G.R. No.
L-29059 December 15, 1987 cement was taxable as a manufactured product under Section 186, in connection with Section 194(4) of the said
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the
Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu
Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private
respondent, the latter moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales
tax liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a
balance owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of
the private respondent was still being questioned and therefore could not be set-off against the refund. 4
In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should
be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the
Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt
from sales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of
distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any
national internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed
in Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax
assessments have already prescribed because the prescriptive period should be counted from the filing of the
sales tax returns, which had not yet been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a
manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of
the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland
Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that
"before the effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code,
Code," thereby implying that it was not considered a manufactured product afterwards. Also, the alleged sales
tax deficiency could not as yet be enforced against it because the tax assessment was not yet final, the same
being still under protest and still to be definitely resolved on the merits. Besides, the assessment had already
prescribed, not having been made within the reglementary five-year period from the filing of the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement
has always been considered a manufactured product and not a mineral product. This matter was extensively
discussed and categorically resolved in Commissioner of Internal Revenue v. Republic Cement
Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the
pertinent cases, declared for a unanimous Court:
From all the foregoing cases, it is clear that cement qua cement was never considered as a
mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at
least 80% of its components are minerals, for the simple reason that cement is the product of
a manufacturing process and is no longer the mineral product contemplated in the Tax Code
(i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad
valorem tax.
What has apparently encouraged the herein respondents to maintain their present posture is
the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29,
1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision
give the impression that Republic Act No. 1299, which amended Section 246, reclassified
cement as a mineral product that was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance on the decision penned by
Justice Angeles is misplaced. The said decision is no authority for the proposition
that after the enactment of Republic Act No. 1299 in 1955 (defining mineral product as things
with at least 80% mineral content), cement became a 'mineral product," as distinguished
from a "manufactured product," and therefore ceased to be subject to sales tax. It was not
necessary for the Court to so rule. It was enough for the Court to say in effect that even
assuming Republic Act No. 1299 had reclassified cement was a mineral product, the
reclassification could not be given retrospective application (so as to justify the refund of
sales taxes paid before Republic Act 1299 was adopted) because laws operate prospectively
only, unless the legislative intent to the contrary is manifest, which was not so in the case of
Republic Act 1266. [The situation would have been different if the Court instead had ruled in
favor of refund, in which case it would have been absolutely necessary (1) to make an
unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not
 subject to sales tax), and (2) to declare the law retroactive, as a basis for granting refund of
sales tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar
as its pronouncements or any implication therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:
The nature of cement as a "manufactured product" (rather than a "mineral product") is well-
settled. The issue has repeatedly presented itself as a threshold question for determining the
basis for computing the ad valorem mining tax to be paid by cement Companies. No
pronouncement was made in these cases that as a "manufactured product" cement is subject
to sales tax because this was not at issue.
The decision sought to be reconsidered here referred to the legislative history of Republic Act
No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec.
246 of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-
20563) that cement was subject to sales tax prior to the effectivity •f Republic Act No. 1299
cannot be construed to mean that, after the law took effect, cement ceased to be so subject
to the tax. To erase any and all misconceptions that may have been spawned by reliance on
the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29,
1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly overruled it
insofar as it may conflict with the decision of August 10, 1983, now subject of these motions
for reconsideration.
On the question of prescription, the private respondent claims that the five-year reglementary period for the
assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the
assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad
valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the
aforestated resolution:
In order to avail itself of the benefits of the five-year prescription period under Section 331 of
the Tax Code, the taxpayer should have filed the required return for the tax involved, that is,
a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16
SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the subject
periods. Both parties admit that returns were made for the ad valorem mining tax. CEPOC
argues that said returns contain the information necessary for the assessment of the sales
tax. The Commissioner does not consider such returns as compliance with the requirement
for the filing of tax returns so as to start the running of the five-year prescriptive period.
We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that
the filing of an income tax return cannot be considered as substantial compliance with the
requirement of filing sales tax returns, in the same way that an income tax return cannot be
considered as a return for compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of
Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax
returns filed by CEPOC, the statute of stations in Sec. 331 did not begin to run against the
government. The assessment made by the Commissioner in 1968 on CEPOC's cement sales
during the period from July 1, 1959 to December 31, 1960 is not barred by the five-year
prescriptive period. Absent a return or when the return is false or fraudulent, the applicable
period is ten (10) days from the discovery of the fraud, falsity or omission. The question in
this case is: When was CEPOC's omission to file tha return deemed discovered by the
government, so as to start the running of said period? 13
The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the
urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be
postponed by simply questioning their validity, the machinery of the state would grind to a halt and all
government functions would be paralyzed. That is the reason why, save for the exception already noted, the Tax
Code provides:
Sec. 291. Injunction not available to restrain collection of tax. — No court shall have authority
to grant an injunction to restrain the collection of any national internal revenue tax, fee or
charge imposed by this Code.
It goes without saying that this injunction is available not only when the assessment is already being questioned
in a court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the
administrative level. There is all the more reason to apply the rule here because it appears that even after
crediting of the refund against the tax deficiency, a balance of more than P 4 million is still due from the private
respondent.
To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which
he will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold
that the respondent Court of Tax Appeals erred in ordering such a charade.
WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE,
without any pronouncement as to costs.
SO ORDERED.
G.R. Nos. 89898-99 October 1, 1990
MUNICIPALITY OF MAKATI, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE GUZMAN, JR., as Judge RTC of Makati, Branch
CXLII ADMIRAL FINANCE CREDITORS CONSORTIUM, INC., and SHERIFF SILVINO R. PASTRANA, respondents.
Defante & Elegado for petitioner.
Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium, Inc.
RESOLUTION
CORTÉS, J.:
The present petition for review is an off-shoot of expropriation proceedings initiated by petitioner Municipality
of Makati against private respondent Admiral Finance Creditors Consortium, Inc., Home Building System & Realty
Corporation and one Arceli P. Jo, involving a parcel of land and improvements thereon located at Mayapis St.,
San Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT No. S-5499.
It appears that the action for eminent domain was filed on May 20, 1986, docketed as Civil Case No. 13699.
Attached to petitioner's complaint was a certification that a bank account (Account No. S/A 265-537154-3) had
been opened with the PNB Buendia Branch under petitioner's name containing the sum of P417,510.00, made
pursuant to the provisions of Pres. Decree No. 42. After due hearing where the parties presented their respective
appraisal reports regarding the value of the property, respondent RTC judge rendered a decision on June 4, 1987,
fixing the appraised value of the property at P5,291,666.00, and ordering petitioner to pay this amount minus
the advanced payment of P338,160.00 which was earlier released to private respondent.
After this decision became final and executory, private respondent moved for the issuance of a writ of execution.
This motion was granted by respondent RTC judge. After issuance of the writ of execution, a Notice of
Garnishment dated January 14, 1988 was served by respondent sheriff Silvino R. Pastrana upon the manager of
the PNB Buendia Branch. However, respondent sheriff was informed that a "hold code" was placed on the
account of petitioner. As a result of this, private respondent filed a motion dated January 27, 1988 praying that
an order be issued directing the bank to deliver to respondent sheriff the amount equivalent to the unpaid
balance due under the RTC decision dated June 4, 1987.
Petitioner filed a motion to lift the garnishment, on the ground that the manner of payment of the expropriation
amount should be done in installments which the respondent RTC judge failed to state in his decision. Private
respondent filed its opposition to the motion.
Pending resolution of the above motions, petitioner filed on July 20, 1988 a "Manifestation" informing the court
that private respondent was no longer the true and lawful owner of the subject property because a new title
over the property had been registered in the name of Philippine Savings Bank, Inc. (PSB) Respondent RTC judge
issued an order requiring PSB to make available the documents pertaining to its transactions over the subject
property, and the PNB Buendia Branch to reveal the amount in petitioner's account which was garnished by
respondent sheriff. In compliance with this order, PSB filed a manifestation informing the court that it had
consolidated its ownership over the property as mortgagee/purchaser at an extrajudicial foreclosure sale held on
April 20, 1987. After several conferences, PSB and private respondent entered into a compromise agreement
whereby they agreed to divide between themselves the compensation due from the expropriation proceedings.
Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved the
compromise agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the sum of
P4,953,506.45 which corresponds to the balance of the appraised value of the subject property under the RTC
decision dated June 4, 1987, from the garnished account of petitioner; and, (3) ordered PSB and private
respondent to execute the necessary deed of conveyance over the subject property in favor of petitioner.
