sales tax on out-of-town deliveries, considering that
the company's branch office was located in Cebu City and that all out-of-town purchase order for
matches were filled up by the branch office and the sales were duly reported to it.
The city treasurer acted within the scope of his authority and in consonance with his bona fide
interpretation of the tax ordinance. The fact that his action was not completely sustained by the
courts would not him liable for We have upheld his act of taxing sales of matches booked and paid
for in the city.
"As a rule, a public officer, whether judicial ,quasi-judicial or executive, is not y liable to one
injured in consequence of an act performed within the scope of his official authority, and in the
line of his official duty." "Where an officer is invested with discretion and is empowered to
exercise his judgment in matters brought before him. he is sometimes called a quasi-judicial
officer, and when so acting he is usually given immunity from liability to persons who may be
injured as the result or an erroneous or mistaken decision, however erroneous his judgment may
be. provided the acts complained of are done within the scope of the officer's authority and
without malice, or corruption." (63 Am Jur 2nd 798, 799 cited in Philippine Racing Club, Inc. vs.
Bonifacio, 109 Phil. 233, 240-241).
It has been held that an erroneous interpretation of an ordinance does not constitute nor does it
amount to bad faith that would entitle an aggrieved party to an award for damages (Cabungcal vs.
Cordovan 120 Phil. 667, 572-3). That salutary in addition to moral temperate, liquidated or
compensatory damages (Art. 2229, Civil Code). Attorney's fees are being claimed herein as actual
damages. We find that it would not be just and equitable to award attorney's fees in this case
against the City of Cebu and its (See Art. 2208, Civil Code). WHEREFORE, the trial court's
judgment is affirmed. No costs.
MATALIN COCONUT CO., INC vs. THE MUNICIPAL COUNCIL OF MALABANG, LANAO DEL SUR,
AMIR M. BALINDONG and HADJI PANGILAMUN MANALOCON, MUNICIPAL MAYOR and
MUNICIPAL TREASURER OF MALABANG, LANAO DEL SUR,
On August 24, 1966, the Municipal Council of Malabang, Lanao del Sur, invoking the authority of
Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act, enacted
Municipal Ordinance No. 45-46, entitled "AN ORDINANCE IMPOSING A POLICE INSPECTION FEE
OF P.30 PER SACK OF CASSAVA STARCH PRODUCED AND SHIPPED OUT OF THE MUNICIPALITY
OF MALABANG AND IMPOSING PENALTIES FOR VIOLATIONS THEREOF." The ordinance made it
unlawful for any person, company or group of persons "to ship out of the Municipality of
Malabang, cassava starch or flour without paying to the Municipal Treasurer or his authorized
representatives the corresponding fee fixed by (the) ordinance." It imposed a "police inspection
fee" of P.30 per sack of cassava starch or flour, which shall be paid by the shipper before the same
is transported or shipped outside the municipality. Any person or company or group of
individuals violating the ordinance "is liable to a fine of not less than P100.00, but not more than
P1,000.00, and to pay Pl.00 for every sack of flour being illegally shipped outside the municipality,
or to suffer imprisonment of 20 days, or both, in the discretion of the court.
The validity of the ordinance was challenged by the Matalin Coconut, Inc. in a petition for
declaratory relief filed with the then Court of First Instance of Lanao del Sur against the Municipal
Council, the Municipal Mayor and the Municipal Treasurer of Malabang, Lanao del Sur. Alleging
among others that the ordinance is not only ultra vires, being violative of Republic Act No. 2264,
but also unreasonable, oppressive and confiscatory, the petitioner prayed that the ordinance be
declared null and void ab initio, and that the respondent Municipal Treasurer be ordered to
refund the amounts paid by petitioner under the ordinance. The petitioner also prayed that
during the pendency of the action, a preliminary injunction be issued enjoining the respondents
from enforcing the ordinance. The application for preliminary injunction, however, was denied by
the trial court; instead respondent Municipal Treasurer was ordered to allow payment of the
taxes imposed by the ordinance under protest.
Claiming that it was also adversely affected by the ordinance, Purakan Plantation Company was
granted leave to intervene in the action. The intervenor alleged that while its cassava flour factory
was situated in another municipality, i.e., Balabagan, Lanao del Sur, it had to transport the cassava
starch and flour it produced to the seashore through the Municipality of Malabang for loading in
coastwise vessels; that the effect of the enactment of Ordinance No. 45-46, is that intervenor had
to refrain from transporting its products through the Municipality of Malabang in order to ship
them by sea to other places.