Petitioner's motion to lift the garnishment was denied.
Petitioner filed a motion for reconsideration, which was duly opposed by private respondent. On the other hand,
for failure of the manager of the PNB Buendia Branch to comply with the order dated September 8, 1988, private
respondent filed two succeeding motions to require the bank manager to show cause why he should not be held
in contempt of court. During the hearings conducted for the above motions, the general manager of the PNB
Buendia Branch, a Mr. Antonio Bautista, informed the court that he was still waiting for proper authorization
from the PNB head office enabling him to make a disbursement for the amount so ordered. For its part,
petitioner contended that its funds at the PNB Buendia Branch could neither be garnished nor levied upon
execution, for to do so would result in the disbursement of public funds without the proper appropriation
required under the law, citing the case of Republic of the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968,
23 SCRA 899].
Respondent trial judge issued an order dated December 21, 1988 denying petitioner's motion for reconsideration
on the ground that the doctrine enunciated in Republic v. Palacio did not apply to the case because petitioner's
PNB Account No. S/A 265-537154-3 was an account specifically opened for the expropriation proceedings of the
subject property pursuant to Pres. Decree No. 42. Respondent RTC judge likewise declared Mr. Antonio Bautista
guilty of contempt of court for his inexcusable refusal to obey the order dated September 8, 1988, and thus
ordered his arrest and detention until his compliance with the said order.
Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions for certiorari with the
Court of Appeals, which were eventually consolidated. In a decision promulgated on June 28, 1989, the Court of
Appeals dismissed both petitions for lack of merit, sustained the jurisdiction of respondent RTC judge over the
funds contained in petitioner's PNB Account No. 265-537154-3, and affirmed his authority to levy on such funds.
Its motion for reconsideration having been denied by the Court of Appeals, petitioner now files the present
petition for review with prayer for preliminary injunction.
On November 20, 1989, the Court resolved to issue a temporary restraining order enjoining respondent RTC
judge, respondent sheriff, and their representatives, from enforcing and/or carrying out the RTC order dated
December 21, 1988 and the writ of garnishment issued pursuant thereto. Private respondent then filed its
comment to the petition, while petitioner filed its reply.
Petitioner not only reiterates the arguments adduced in its petition before the Court of Appeals, but also alleges
for the first time that it has actually two accounts with the PNB Buendia Branch, to wit:
xxx xxx xxx
(1) Account No. S/A 265-537154-3 — exclusively for the expropriation of the subject
property, with an outstanding balance of P99,743.94.
(2) Account No. S/A 263-530850-7 — for statutory obligations and other purposes of the
municipal government, with a balance of P170,098,421.72, as of July 12, 1989.
xxx xxx xxx
[Petition, pp. 6-7; Rollo, pp. 11-12.]
Because the petitioner has belatedly alleged only in this Court the existence of two bank accounts, it may fairly
be asked whether the second account was opened only for the purpose of undermining the legal basis of the
assailed orders of respondent RTC judge and the decision of the Court of Appeals, and strengthening its reliance
on the doctrine that public funds are exempted from garnishment or execution as enunciated in Republic v.
Palacio [supra.] At any rate, the Court will give petitioner the benefit of the doubt, and proceed to resolve the
principal issues presented based on the factual circumstances thus alleged by petitioner.
Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation proceedings it
had initiated over the subject property, petitioner poses no objection to the garnishment or the levy under
execution of the funds deposited therein amounting to P99,743.94. However, it is petitioner's main contention
that inasmuch as the assailed orders of respondent RTC judge involved the net amount of P4,965,506.45, the
funds garnished by respondent sheriff in excess of P99,743.94, which are public funds earmarked for the
municipal government's other statutory obligations, are exempted from execution without the proper
appropriation required under the law.
There is merit in this contention. The funds deposited in the second PNB Account No. S/A 263-530850-7 are
public funds of the municipal government. In this jurisdiction, well-settled is the rule that public funds are not
subject to levy and execution, unless otherwise provided for by statute [Republic v. Palacio, supra.; The
Commissioner of Public Highways v. San Diego, G.R. No. L-30098, February 18, 1970, 31 SCRA 616]. More
particularly, the properties of a municipality, whether real or personal, which are necessary for public use cannot
be attached and sold at execution sale to satisfy a money judgment against the municipality. Municipal revenues
derived from taxes, licenses and market fees, and which are intended primarily and exclusively for the purpose of
financing the governmental activities and functions of the municipality, are exempt from execution [See Viuda De
Tan Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality of Paoay, Ilocos Norte v. Manaois,
86 Phil. 629 (1950); Municipality of San Miguel, Bulacan v. Fernandez, G.R. No. 61744, June 25, 1984, 130 SCRA
56]. The foregoing rule finds application in the case at bar. Absent a showing that the municipal council of Makati
has passed an ordinance appropriating from its public funds an amount corresponding to the balance due under
the RTC decision dated June 4, 1987, less the sum of P99,743.94 deposited in Account No. S/A 265-537154-3, no
levy under execution may be validly effected on the public funds of petitioner deposited in Account No. S/A 263-
530850-7.
Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse. Where a
municipality fails or refuses, without justifiable reason, to effect payment of a final money judgment rendered
against it, the claimant may avail of the remedy of mandamus in order to compel the enactment and approval of
the necessary appropriation ordinance, and the corresponding disbursement of municipal funds therefor
[See Viuda De Tan Toco v. The Municipal Council of Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco
v. Gonzales, 108 Phil. 247 (1960)].
In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed by petitioner. No appeal
was taken therefrom. For three years now, petitioner has enjoyed possession and use of the subject property
notwithstanding its inexcusable failure to comply with its legal obligation to pay just compensation. Petitioner
has benefited from its possession of the property since the same has been the site of Makati West High School
since the school year 1986-1987. This Court will not condone petitioner's blatant refusal to settle its legal
obligation arising from expropriation proceedings it had in fact initiated. It cannot be over-emphasized that,
within the context of the State's inherent power of eminent domain,
. . . [j]ust compensation means not only the correct determination of the amount to be paid
to the owner of the land but also the payment of the land within a reasonable time from its
taking. Without prompt payment, compensation cannot be considered "just" for the property
owner is made to suffer the consequence of being immediately deprived of his land while
being made to wait for a decade or more before actually receiving the amount necessary to
cope with his loss [Cosculluela v. The Honorable Court of Appeals, G.R. No. 77765, August 15,
1988, 164 SCRA 393, 400. See also Provincial Government of Sorsogon v. Vda. de Villaroya,
G.R. No. 64037, August 27, 1987, 153 SCRA 291].
The State's power of eminent domain should be exercised within the bounds of fair play and justice. In the case
at bar, considering that valuable property has been taken, the compensation to be paid fixed and the
municipality is in full possession and utilizing the property for public purpose, for three (3) years, the Court finds
that the municipality has had more than reasonable time to pay full compensation.
WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to immediately pay Philippine
Savings Bank, Inc. and private respondent the amount of P4,953,506.45. Petitioner is hereby required to submit
to this Court a report of its compliance with the foregoing order within a non-extendible period of SIXTY (60)
DAYS from the date of receipt of this resolution.
The order of respondent RTC judge dated December 21, 1988, which was rendered in Civil Case No. 13699, is SET
ASIDE and the temporary restraining order issued by the Court on November 20, 1989 is MADE PERMANENT.
SO ORDERED.
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the
other hand, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good,
may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue
flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the
office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his
file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7,
1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April
23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the decision or ruling challenged.7 It is true that as a rule the
warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted
doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it
filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara
gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and
was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was
filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965.
The period started running again only on April 7, 1965, when the private respondent was definitely informed of
the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was
filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work
in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be (a) Expenses:
personal holding company income 12 but later conformed to the decision of the respondent court rejecting this
assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the persons (1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable
among whom it was distributed It has been established that the Philippine Sugar Estate Development Company year in carrying on any trade or business, including a reasonable allowance for salaries or
had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. other compensation for personal services actually rendered; ... 22
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
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
in it.14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation
purchased the PSEDC properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals.16 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
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns
deductibility in the case of compensation payments is whether they are reasonable and are,
and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the evidence,
in fact, payments purely for service. This test and deductibility in the case of compensation
that no distribution of dividends was involved.18
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:
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,
Any amount paid in the form of compensation, but not in fact as the purchase price of
whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
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
We find that these suspicions were adequately met by the private respondent when its President, Alberto excess of those ordinarily paid for similar services, and the excessive payment correspond or
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum bear a close relationship to the stockholdings of the officers of employees, it would seem
but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a likely that the salaries are not paid wholly for services rendered, but the excessive payments
family corporation where strict business procedures were not applied and immediate issuance of receipts was are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18,
not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting 325.)
of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to
be informal. This arrangement was understandable, however, in view of the close relationship among the
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
persons in the family corporation.
controlling stockholders. 23

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the
should be, as it was, sufficiently recompensed.
respondent court is in accord with the following provision of the Tax Code:

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part
deductions —
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 "WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary merit."[3]
method of exaction by those in the seat of power.
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as follows:
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 "WHEREFORE, in [view of] all the foregoing, Petitioners claim for refund is hereby DENIED
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the and this Petition for Review is DISMISSED for lack of merit."[4]
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.
Also assailed is the November 8, 1995 CA Resolution[5] denying reconsideration.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
The Facts
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. The facts of this case were summarized by the CA in this wise:

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs. "This case involves a claim for tax refund in the amount of P112,491.00 representing
petitioners tax withheld for the year 1989.
SO ORDERED.
In its Corporate Annual Income Tax Return for the year 1989, the following items are
reflected:
[G.R. No. 122480. April 12, 2000]

Income.............................P1,017,931,831.00
BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and the
Deductions........................P1,026,218,791.00
COMMISSIONER OF INTERNAL REVENUE, respondents.
Net Income (Loss).................(P8,286,960.00)
Taxable Income (Loss).............P8,286,960.00
DECISION
Less:
PANGANIBAN, J.:
1988 Tax Credit...............P185,001.00
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same 1989 Tax Credit...............P112,491.00
standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a
refund, the State should not invoke technicalities to keep money not belonging to it. No one, not even the State,
TOTAL AMOUNT......................P297,492.00
should enrich oneself at the expense of another.
REFUNDABLE

The Case
"It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable
amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present
Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of Appeals [1] (CA) in CA-GR case. However, petitioner declared in the same 1989 Income Tax Return that the said total
SP No. 34240, which affirmed the December 24, 1993 Decision[2] of the Court of Tax Appeals (CTA). The CA refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable
disposed as follows: year.
 "On October 11, 1990, petitioner filed a written claim for refund in the amount of
P112,491.00 with the respondent Commissioner of Internal Revenue alleging that it did not
apply the 1989 refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual
Income Tax Return or other tax liabilities due to the alleged business losses it incurred for the
same year.
"Without waiting for respondent Commissioner of Internal Revenue to act on the claim for
refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking
the refund of the amount of P112,491.00.
"The respondent Court of Tax Appeals dismissed petitioners petition on the ground that
petitioner failed to present as evidence its Corporate Annual Income Tax Return for 1990 to
establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive
of the amount P112,491.00 which is the subject of the present controversy) to its 1990
income tax liability.
"Petitioner filed a motion for reconsideration, however, the same was denied by respondent
court in its Resolution dated May 6, 1994."[6]
As earlier noted, the CA affirmed the CTA. Hence, this Petition.[7]
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
"It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual
income Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its
previous declaration in the 1989 Income Tax Return that the said amount will be applied as a
tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is
no basis to grant the claim for refund. x x x
"Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation
of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. In other words, the burden of proof rests upon the taxpayer to
establish by sufficient and competent evidence its entitlement to the claim for refund."[8]
Issue
In their Memorandum, respondents identify the issue in this wise:
"The sole issue to be resolved is whether or not petitioner is entitled to the refund of
P112,491.00, representing excess creditable withholding tax paid for the taxable year
1989."[9]
The Courts Ruling
The Petition is meritorious.
Main Issue: Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund
amounting to P112,491. Pursuant to Section 69[10] of the 1986 Tax Code which states that a corporation entitled
to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year,
petitioner indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the
succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR) that it
would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was
forthcoming, petitioner filed its claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax
Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held
that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this
presumption because it did not present its 1990 Return, which would have shown that the amount in dispute
was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are binding on this
Court. This rule, however, does not apply where, inter alia, the judgment is premised on a misapprehension of
facts, or when the appellate court failed to notice certain relevant facts which if considered would justify a
different conclusion.[11] This case is one such exception.
In the first place, petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit.
During the trial before the CTA, Ms. Yolanda Esmundo, the manager of petitioners accounting department,
testified to this fact. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez,
petitioners vice-president, stating that the amount of P112,491 "has not been and/or will not be automatically
credited/offset against any succeeding quarters income tax liabilities for the rest of the calendar year ending
December 31, 1990." Also presented were the quarterly returns for the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioners claim. In fact, it presented no
evidence at all. Because it ought to know the tax records of all taxpayers, the CIR could have easily disproved
petitioners claim. To repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to petitioners Motion for
Reconsideration filed before the CTA.[12] A final adjustment return shows whether a corporation incurred a loss
or gained a profit during the taxable year. In this case, that Return clearly showed that petitioner
incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioners
Motion and the 1990 Final Adjustment Return attached thereto. In denying the Motion for Reconsideration,
however, the CTA ignored the said Return. In the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after the trial. The law creating
the Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly
by the technical rules of evidence."[13] The paramount consideration remains the ascertainment of truth. Verily,
the quest for orderly presentation of issues is not an absolute. It should not bar courts from considering
undisputed facts to arrive at a just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner
suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the
amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence
presented during the trial, the appellate court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action.
They are tools designed to facilitate the attainment of justice.[14] But there can be no just determination of the
present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even
before this Court.[15] To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it
incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and
this Court to withhold the tax refund which rightfully belongs to the petitioner.
Public respondents maintain that what was attached to petitioners Motion for Reconsideration was not the final
adjustment Return, but petitioners first two quarterly returns for 1990.[16] This allegation is wrong. An
examination of the records shows that the 1990 Final Adjustment Return was attached to the Motion for
Reconsideration. On the other hand, the two quarterly returns for 1990 mentioned by respondent were in fact
attached to the Petition for Review filed before the CTA. Indeed, to rebut respondents specific contention,
petitioner submitted before us its Surrejoinder, to which was attached the Motion for Reconsideration and
Exhibit "A" thereof, the Final Adjustment Return for 1990.[17]
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax
Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 x x x." [18] Respondent, however, urges this Court not to
take judicial notice of the said case.[19]
As a rule, "courts are not authorized to take judicial notice of the contents of the records of other cases, even
when such cases have been tried or are pending in the same court, and notwithstanding the fact that both cases
may have been heard or are actually pending before the same judge."[20]
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters ought to be known
to judges because of their judicial functions. In this case, the Court notes that a copy of the Decision in CTA Case
No. 4897 was attached to the Petition for Review filed before this Court. Significantly, respondents do not claim
at all that the said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the contents of the
said Decision, claiming merely that the Court cannot take judicial notice thereof.
To our mind, respondents reasoning underscores the weakness of their case. For if they had really believed that
petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990.
Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein -- that petitioner
suffered a net loss in 1990 in the same way that it refused to controvert the same fact established by petitioners
other documentary exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioners case. It is merely one more bit
of information showing the stark truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the claimant. Under the facts of this case, we hold that petitioner has
established its claim. Petitioner may have failed to strictly comply with the rules of procedure; it may have even
been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed
fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax
credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at
the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in
paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes.
Indeed, the State must lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of the Court of
Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is ordered to refund to petitioner the
amount of P112,491 as excess creditable taxes paid in 1989. No costs.
SO ORDERED.
G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX
APPEALS, respondents.
PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit
for amounts representing pre-payment of income and common carrier's taxes under the National Internal
Revenue Code, section 24 (b) (2), as amended.1
Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies,
Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA2 chartered M/V
Gardenia to load 16,500 metric tons of raw sugar in the Philippines.3 On December 23, 1980, Mr. Edilberto Lising,
the operations supervisor of Soriamont Agency,4 paid the required income and common carrier's taxes in the
respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS
(P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75)
based on the expected gross receipts of the vessel.5 Upon arriving, however, at Guimaras Port of Iloilo, the vessel
found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed to
have the vessel sail for Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from
the charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED
SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before
petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim,
hence, on May 14, 1981, private respondent filed a petition for review 6 before public respondent Court of Tax
Appeals.
Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are
presumed to have been collected in accordance with law; that in an action for refund, the burden of proof is
upon the taxpayer to show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain
said burden is fatal to the action for refund; and that claims for refund are construed strictly against tax
claimants.7
After trial, respondent tax court decided in favor of the private respondent. It held:
It has been shown in this case that 1) the petitioner has complied with the mentioned
statutory requirement by having filed a written claim for refund within the two-year period
from date of payment; 2) the respondent has not issued any deficiency assessment nor
disputed the correctness of the tax returns and the corresponding amounts of prepaid
income and percentage taxes; and 3) the chartered vessel sailed out of the Philippine port
with absolutely no cargo laden on board as cleared and certified by the Customs authorities;
nonetheless 4) respondent's apparent bit of reluctance in validating the legal merit of the
claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for
refund which is the subject matter of this case has not yet submitted his report. Whether or
not respondent will present his evidence will depend on the said report of the examiner."
(Respondent's Manifestation and Motion dated September 7, 1982). Be that as it may the
case was submitted for decision by respondent on the basis of the pleadings and records and
by petitioner on the evidence presented by counsel sans the respective memorandum.
An examination of the records satisfies us that the case presents no dispute as to relatively
simple material facts. The circumstances obtaining amply justify petitioner's righteous
indignation to a more expeditious action. Respondent has offered no reason nor made effort
to submit any controverting documents to bash that patina of legitimacy over the claim. But
as might well be, towards the end of some two and a half years of seeming impotent anguish
over the pendency, the respondent Commissioner of Internal Revenue would furnish the
satisfaction of ultimate solution by manifesting that "it is now his turn to present evidence,
however, the Appellate Division of the BIR has already recommended the approval of
petitioner's claim for refund subject matter of this petition. The examiner who examined this
case has also recommended the refund of petitioner's claim. Without prejudice to
withdrawing this case after the final approval of petitioner's claim, the Court ordered the
resetting to September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not
fashion any further issue into an apparently settled legal situation as far be it from a comedy
of errors it would be too much of a stretch to hold and deny the refund of the amount of
prepaid income and common carrier's taxes for which petitioner could no longer be made
accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for
review on certiorari.
Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it
failed to prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when
it did not present its charter agreement.
We find no merit in the petition.
There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which
at that time provides as follows:
A corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income derived in the preceding taxable year from all
sources within the Philippines: Provided, however, That international carriers shall pay a tax
of two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross Philippine
Billings" include gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo or mail originates from
the Philippines. The gross revenue realized from the said cargo or mail include the gross
freight charge up to final destination. Gross revenue from chartered flights originating from
the Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or
payment of the passage documents . . . . .
Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes
depending on the amount of income it derives from sources within the Philippines. Thus, before such a tax
liability can be enforced the taxpayer must be shown to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for exemption8 and should be
construed in strictissimi juris against the taxpayer.9 Likewise, there can be no disagreement with petitioner's
stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund.
The pivotal issue involves a question of fact — whether or not the private respondent was able to prove that it
derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the
government.
The respondent court held that sufficient evidence has been adduced by the private respondent proving that it
derived no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and
hence must be sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia"
arrived in Iloilo on January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo
laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of Customs,
Port of Iloilo while Exhibit "F" is the Certification by the Officer-in-Charge, Export Division of the Bureau of
Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of
Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records also reveal
that in the course of the proceedings in the court a quo, petitioner hedged and hawed when its turn came to
present evidence. At one point, its counsel manifested that the BIR examiner and the appellate division of the
BIR have both recommended the approval of private respondent's claim for refund. The same counsel even
represented that the government would withdraw its opposition to the petition after final approval of private
respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition even if it
did not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court
in its Decision and for good reason. Taxpayers owe honesty to government just as government owes fairness to
taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that
private respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The
contention cannot succeed. It presupposes without any basis that the charter agreement is prejudicial evidence
against the private respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or
without transporting its supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no
court of justice will regard it as truth. Moreover, the charter agreement could have been presented by petitioner
itself thru the proper use of a subpoena duces tecum. It never did either because of neglect or because it knew it
would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot take to task the private
respondent for not presenting what it mistakenly calls "suppressed evidence."
We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75)
erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing
that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen
(15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent is
just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs
to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that
BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling in Roxas v. Court
of Tax Appeals 12 is apropos to recall:
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.
IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is
AFFIRMED in toto. No costs.
SO ORDERED.
G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.
REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated from the same
factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by
resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter,
Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a
Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion
of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to
extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new
concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates
produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said
loan was to be used for the purchase of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for
purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of
¥4,320,000,000.00, at about the same time as the approval of its loan for ¥2,880,000,000.00 from a consortium
of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at
the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the
loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to
Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
the total amount of loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter
totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of
P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue
Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be
applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of
Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in
the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition
for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the
claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and
financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis
for private repondents' claim for exemption from paying the tax on the interest payments on the loan as earlier
stated. It was further claimed that the interest payments on the loan from the consortium of Japanese banks
were likewise exempt because said loan supposedly came from or were financed by Eximbank. The provision of
the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2)
financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or
regional financing institutions established by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon
manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being
reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16,
1976, the said division recommended to petitioner the approval of private respondent's claim. However, before
action could be taken thereon, respondent court scheduled the case for hearing on September 30, 1977, during
which trial private respondents presented their evidence while petitioner submitted his case on the basis of the
records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of
Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material
averments of private respondents when he supposedly prayed "for judgment on the pleadings without off-spring
proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers and documents
pertaining to the loan of ¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same
amount given to Atlas. It also observed that the money for the loans from the consortium of private Japanese
banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded
that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through
which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining &
Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this
Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of
P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to
the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for
exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA
Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents
dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on
March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal
was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this
Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No.
54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and,
therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a
mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on
loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should
be deemed to have admitted the allegations of the private respondents when it submitted the case on the basis
of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner
nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its
allegations. The records of the Bureau of Internal Revenue relevant to the case were duly submitted and
admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not only on the pleadings but on the evidence
adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect
and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of
gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the
holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining
and proven in these cases, however, warrant a departure from said general rule since we are convinced that
there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative
in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to
Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas
as the seller of the copper concentrates. From the categorical language used in the document, one prestation
was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it
implausible, if not vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said
transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its
loan application with the former was that the amount being procured would be used as a loan to and in
consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose could
not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as
respondent court believes, said corporations would have specifically so stated, especially considering their
experience and expertise in financial transactions, not to speak of the amount involved and its purchasing value
in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following
arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It is not a
mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI
where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo
mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years,
the entire copper concentrate that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the
consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its
part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources.
And from what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained
the $20 million from the EXIMBANK, of Japan and the consortium of Japanese banks financed through
the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private
entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the
loans were secured by MITSUBISHI primarily "as a loan to and in consideration for importing copper
concentrates from ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI
and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate
contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not
EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the
 Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and
ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf of
EXIMBANK, of Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and becomes
the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said
amount ceased to be the property of the bank and became the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the
former being the owner of the $20 million upon completion of its loan contract with EXIMBANK of
Japan.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth
thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.
Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in paying
Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to
the manner or procedure for the payment of the latter's obligation is their own concern. It should also be noted
that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract
with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and
including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is
the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove
that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge.
Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax
code, are entitled to exemption and which should indispensably be the party in interest in this case.