After trial, the Court a quo rendered a decision declaring the municipal ordinance in question null
and void; ordering the respondent Municipal Treasurer to refund to the petitioner the payments it
made under the said ordinance from September 27, 1966 to May 2, 1967, amounting to P
25,500.00, as well as all payments made subsequently thereafter; and enjoining and prohibiting
the respondents, their agents or deputies, from collecting the tax of P.30 per bag on the cassava
flour or starch belonging to intervenor, Purakan Plantation Company, manufactured or milled in
the Municipality of Balabagan, but shipped out through the Municipality of Malabang.
After the promulgation of the decision, the Trial Court issued a writ of preliminary mandatory
injunction, upon motion of petitioner, requiring the respondent Municipal Treasurer to deposit
with the Philippine National Bank, Iligan Branch, in the name of the Municipality of Malabang,
whatever amounts the petitioner had already paid or shall pay pursuant to the ordinance in
question up to and until final termination of the case; the deposit was not to be withdrawn from
the said bank without any order from the court. On motion for reconsideration by respondents,
the writ was subsequently modified on July 20, 1967, to require the deposit only of amounts paid
from the effectivity of the writ up to and until the final termination of the suit.
From the decision of the trial court, the respondents appealed to this Court.
A motion to dismiss appeal filed by petitioner-appellee, was denied by this court in its resolution
of October 31, 1967. Subsequently, respondents-appellants filed a motion to dissolve the writ of
preliminary mandatory injunction issued by the trial court on July 20, 1967. This motion was also
denied by this Court on January 10, 1968.
Of the assignments of error raised by the appellants in their Brief, only the following need be
discussed: (1) that the trial court erred in adjudicating the money claim of the petitioner in an
action for declaratory relief; and (2) that the trial court erred in declaring the municipal ordinance
in question null and void.
The respondents-appellants maintain that it was error for the trial court, in an action for
declaratory relief, to order the refund to petitioner-appellee of the amounts paid by the latter
under the municipal ordinance in question. It is the contention of respondents-appellants that in
an action for declaratory relief, all the court can do is to construe the validity of the ordinance in
question and declare the rights of those affected thereby. The court cannot declare the ordinance
illegal and at the same time order the refund to petitioner of the amounts paid under the
ordinance, without requiring petitioner to file an ordinary action to claim the refund after the
declaratory relief judgment has become final. Respondents maintain that under Rule 64 of the
Rules of Court, the court may advise the parties to file the proper pleadings and convert the
hearing into an ordinary action, which was not done in this case.
We find no merit in such contention. Under Sec. 6 of Rule 64, the action for declaratory relief may
be converted into an ordinary action and the parties allowed to file such pleadings as may be
necessary or proper, if before the final termination of the case "a breach or violation of
an...ordinance, should take place." In the present case, no breach or violation of the ordinance
occurred. The petitioner decided to pay "under protest" the fees imposed by the ordinance. Such
payment did not affect the case; the declaratory relief action was still proper because the
applicability of the ordinance to future transactions still remained to be resolved, although the
matter could also be threshed out in an ordinary suit for the recovery of taxes paid (Shell Co. of
the Philippines, Ltd. vs. Municipality of Sipocot, L-12680, March 20, 1959). In its petition for
declaratory relief, petitioner-appellee alleged that by reason of the enforcement of the municipal
ordinance by respondents it was forced to pay under protest the fees imposed pursuant to the
said ordinance, and accordingly, one of the reliefs prayed for by the petitioner was that the
respondents be ordered to refund all the amounts it paid to respondent Municipal Treasurer
during the pendency of the case. The inclusion of said allegation and prayer in the petition was
not objected to by the respondents in their answer. During the trial, evidence of the payments
made by the petitioner was introduced. Respondents were thus fully aware of the petitioner's
claim for refund and of what would happen if the ordinance were to be declared invalid by the
court.
Respondents' contention, if sustained, would in effect require a separate suit for the recovery of
the fees paid by petitioner under protest. Multiplicity of suits should not be allowed or
encouraged and, in the context of the present case, is clearly uncalled for and unnecessary.