The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic
interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the 15%
analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution
withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK, but the interest income
of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of
earned by MITSUBISHI from the loan to ATLAS. . . . 13
pervasive relevance at this time, that while international comity is invoked in this case on the nebulous
representation that the funds involved in the loans are those of a foreign government, scrupulous care must be
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a
appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities,
considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month after which in turn will negotiate independently with their governments, could be availed of to take advantage of the
the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract tax exemption law under discussion.
of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing
copper concentrates from Atlas, but all that this proves is the justification for the loan as represented by
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980
Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong
and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they
see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not
unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it SO ORDERED.
that the same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making
loans except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to
establish such submission by adequate evidence but it posits the unfair and unexplained imputation that, for
reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to
accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real
obligee. [G.R. No. 112024. January 28, 1999]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax
TAX APPEALS and COURT OF APPEALS, respondents. credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees
DECISION from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
QUISUMBING, J.: Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as
This petition for review assails the Resolution[1] of the Court of Appeals dated September 22, CTA Case No. 4309 entitled: Philippine Bank of Communications vs. Commissioner of Internal Revenue.
1993, affirming the Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the claims of the
petitioner for tax refund and tax credits, and disposing as follows: The losses petitioner incurred as per the summary of petitioners claims for refund and tax credit for 1985
and 1986, filed before the Court of Tax Appeals, are as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due course. The Decision of the Court 1985 1986
of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto. Net Income (Loss) (P25,317,228.00) (P14,129,602.00)
Tax Due NIL NIL
SO ORDERED.[4] Quarterly tax
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
The Court of Tax Appeals earlier ruled as follows:
Excess Tax Payments P5,299,749.50*========== P234,077.69=============
==== =
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in the amount
of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo difference was noted.
refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically
credited the same to the succeeding year. The petition for review is dismissed for lack of merit.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of
petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond
SO ORDERED.[5]
the two-year reglementary period provided for by law. The petitioners claim for refund in 1986 amounting
to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its
The facts on record show the antecedent circumstances pertinent to this case. tax payment in the succeeding year.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but the same was
under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported denied due course for lack of merit.[6]
profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBComs tax
credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of
0747-85 for P3,401,701.00 and P1, 615,253.00, respectively. Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTAs resolution dated July
20, 1993. Hence this petition now before us.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the
year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax The issues raised by the petitioner are:
liability. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss
I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of BIR in RMC No.
of P14,129,602.00, and thus declared no tax payable for the year.
7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and credit of its 1985-86 excess quarterly income tax payments -- can be prejudiced by the
remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. subsequent BIR rejection, applied retroactively, of its assurances in RMC No. 7-85 that the
 prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two
years but ten (10).[7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBComs
claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation,
without proof, that there were taxes due in 1987 and that PBCom availed of tax-crediting that
year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax
refund or tax credits on the ground of prescription, despite petitioners reliance on RMC No. 7-85, changing the
prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid
income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may
claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article
1144 of the Civil Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM
THE FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide:
xxxxxxxxx
It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of
overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in
accordance with Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the
case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax
or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing
refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue
Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under
these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of
the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to
facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit within the two-year period. As already stated, actions hereon by
the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the
Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article
1144 of the Civil Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its declared circular if
it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting Corporation vs. Court of Tax
Appeals[10] petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have
no retroactive effect if it would be prejudicial to taxpayers. In ABS-CBN case, the Court held that the government
is precluded from adopting a position inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rule as
follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated
by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be
prejudicial to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required
of him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from
the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of
the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle,
to wit: ACCRA Investments Corp. vs. Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs. TMX
Sales, Inc., et al..[12] Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the
petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15,
1988 to seek relief from the court.Further, respondent Commissioner stresses that when the petitioner filed the
case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is
fatal to petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to
the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards
the two-year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds
for the State to finance the needs of the citizenry and to advance the common weal. [13] Due process of law under
the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon
taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered
with as little as possible.[14]
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law
because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly
delayed or hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides
for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally
collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause that may arise after payment; Provided however, That
the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been erroneously paid. (Italics
supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from the time of filing the Adjustment Return and final
payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this Court explained the
application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the refund is
ascertained, which can only be determined after a final adjustment return is accomplished. In the present case,
this date is April 16, 1984, and two years from this date would be April 16, 1986. x x x As we have earlier said in
the TMX Sales case, Sections 68,[16] 69,[17] and 70[18] on Quarterly Corporate Income Tax Payment and Section 321
should be considered in conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of
two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense
of more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts.Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. [20] Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by administrative officials to
implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary
to the provisions and spirit of Act. No. 4003 as amended, because whereas the prohibition prescribed in said
Fisheries Act was for any single period of time not exceeding five years duration, FAO No. 37-1 fixed no period,
that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-
1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in
case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a
law cannot go beyond the terms and provisions of the latter. x x x In this connection, the attention of the
technical men in the offices of Department Heads who draft rules and regulation is called to the importance and
necessity of closely following the terms and provisions of the law which they intended to implement, this to
avoid any possible misunderstanding or confusion as in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its
officials or agents.[24] As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the
Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec.
230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be
given weight for to do so would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped
by the principle of non-retroactivity of BIR rulings. Again We do not agree. The Memorandum Circular, stating
that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the
decision, stating that the taxpayer should still file a claim for a refund or tax credit and the corresponding
petition for review within the two-year prescription period, and that the lengthening of the period of limitation
on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of
Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioners
claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and
in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative
interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec.
230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes as part of the
legal system of the country. But administrative decisions do not enjoy that level of recognition.A memorandum-
circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action. For there are
no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such
wrong interpretation could not place the Government in estoppel to correct or overrule the same. [27] Moreover,
the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because
the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal
Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a
claim for exemption and should be construed in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTAs
decision denying its claim for refund of P 234,077.69 (tax overpaid in 1986), based on mere speculation, without
proof, that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly
payments over the actual income tax computed 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 (by marking the option box
provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for
the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative,
and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply
for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was
not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and
applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two
remedies of refund and tax credit are alternative.[30]
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as
specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect.Moreover, the
1987 annual corporate tax return of the petitioner was not offered as evidence to controvert said fact. Thus, we
are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their
part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal
Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of
Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed
provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of
tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and
other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of
taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would
be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the
exercise of his profession vis-a-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. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest
of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax
is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does
properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does,
to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803
dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion
in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as
"a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate.
Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this
Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or
executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged
statutory provision — as petitioner here alleges — fails to abide by its command, then this Court must so declare
and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on
taxable net income derived from business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does
not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here
would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the
authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they
arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to
such a conclusion. Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds
no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an
arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of
the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the
state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject
to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent
domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the
common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in
reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the conditions not being different, both in the privileges
conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is
that equal protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in
the same fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same
formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble
concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is,
however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal
protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection
of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are
expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of
specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in
law as though they were the same." 21 Hence the constant reiteration of the view that classification if rational in
character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L.
Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of
taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust
Company v. Yatco,25 decided in 1940, when the tax "operates with the same force and effect in every place
where the subject may be found. " 26 He likewise added: "The rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly attainable." 27 The problem of classification did not present
itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... . 28 As
clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform." 29 There
is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally
to all persons, firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction
between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be
classified into different categories. To repeat, it. is enough that the classification must rest upon substantial
distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa
Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes
because they are in the same situation more or less. On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce
their income. It would not be just then to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification
then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual
foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on
due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between
compensation and taxable net income of professionals and businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed and Acting Members
of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C.
FLORES, in their capacities as appointed and Acting Members of the BOARD OF ASSESSMENT APPEALS of
Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila,respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of
Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of
Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the
Board of Tax Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City
Assessor of Manila" and "Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the
classification and assessments made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta.
Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants
were paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the
National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in
monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not
exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more than 10%
thereafter. The said Act also suspended paragraph (1) of Article 1673 of the Civil Code for two years from its
effectivity thereby disallowing the ejectment of lessees upon the expiration of the usual legal period of lease. On
October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to
increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil
Code, excepting leases with a definite period. Consequently, the Reyeses, petitioners herein, were precluded
from raising the rentals and from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified
and reassessed the value of the subject properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in the corresponding tax rates prompting
petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They averred that
the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used in determining the land values instead
of the comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax
Assessment Appeals, however, considered the assessments valid, holding thus:
 WHEREFORE, and considering that the appellants have failed to submit concrete evidence which could
overcome the presumptive regularity of the classification and assessments appear to be in accordance
with the base schedule of market values and of the base schedule of building unit values, as approved
by the Secretary of Finance, the cases should be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They submitted, among others, the
summary of the yearly rentals to show the income derived from the properties. Respondent City Assessor, on the
other hand, submitted three (3) deeds of sale showing the different market values of the real property situated
in the same vicinity where the subject properties of petitioners are located. To better appreciate the locational
and physical features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the
presence of two representatives of the City Assessor prior to the healing of the case. Neither the owners nor
their authorized representatives were present during the said ocular inspection despite proper notices served
them. It was found that certain parcels of land were below street level and were affected by the tides (Rollo, pp.
24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of
which reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax
Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the
appealed Decision is modified by allowing a 20% reduction in their respective market values and
applying therein the assessment level of 30% to arrive at the corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD IN
FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners
maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of
the restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the
City of Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that
the resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable
by the dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to
their properties as revised and increased on the ground that they were arbitrarily excessive, unwarranted,
inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income
approach is used in determining land values in some vicinities, it maintains that when income is affected by some
sort of price control, the same is rejected in the consideration and study of land values as in the case of
properties affected by the Rent Control Law for they do not project the true market value in the open market
(Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales Approach" on the ground that the
value estimate of the properties predicated upon prices paid in actual, market transactions would be a uniform
and a more credible standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise stated,
public respondents would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the
market value of properties within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal for taxation
purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However, it is
conceded that the propriety of one as against the other would of course depend on several factors. Hence, as
early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has
been stressed that the assessors, in finding the value of the property, have to consider all the circumstances and
elements of value and must exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform,
but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class
shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation
required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the
need to examine closely and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its
rate goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But
for all its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does
property rights, both the due process and equal protection clauses of the Constitution may properly be invoked
to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903
dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality
spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The
power to tax is not the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta,
130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
In the same vein, 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 confiscation of property.
That would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but
the government's act must not be prompted by a 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 (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental
Principle to guide the appraisal and assessment of real property for taxation purposes is that the property must
be "appraised at its current and fair market value."
By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the
market value of properties not so covered. The former has naturally a much lesser market value in view of the
rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under
the "comparable sales approach" were presented by the public respondents, namely: (1) that the sale must
represent a bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property
must be comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that
for properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As
a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these
properties were comparable with other residential properties not burdened by P.D. 20. Neither can the given
circumstances be nonchalantly dismissed by public respondents as imposed under distressed conditions clearly
implying that the same were merely temporary in character. At this point in time, the falsity of such premises
cannot be more convincingly demonstrated by the fact that the law has existed for around twenty (20) years
with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
However, 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 taxations, which is the promotion of the common good, may be
achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to
reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359
and P.D. 20) under the principle of social justice should not now be penalized by the same government by the
imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would amount to only P10.00
per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are
REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City Assessor
of Manila are ordered to make a new assessment by the income approach method to guarantee a fairer and
more realistic basis of computation (Rollo, p. 71).
SO ORDERED.
G.R. No. 78780 July 23, 1987
DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE
PHILIPPINES, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the
Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or
perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme
Court, from making any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers
constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the
1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be decreased," even
as it is anathema to the Ideal of an independent judiciary envisioned in and by said Constitution."
It may be pointed out that, early on, the Court had dealt with the matter administratively in response to
representations that the Court direct its Finance Officer to discontinue the withholding of taxes from salaries of
members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the Chief Justice's directive as
follows:
RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief Justice's previous
and standing directive to the Fiscal Management and Budget Office of this Court to continue with the
deduction of the withholding taxes from the salaries of the Justices of the Supreme Court as well as
from the salaries of all other members of the judiciary.
That should have resolved the question. However, with the filing of this petition, the Court has deemed it best to
settle the legal issue raised through this judicial pronouncement. As will be shown hereinafter, the clear intent of
the Constitutional Commission was to delete the proposed express grant of exemption from payment of income
tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government"
in the words of Commissioner Rigos. In the course of the deliberations, it was further expressly made clear,
specially with regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment of
Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax
applied to all taxpayers.
This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as approved
and ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured by the failure to
include in the General Provisions a proscription against exemption of any public officer or employee, including
constitutional officers, from payment of income tax, the Court since then has authorized the continuation of the
deduction of the withholding tax from the salaries of the members of the Supreme Court, as well as from the
salaries of all other members of the Judiciary. The Court hereby makes of record that it had then discarded the
ruling in Perfecto vs. Meer and Endencia vs. David, infra, that declared the salaries of members of the Judiciary
exempt from payment of the income tax and considered such payment as a diminution of their salaries during
their continuance in office. The Court hereby reiterates that the salaries of Justices and Judges are properly
subject to a general income tax law applicable to all income earners and that the payment of such income tax by
Justices and Judges does not fall within the constitutional protection against decrease of their salaries during
their continuance in office.
A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:
... (The members of the Supreme Court and all judges of inferior courts) shall receive such
compensation as may be fixed by law, which shall not be diminished during their continuance in office
... 1 (Emphasis supplied).
Under the 1973 Constitution, the same provision read:
The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of judges of
inferior courts shall be fixed by law, which shall not be decreased during their continuance in office.
... 2 (Emphasis ours).
And in respect of income tax exemption, another provision in the same 1973 Constitution specifically stipulated:
No salary or any form of emolument of any public officer or employee, including constitutional officers,
shall be exempt from payment of income tax. 3
The provision in the 1987 Constitution, which petitioners rely on, reads:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of
lower courts shall be fixed by law. During their continuance in office, their salary shall not
be decreased. 4(Emphasis supplied).
The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution, for
which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-
diminution "of salaries of judicial officers.
The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate such
contention.
The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:
Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court and of
judges of the lower courts shall be fixed by law. During their continuance in office, their salary shall not
be diminished nor subjected to income tax. Until the National Assembly shall provide otherwise, the
Chief Justice shall receive an annual salary of _____________ and each Associate Justice
______________ pesos. 5(Emphasis ours)
During the debates on the draft Article (Committee Report No. 18), two Commissioners presented their
objections to the provision on tax exemption, thus:
MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this not
violate the principle of the uniformity of taxation and the principle of equal protection of the law?
After all, tax is levied not on the salary but on the combined income, such that when the judge receives
a salary and it is comingled with the other income, we tax the income, not the salary. Why do we have
to give special privileges to the salary of justices?
 MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or decrease of their
salary during their term. This is an indirect way of decreasing their salary and affecting the
independence of the judges.
MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the special
privilege on taxation might, in effect, be a violation of the principle of uniformity in taxation and the
equal protection clause. 6
xxx xxx xxx
MR. OPLE. x x x
Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto Concepcion,
for whom we have the highest respect, to surround the Supreme Court and the judicial system as a
whole with the whole armor of defense against the executive and legislative invasion of their
independence. But in so doing, some of the citizens outside, especially the humble government
employees, might say that in trying to erect a bastion of justice, we might end up with the fortress of
privileges, an island of extra territoriality under the Republic of the Philippines, because a good number
of powers and rights accorded to the Judiciary here may not be enjoyed in the remotest degree by
other employees of the government.
An example is the exception from income tax, which is a kind of economic immunity, which is, of
course, denied to the entire executive department and the legislative. 7
And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A. Rigos
proposed that the term "diminished" be changed to "decreased" and that the words "nor subjected to income
tax" be deleted so as to "give substance to equality among the three branches in the government.
Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the original draft and
referred to the ruling of this Court in Perfecto vs. Meer 8 that "the independence of the judges is of far greater
importance than any revenue that could come from taxing their salaries." Commissioner Rigos then moved that
the matter be put to a vote. Commissioner Joaquin G. Bernas stood up "in support of an amendment to the
amendment with the request for a modification of the amendment," as follows:
FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is not enough
to drop the phrase "shall not be subjected to income tax," because if that is all that the Gentleman will
do, then he will just fall back on the decision in Perfecto vs. Meer and in Dencia vs. David [should be
Endencia and Jugo vs. David, etc., 93 Phil. 696[ which excludes them from income tax, but rather I