The main issue to be resolve in this case whether not Ordinance No. 45-66 enacted by respondent
Municipal Council of Malabang, Lanao del Sur, is valid. The respondents-appellants contend that
the municipality has the power and authority to approve the ordinance in question pursuant to
Section 2 of the Local Autonomy Act (Republic Act No. 2264).
Since the enactment of the Local Autonomy Act, a liberal rule has been followed by this Court in
construing municipal ordinances enacted pursuant to the taxing power granted under Section 2 of
said law. This Court has construed the grant of power to tax under the above-mentioned provision
as sufficiently plenary to cover "everything, excepting those which are mentioned" therein,
subject only to the limitation that the tax so levied is for public purposes, just and uniform (Nin
Bay Mining Company vs. Municipality of Roxas, Province of Palawan, 14 SCRA 661; C.N. Hodges vs.
Municipal Board, Iloilo City, et al., 19 SCRA 28).
We agree with the finding of the trial court that the amount collected under the ordinance in
question partakes of the nature of a tax, although denominated as "police inspection fee" since its
undeniable purpose is to raise revenue. However, we cannot agree with the trial court's finding
that the tax imposed by the ordinance is a percentage tax on sales which is beyond the scope of
the municipality's authority to levy under Section 2 of the Local Autonomy Act. Under the said
provision, municipalities and municipal districts are prohibited from imposing" any percentage
tax on sales or other taxes in any form based thereon. " The tax imposed under the ordinance in
question is not a percentage tax on sales or any other form of tax based on sales. It is a fixed tax of
P.30 per bag of cassava starch or flour "shipped out" of the municipality. It is not based on sales.
However, the tax imposed under the ordinance can be stricken down on another ground.
According to Section 2 of the abovementioned Act, the tax levied must be "for public
purposes, just and uniform" (Emphasis supplied.) As correctly held by the trial court, the so-called
"police inspection fee" levied by the ordinance is "unjust and unreasonable." Said the court a quo:
... It has been proven that the only service rendered by the Municipality of Malabang, by way of
inspection, is for the policeman to verify from the driver of the trucks of the petitioner passing by
at the police checkpoint the number of bags loaded per trip which are to be shipped out of the
municipality based on the trip tickets for the purpose of computing the total amount of tax to be
collect (sic) and for no other purpose. The pretention of respondents that the police, aside from
counting the number of bags shipped out, is also inspecting the cassava flour starch contained in
the bags to find out if the said cassava flour starch is fit for human consumption could not be given
credence by the Court because, aside from the fact that said purpose is not so stated in the
ordinance in question, the policemen of said municipality are not competent to determine if the
cassava flour starch are fit for human consumption. The further pretention of respondents that
the trucks of the petitioner hauling the bags of cassava flour starch from the mill to the bodega at
the beach of Malabang are escorted by a policeman from the police checkpoint to the beach for the
purpose of protecting the truck and its cargoes from molestation by undesirable elements could
not also be given credence by the Court because it has been shown, beyond doubt, that the
petitioner has not asked for the said police protection because there has been no occasion where
its trucks have been molested, even for once, by bad elements from the police checkpoint to the
bodega at the beach, it is solely for the purpose of verifying the correct number of bags of cassava
flour starch loaded on the trucks of the petitioner as stated in the trip tickets, when unloaded at
its bodega at the beach. The imposition, therefore, of a police inspection fee of P.30 per bag,
imposed by said ordinance is unjust and unreasonable.
The Court finally finds the inspection fee of P0.30 per bag, imposed by the ordinance in question
to be excessive and confiscatory. It has been shown by the petitioner, Matalin Coconut Company,
Inc., that it is merely realizing a marginal average profit of P0.40, per bag, of cassava flour starch
shipped out from the Municipality of Malabang because the average production is P15.60 per bag,
including transportation costs, while the prevailing market price is P16.00 per bag. The further
imposition, therefore, of the tax of P0.30 per bag, by the ordinance in question would force the
petitioner to close or stop its cassava flour starch milling business considering that it is
maintaining a big labor force in its operation, including a force of security guards to guard its
properties. The ordinance, therefore, has an adverse effect on the economic growth of the
Municipality of Malabang, in particular, and of the nation, in general, and is contrary to the
economic policy of the government.