would propose that the statement will read: "During their continuance in office, their salary shall not
be diminished BUT MAY BE SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say
that the argument seems to be that the justice and judges should not be subjected to income tax
because they already gave up the income from their practice. That is true also of Cabinet members and
all other employees. And I know right now, for instance, there are many people who have accepted
employment in the government involving a reduction of income and yet are still subject to income tax.
So, they are not the only citizens whose income is reduced by accepting service in government.
Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico F. de los
Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner Bernas announced:
During the suspension, we came to an understanding with the original proponent, Commissioner Rigos,
that his amendment on page 6,. line 4 would read: "During their continuance in office, their salary shall
not be DECREASED."But this is on the understanding that there will be a provision in the Constitution
similar to Section 6 of Article XV, the General Provisions of the 1973 Constitution, which says:
No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax.
So, we put a period (.) after "DECREASED" on the understanding that the salary of justices is subject to
tax.
When queried about the specific Article in the General Provisions on non-exemption from tax of salaries of public
officers, Commissioner Bernas replied:
FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions. But at any rate,
when we put a period (.) after "DECREASED," it is on the understanding that the doctrine in Perfecto vs.
Meer and Dencia vs. David will not apply anymore.
The amendment to the original draft, as discussed and understood, was finally approved without objection.
THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will be a provision
under the Article on General Provisions. Could Commissioner Rosario Braid kindly take note that the
salaries of officials of the government including constitutional officers shall not be exempt from income
tax? The amendment proposed herein and accepted by the Committee now reads as follows: "During
their continuance in office, their salary shall not be DECREASED"; and the phrase "nor subjected to
income tax" is deleted.9
The debates, interpellations and opinions expressed regarding the constitutional provision in question until it
was finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution, in
adopting it, was to make the salaries of members of the Judiciary taxable. The ascertainment of that intent is but
in keeping with the fundamental principle of constitutional construction that the intent of the framers of the
organic law and of the people adopting it should be given effect.10 The primary task in constitutional construction
is to ascertain and thereafter assure the realization of the purpose of the framers and of the people in the
adoption of the Constitution.11it may also be safely assumed that the people in ratifying the Constitution were
guided mainly by the explanation offered by the framers.12 1avvphi1
Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced
hereunder:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of
lower courts shall be fixed by law. During their continuance in office, their salary shall not
be decreased. (Emphasis supplied).
it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices
and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower,
it would be applicable only to those appointed after its approval. It would be a strained construction to read into
the provision an exemption from taxation in the light of the discussion in the Constitutional Commission.
With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income tax upon
the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs. Meer,13 as affirmed
in Endencia vs. David 14 must be declared discarded. The framers of the fundamental law, as the alter ego of the
people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the
1987 Constitution that they have adopted
Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations
of their representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the
government and should share the burden of general income taxation equitably.
WHEREFORE, the instant petition for Prohibition is hereby dismissed.
G.R. No. 78780 July 23, 1987
DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE
PHILIPPINES, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the
Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or
perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme
Court, from making any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers
constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the
1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be decreased," even
as it is anathema to the Ideal of an independent judiciary envisioned in and by said Constitution."
It may be pointed out that, early on, the Court had dealt with the matter administratively in response to
representations that the Court direct its Finance Officer to discontinue the withholding of taxes from salaries of
members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the Chief Justice's directive as
follows:
RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief Justice's previous
and standing directive to the Fiscal Management and Budget Office of this Court to continue with the
deduction of the withholding taxes from the salaries of the Justices of the Supreme Court as well as
from the salaries of all other members of the judiciary.
That should have resolved the question. However, with the filing of this petition, the Court has deemed it best to
settle the legal issue raised through this judicial pronouncement. As will be shown hereinafter, the clear intent of
the Constitutional Commission was to delete the proposed express grant of exemption from payment of income
tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government"
in the words of Commissioner Rigos. In the course of the deliberations, it was further expressly made clear,
specially with regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment of
Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax
applied to all taxpayers.
This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as approved
and ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured by the failure to
include in the General Provisions a proscription against exemption of any public officer or employee, including
constitutional officers, from payment of income tax, the Court since then has authorized the continuation of the
deduction of the withholding tax from the salaries of the members of the Supreme Court, as well as from the
salaries of all other members of the Judiciary. The Court hereby makes of record that it had then discarded the
ruling in Perfecto vs. Meer and Endencia vs. David, infra, that declared the salaries of members of the Judiciary
exempt from payment of the income tax and considered such payment as a diminution of their salaries during
their continuance in office. The Court hereby reiterates that the salaries of Justices and Judges are properly
subject to a general income tax law applicable to all income earners and that the payment of such income tax by
Justices and Judges does not fall within the constitutional protection against decrease of their salaries during
their continuance in office.
A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:
... (The members of the Supreme Court and all judges of inferior courts) shall receive such
compensation as may be fixed by law, which shall not be diminished during their continuance in office
... 1 (Emphasis supplied).
Under the 1973 Constitution, the same provision read:
The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of judges of
inferior courts shall be fixed by law, which shall not be decreased during their continuance in office.
... 2 (Emphasis ours).
And in respect of income tax exemption, another provision in the same 1973 Constitution specifically stipulated:
No salary or any form of emolument of any public officer or employee, including constitutional officers,
shall be exempt from payment of income tax. 3
The provision in the 1987 Constitution, which petitioners rely on, reads:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of
lower courts shall be fixed by law. During their continuance in office, their salary shall not
be decreased. 4(Emphasis supplied).
The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution, for
which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-
diminution "of salaries of judicial officers.
The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate such
contention.
The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:
Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court and of
judges of the lower courts shall be fixed by law. During their continuance in office, their salary shall not
be diminished nor subjected to income tax. Until the National Assembly shall provide otherwise, the
Chief Justice shall receive an annual salary of _____________ and each Associate Justice
______________ pesos. 5(Emphasis ours)
During the debates on the draft Article (Committee Report No. 18), two Commissioners presented their
objections to the provision on tax exemption, thus:
MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this not
violate the principle of the uniformity of taxation and the principle of equal protection of the law?
After all, tax is levied not on the salary but on the combined income, such that when the judge receives
a salary and it is comingled with the other income, we tax the income, not the salary. Why do we have
to give special privileges to the salary of justices?
MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or decrease of their
salary during their term. This is an indirect way of decreasing their salary and affecting the
independence of the judges.
MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the special
privilege on taxation might, in effect, be a violation of the principle of uniformity in taxation and the
equal protection clause. 6
xxx xxx xxx
MR. OPLE. x x x
Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto Concepcion,
for whom we have the highest respect, to surround the Supreme Court and the judicial system as a
whole with the whole armor of defense against the executive and legislative invasion of their
independence. But in so doing, some of the citizens outside, especially the humble government
employees, might say that in trying to erect a bastion of justice, we might end up with the fortress of
privileges, an island of extra territoriality under the Republic of the Philippines, because a good number
of powers and rights accorded to the Judiciary here may not be enjoyed in the remotest degree by
other employees of the government.
An example is the exception from income tax, which is a kind of economic immunity, which is, of
course, denied to the entire executive department and the legislative. 7
And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A. Rigos
proposed that the term "diminished" be changed to "decreased" and that the words "nor subjected to income
tax" be deleted so as to "give substance to equality among the three branches in the government.
Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the original draft and
referred to the ruling of this Court in Perfecto vs. Meer 8 that "the independence of the judges is of far greater
importance than any revenue that could come from taxing their salaries." Commissioner Rigos then moved that
the matter be put to a vote. Commissioner Joaquin G. Bernas stood up "in support of an amendment to the
amendment with the request for a modification of the amendment," as follows:
FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is not enough
to drop the phrase "shall not be subjected to income tax," because if that is all that the Gentleman will
do, then he will just fall back on the decision in Perfecto vs. Meer and in Dencia vs. David [should be
Endencia and Jugo vs. David, etc., 93 Phil. 696[ which excludes them from income tax, but rather I
would propose that the statement will read: "During their continuance in office, their salary shall not
be diminished BUT MAY BE SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say
that the argument seems to be that the justice and judges should not be subjected to income tax
because they already gave up the income from their practice. That is true also of Cabinet members and
all other employees. And I know right now, for instance, there are many people who have accepted
employment in the government involving a reduction of income and yet are still subject to income tax.
So, they are not the only citizens whose income is reduced by accepting service in government.
Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico F. de los
Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner Bernas announced:
During the suspension, we came to an understanding with the original proponent, Commissioner Rigos,
that his amendment on page 6,. line 4 would read: "During their continuance in office, their salary shall
not be DECREASED."But this is on the understanding that there will be a provision in the Constitution
similar to Section 6 of Article XV, the General Provisions of the 1973 Constitution, which says:
No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax.
So, we put a period (.) after "DECREASED" on the understanding that the salary of justices is subject to
tax.
When queried about the specific Article in the General Provisions on non-exemption from tax of salaries of public
officers, Commissioner Bernas replied:
FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions. But at any rate,
when we put a period (.) after "DECREASED," it is on the understanding that the doctrine in Perfecto vs.
Meer and Dencia vs. David will not apply anymore.
The amendment to the original draft, as discussed and understood, was finally approved without objection.
THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will be a provision
under the Article on General Provisions. Could Commissioner Rosario Braid kindly take note that the
salaries of officials of the government including constitutional officers shall not be exempt from income
tax? The amendment proposed herein and accepted by the Committee now reads as follows: "During
their continuance in office, their salary shall not be DECREASED"; and the phrase "nor subjected to
income tax" is deleted.9
The debates, interpellations and opinions expressed regarding the constitutional provision in question until it
was finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution, in
adopting it, was to make the salaries of members of the Judiciary taxable. The ascertainment of that intent is but
in keeping with the fundamental principle of constitutional construction that the intent of the framers of the
organic law and of the people adopting it should be given effect.10 The primary task in constitutional construction
is to ascertain and thereafter assure the realization of the purpose of the framers and of the people in the
adoption of the Constitution.11it may also be safely assumed that the people in ratifying the Constitution were
guided mainly by the explanation offered by the framers.12 1avvphi1
Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced
hereunder:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of
lower courts shall be fixed by law. During their continuance in office, their salary shall not
be decreased. (Emphasis supplied).
it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices
and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower,
it would be applicable only to those appointed after its approval. It would be a strained construction to read into
the provision an exemption from taxation in the light of the discussion in the Constitutional Commission.
With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income tax upon
the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs. Meer,13 as affirmed
in Endencia vs. David 14 must be declared discarded. The framers of the fundamental law, as the alter ego of the
people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the
1987 Constitution that they have adopted
Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations
of their representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the
government and should share the burden of general income taxation equitably.
WHEREFORE, the instant petition for Prohibition is hereby dismissed.
G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, petitioner, FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION,
vs. INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners,
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents. vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and
G.R. No. 115525 October 30, 1995 THE COMMISSIONER OF CUSTOMS, respondents.

JUAN T. DAVID, petitioner, G.R. No. 115852 October 30, 1995

vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; PHILIPPINE AIRLINES, INC., petitioner,
LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR vs.
REPRESENTATIVES, respondents. THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115543 October 30, 1995 G.R. No. 115873 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs. vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T.
REVENUE AND BUREAU OF CUSTOMS, respondents. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as
Secretary of Finance, respondents.
G.R. No. 115544 October 30, 1995
G.R. No. 115931 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION;
PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners, PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK
vs. SELLERS, petitioners,
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. vs.
GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner
Secretary of Finance, respondents. of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of
Customs, respondents.
G.R. No. 115754 October 30, 1995
RESOLUTION
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
MENDOZA, J.:
G.R. No. 115781 October 30, 1995
These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law. The
APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the exception
G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS
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.
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

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, 4. R.A. NO. 7649
and S. No. 807, which was approved by the Senate on October 21, 1991.
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.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
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. (Id.,
p. 4058)
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.
(Id. at 710. (emphasis added))
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.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A
COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
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)
(227 SCRA at 707-708)
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.
(At 382-383)
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.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
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 the flush of enactment. This Court does not sit as a third branch of the legislature, much less exercise a veto
as instruments for social justice and economic development. power over legislation.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining order
by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5. What P.D. No. 1955, §1 did previously issued is hereby lifted.
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 ABAKADA GURO PARTY LIST (Formerly G.R. No. 168056
then again cooperatives were not the only ones whose exemptions were withdrawn. The withdrawal of tax AASJAS) OFFICERS SAMSON S.
incentives applied to all, including government and private entities. In the second place, the Constitution does ALCANTARA and ED VINCENT S. ALBANO,
not really require that cooperatives be granted tax exemptions in order to promote their growth and viability. Petitioners, Present:
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 DAVIDE, JR., C.J.,
indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives PUNO,
should be granted tax exemptions, but that is left to the discretion of Congress. If Congress does not grant PANGANIBAN,
exemption and there is no discrimination to cooperatives, no violation of any constitutional policy can be QUISUMBING,
charged. YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from taxation. - versus - CARPIO,
Such theory is contrary to the Constitution under which only the following are exempt from taxation: charitable AUSTRIA-MARTINEZ,
institutions, churches and parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit educational CORONA,
institutions by reason of Art. XIV, §4 (3). CARPIO-MORALES,
CALLEJO, SR.,
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal AZCUNA,
protection of the law because electric cooperatives are exempted from the VAT. The classification between TINGA,
electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) CHICO-NAZARIO, and
apparently rests on a congressional determination that there is greater need to provide cheaper electric power GARCIA, JJ.
to as many people as possible, especially those living in the rural areas, than there is to provide them with other THE HONORABLE EXECUTIVE SECRETARY
necessities in life. We cannot say that such classification is unreasonable. EDUARDO ERMITA; HONORABLE SECRETARY
OF THE DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE COMMISSIONER
We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have
OF INTERNAL REVENUE GUILLERMO
in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We have now
PARAYNO, JR.,
come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners and that
Respondents.
its enactment by the other branches of the government does not constitute a grave abuse of discretion. Any
DECISION
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 AUSTRIA-MARTINEZ, J.:
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 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)[1] 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[2] 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[3] 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[4] 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.[5] 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. . . .[6]
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 appropriation, revenue or tariff bills shall originate exclusively in the House of
of services and use or lease of properties) of the NIRC. Representatives

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, G.R. No. 168730
excessive, and confiscatory.
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005,
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect
property without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle
contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner
that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in
without due process of law. Petitioners further contend that like any other property or property right, the input violation of Article VI, Section 28(1) of the Constitution.
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.
RESPONDENTS COMMENT
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 The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast
government, is not based on real and substantial differences to meet a valid classification.
doubt on its validity.
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
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463 630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto, have
petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following
already been settled. With regard to the issue of undue delegation of legislative power to the President,
grounds:
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate
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; 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
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on the creditable input tax, the 60-month amortization on the purchase or importation of capital goods
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
exceeding P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, confiscatory, and that it violates the constitutional principle on progressive taxation, among others.
121, 125,[7] 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
 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 The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods
towards a sustainable macroeconomic environment necessary for economic growth. or properties and services.[8] Being an indirect tax on expenditure, the seller of goods or services may pass on the

ISSUES amount of tax paid to the buyer,[9] with the seller acting merely as a tax collector.[10] The burden of VAT is

intended to fall on the immediate buyers and ultimately, the end-consumers.