Having found the ordinance in question to be invalid, we find it unnecessary to rule on the other
errors assigned by the appellants. WHEREFORE, petition is dismissed. The decision of the court a
quo is hereby affirmed. No costs.
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma,plaintiff-appellant, vs. J. ANTONIO ARANETA, as the Collector of Internal
Revenue, defendant-appellee.
This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the
taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided
in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3
levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded
to others for a consideration, on lease or otherwise —
a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury,
to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any
or all of the following purposes or to attain any or all of the following objectives, as may be
provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the
preferntial position of the Philippine sugar in the United States market, and ultimately to insure
its continued existence notwithstanding the loss of that market and the consequent necessity of
meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements
thereof — the mill, the landowner, the planter of the sugar cane, and the laborers in the factory
and in the field — so that all might continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production
thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and
working conditions: Provided, That the President of the Philippines may, until the adjourment of
the next regular session of the National Assembly, make the necessary disbursements from the
fund herein created (1) for the establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar
factories with the view of reducing manufacturing costs, (b) to produce and propagate higher
yielding varieties of sugar cane more adaptable to different district conditions in the Philippines,
(c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol
from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of
the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of
excess cane lands, and (g) on other problems the solution of which would help rehabilitate and
stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills
and sugar plantations, authorizing him to organize the necessary agency or agencies to take
charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the fund herein created of the
necessary amount or amounts needed for salaries, wages, travelling expenses, equipment, and
other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutioally levied. The action having been dismissed by the Court of First Instance, the
plaintifs appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of
our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to enable
it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs.
Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —
The protection of a large industry constituting one of the great sources of the state's wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within the police power of the
sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter
of public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must
be allowed fully play, subject only to the test of reasonableness; and it is not contended that the
means provided in section 6 of the law (above quoted) bear no relation to the objective pursued
or are oppressive in character. If objective and methods are alike constitutionally valid, no reason
is seen why the state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs.
Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held
that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U.
S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L.
Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization
of by-products and solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400). The decision appealed from
is affirmed, with costs against appellant. So ordered.
NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner, vs. HONORABLE COURT OF
APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, respondents.
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to
modify the October 30, 1996 Decision[1] and the January 27, 1997 Resolution[2] of the Court of
Appeals[3] in CA-G.R. SP No. 34063.
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine
Long Distance Telephone Company (PLDT) the following assessment notices and demands for
payment:
1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e) of the PSA
for the said year, 1988, computed at P0.50 per P100.00 of the Protestants (PLDT) outstanding
capital stock as at December 31, 1987 which then consisted of Serial Preferred Stock amounting
to P1,277,934,390.00 (Billion) and Common Stock of P221,097,785 (Million) or a total of
P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the approval of the
protestants increase of its authorized capital stock from P2.7 Billion to P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40 (g) of the
PSA in connection with the Commissions decisions in NTC Cases Nos. 86-13 and 87-008
respectively, approving the Protestants equity participation in the Fiber Optic Interpacific Cable
systems and X-5 Service Improvement and Expansion Program.[4]
In its two letter-protests[5] dated February 23, 1988 and July 14, 1988, and position
papers[6] dated November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the
aforesaid assessments, theorizing inter alia that:
(a) The assessments were being made to raise revenues and not as mere reimbursements for
ctual regulatory expenses in violation of the doctrine in PLDT vs. PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par values of
private respondents outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed fees under
Section 40 (f) for the increase of its authorized capital stock since petitioner did not render any
supervisory or regulatory activity and incurred no expenses in relation thereto.
x x x[7]
On September 29, 1993, the NTC rendered a Decision[8] in NTC Case No. 90-223, denying the
protest of PLDT and disposing thus:
FOR ALL THE FOREGOING, finding PLDTs protest to be without merit, the Commission has no
alternative but to uphold the law and DENIES the protest of PLDT. Unless otherwise restrained by
a competent court of law, the Common Carrier Authorization Department (CCAD) is hereby
directed to update its assessments and collections on PLDT and all public telecommunications
carriers for the payment of the fees in accordance with the provisions of Section 40 (e) (f) and (g)
of the Revised NTC Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration,[9] which was denied by NTC
in an Order[10] issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out
with its questioned Decision of October 30, 1996, modifying the disposition of NTC as follows:
"WHEREFORE, the assailed decision and order of the respondent Commission dated September
29, 1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are hereby MODIFIED. The
Commission is ordered to recompute its assessments and demands for payment from petitioner
PLDT as follows:
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public Service Act,
as amended, they should be computed at fifty centavos for each one hundred pesos or fraction
thereof of the par value of the capital stock subscribed or paid excluding stock dividends,
premiums or capital in excess of par.
B. For permit fees for the approval of petitioners increase of authorized capital stock under
Section 40 (f) of the same Act, they should be computed at fifty for each one hundred pesos or
fraction thereof, regardless of any regulatory service or expense incurred by respondent.
On November 20, 1996, NTC moved for partial reconsideration of the abovementioned Decision,
with respect to the basis of the assessment under Section 40(e), i.e., par value of the subscribed
capital stock. It also sought a partial reconsideration of the fee of fifty (P0.50) centavos for the
issuance or increasing of the capital stock under Section 40 (f).[11]
With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated
January 27, 1997, petitioner found its way to this Court via the present Petition; posing as sole
issue:
WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPUTATION OF
SUPERVISION AND REGULATION FEES UNDER SECTION 40 (F) OF THE PUBLIC SERVICE ACT
SHOULD BE BASED ON THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on
the market value of PLDTs outstanding capital stock inclusive of stock dividends and premium,
and not on the par value of PLDTs capital stock excluding stock dividends and premium, as
contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone
Company vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to
be charged by NTC on PLDT, is the capital stock subscribed or paid and not, alternatively, the
property and equipment.
The law in point is clear and categorical. There is no room for construction. It simply calls for
application. To repeat, the fee in question is based on the capital stock subscribed or paid, nothing
less nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since
Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain
and Taxation, the distinction between police power and the power to tax, which could be
significant if the exercising authority were mere political subdivisions (since delegation by it to
such political subdivisions of one power does not necessarily include the other), would not be of
any moment when, as in the case under consideration, Congress itself exercises the power. All that
is to be done would be to apply and enforce the law when sufficiently definitive and not
constitutional infirm.
The term capital and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation. The capital subscribed is the
total amount of the capital that persons (subscribers or shareholders) have agreed to take and
pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it
is the amount that the corporation receives, inclusive of the premiums if any, in consideration of
the original issuance of the shares.In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital account. It is the same amount
that can loosely be termed as the trust fund of the corporation. The Trust Fund doctrine considers
this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the
creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefor.[12]
In the same way that the Court in PLDT vs. PSC has rejected the value of the property and
equipment as being the proper basis for the fee imposed by Section 40(e) of the Public Service
Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of computing
the fee on the par value of [PLDTs] capital stock subscribed or paid excluding stock dividends,
premiums, or capital in excess of par. Neither, however, is the assessment made by the National
Telecommunications Commission on the basis of the market value of the subscribed or paid-in
capital stock acceptable since it is itself a deviation from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and regulation
fee under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of PLDTs outstanding
capital stock as of December 31, 1987, amounted to P7,495,161.00. The same was based on the
amount of P1,277,934,390.00 of serial preferred stocks and P221,097,785.00 of common stocks
or a total of P1,499,032,175.00. The assessment was reported to include stock dividends,
premium on issued common shares and premium on preferred shares converted into common
stock.[13] The actual capital paid or the amount of capital stock paid and for which PLDT received
actual payments were not disclosed or extant in the records before the Court. The only other item
available is the amount assessed by petitioner from PLDT, which had been based on market value
of the outstanding capital stock on given dates.[14]
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case of
Philippine Long Distance Telephone Company vs. Public Service Commission, it should be
reiterated that the proper basis for the computation of subject fee under Section 40(e) of the
Public Service Act, as amended by Republic Act No. 3792, is the capital stock subscribed or paid
and not, alternatively, the property and equipment.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its Resolution,
dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the National
Telecommunication Commission, dated September 29, 1993, and Order, dated May 3, 1994, in
NTC case No. 90-223, are hereby SET ASIDE and the National Telecommunication Commission is
hereby ordered to make a re-computation of the fee to be imposed on Philippine Long Distance
Telephone Company on the basis of the latters capital stock subscribed or paid and strictly in
accordance with the foregoing disquisition and conclusion.