The Court defined the issues, as follows:

PROCEDURAL ISSUE 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.[11]Examples are individual and corporate income
Whether R.A. No. 9337 violates the following provisions of the Constitution:
taxes, transfer taxes, and residence taxes.[12]
a. Article VI, Section 24, and

b. Article VI, Section 26(2) In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a

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:
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.[13] Under the

tax credit method, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT
a. Article VI, Section 28(1), and
paid on its purchases, inputs and imports.[14]
b. Article VI, Section 28(2)
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the tax credit
and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following method.[15]
provisions of the Constitution:
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,[16] R.A. No. 8241 or the
a. Article VI, Section 28(1), and Improved VAT Law,[17] R.A. No. 8424 or the Tax Reform Act of 1997,[18] and finally, the presently beleaguered R.A.
No. 9337, also referred to by respondents as the VAT Reform Act.
b. Article III, Section 1
The Court will now discuss the issues in logical sequence.
RULING OF THE COURT
PROCEDURAL ISSUE
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax
I.Whether R.A. No. 9337 violates the following provisions of the Constitution:
(VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
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.[19] 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,[20]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 Congresss 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.
Striking down such argument, the Court held thus:
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 conclusive of
its due enactment. A review of cases reveals the Courts consistent adherence to the rule. The Court finds no
reason to deviate from the salutary rule in this case where the irregularities alleged by the petitioners mostly
involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the enforcement of these internal rules of Congress, whether
House or Senate. Parliamentary rules are merely procedural and with their observance the courts have no
concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in its
favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of
expression, all deny to the courts the power to inquire into allegations
that, in enacting a law, a House of Congress failed to comply with its
own rules, in the absence of showing that there was a violation of a
constitutional provision or the rights of private individuals. In Osmea v.
Pendatun, it was held: At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to revocation, modification or
waiver at the pleasure of the body adopting them. And it has been said
that Parliamentary rules are merely procedural, and with their
observance, the courts have no concern. They may be waived or
disregarded by the legislative body. Consequently, mere failure to
conform to parliamentary usage will not invalidate the action (taken by
a deliberative body) when the requisite number of members have
agreed to a particular measure.[21] (Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting provisions in the House
and Senate bills. Akin to the Farias case,[22] the present petitions also raise an 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 power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own
business expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of
Finance,[23] the Court already made the pronouncement that [i]f a change is desired in the practice [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. [24] To date, 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:
House Bill No. 3555
House Bill No.3705 Senate Bill No. 1950
With regard to Stand-By Authority in favor of President

Provides for 12% VAT on
every sale of goods or
properties (amending Sec.
106 of NIRC); 12% VAT on
importation of goods
(amending Sec. 107 of NIRC);
and 12% VAT on sale of
services and use or lease of
properties (amending Sec.
108 of NIRC)
With regard to the no pass-on provision
No similar provision
Provides for 12% VAT in general
on sales of goods or properties
and reduced rates for sale of
certain locally manufactured
goods and petroleum products
and raw materials to be used in
the manufacture thereof
(amending Sec. 106 of NIRC); 12%
VAT on importation of goods and
reduced rates for certain
imported products including
petroleum products (amending
Sec. 107 of NIRC); and 12% VAT on
sale of services and use or lease of
properties and a reduced rate for
certain services including power
generation (amending Sec. 108 of
NIRC)
Provides that the VAT imposed on
power generation and on the sale
of petroleum products shall be
absorbed by generation
companies or sellers, respectively,
and shall not be passed on to
consumers
Provides for a single rate of 10%
VAT on sale of goods or properties
(amending Sec. 106 of NIRC), 10%
VAT on sale of services including
sale of electricity by generation
companies, transmission and
distribution companies, and use or
lease of properties (amending Sec.
108 of NIRC)
Provides that the VAT imposed on
sales of electricity by generation
companies and services of
transmission companies and
distribution companies, as well as
those of franchise grantees of
electric utilities shall not apply to
residential
end-users. VAT shall be absorbed
by generation, transmission, and
distribution companies.
With regard to 70% limit on input tax credit
Provides that the input tax No similar provision Provides that the input tax credit
credit for capital goods on for capital goods on which a VAT
which a VAT has been paid has been paid shall be equally
shall be equally distributed distributed over 5 years or the
over 5 years or the depreciable life of such capital
depreciable life of such goods; the input tax credit for
capital goods; the input tax goods and services other than
credit for goods and services capital goods shall not exceed 90%
other than capital goods shall of the output VAT.
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.
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision No similar provision Provided for amendments to
several NIRC provisions regarding
corporate income, percentage,
franchise and excise taxes
The disagreements between the provisions in the House bills and the Senate bill were with regard to
(1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission
and distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the
VAT imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner Provided, The input tax on goods purchased or imported in a calendar
input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, month for use in trade or business for which deduction for depreciation is
franchise and excise taxes should be amended. allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate
There being differences and/or disagreements on the foregoing provisions of the House and Senate acquisition cost for such goods, excluding the VAT component thereof,
bills, the Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if
same by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the the estimated useful life of the capital good is less than five (5) years, as
disagreeing provisions by making the following changes: used for depreciation purposes, then the input VAT shall be spread over
such shorter period: . . .
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 (B) Excess Output or Input Tax. If at the end of any taxable quarter the
until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) output tax exceeds the input tax, the excess shall be paid by the VAT-
of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year registered person. If the input tax exceeds the output tax, the excess shall
exceeds 1%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to be carried over to the succeeding quarter or quarters: PROVIDED that the
12% effective January 1, 2006. input tax inclusive of input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy percent
2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax
and distribution companies should not be passed on to consumers or whether both the VAT imposed on attributable to zero-rated sales by a VAT-registered person may at his
electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum
option be refunded or credited against other internal revenue taxes, . . .
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.
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 amendments and
3. With regard to the disagreement on whether input tax credits should be limited or not, the basically adopted the provisions found in Senate Bill No. 1950, with some
changes as to the rate of the tax to be imposed.
Bicameral Conference Committee decided to adopt the position of the House by putting a limitation on the
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
amount of input tax that may be credited against the output tax, although it crafted its own language as to the
the House bill and the Senate bill. The term settle is synonymous to reconcile and harmonize. [25] To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific
amount of the limitation on input tax credits and the manner of computing the same by providing thus:
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
(A) Creditable Input Tax. . . .
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.[26] (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never really enjoyed
the support of either House.[27]
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.[28]
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[29] and Tolentino vs. Secretary of Finance,[30] 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.[31] (Emphasis supplied)
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:
transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as

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.
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

Petitioners argument that the practice where a bicameral conference committee is allowed to add or 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:
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: Section
27
Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
Nor is there any reason for requiring that the Committees Report in these cases
28(B)(1) Inter-corporate Dividends
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 34(B)(1) Inter-corporate Dividends
bill. . . . 116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers
of Garage
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced 119 Tax on franchises
for the first time in either house of Congress, not to the conference committee
121 Tax on banks and Non-Bank Financial
report.[32](Emphasis supplied)
Intermediaries
148 Excise Tax on manufactured oils and other fuels
The Court reiterates here that the no-amendment rule refers only to the procedure to be followed by
151 Excise Tax on mineral products
each house of Congress with regard to bills initiated in each of said respective houses, before said bill is
236 Registration requirements
 237 Issuance of receipts or sales or commercial
invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the
House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and
114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110 and
111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were
not found in the House bills 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
Article VI, Section 24 of the Constitution.
The argument does not hold water.
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?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court held,
thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to
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 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 bill which initiated the legislative process
culminating in the enactment of the law must 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 legislative power of the two houses of Congress and in fact make the House superior to the
Senate.
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.
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 must come from the House of Representatives on the theory that, elected as they
are from the 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 same problems from the national perspective. Both views
are thereby made to bear on the enactment of such laws.[33] (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives,
the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
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 floor, which was later
substituted by House Bill No. 3555, stated:
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).
(Emphasis supplied)
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.[34] (Emphasis
supplied)
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.[35]
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.[36]
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 %). (Emphasis
supplied)
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. [37] 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.[38] 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.[39]
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.[40] 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;[41] 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.[42] 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. [43] 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.[44]
In People vs. Vera,[45] 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 In Edu vs. Ericta,[47] the Court reiterated:
appointee or delegate of the legislature.
What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal
The true distinction, says Judge Ranney, is between the delegation of power to them; the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the
make the law, which necessarily involves a discretion as to what it shall be, and conferring legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be
an authority or discretion as to its execution, to be exercised under and in pursuance of the directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its functions
law. The first cannot be done; to the latter no valid objection can be made. 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
It is contended, however, that a legislative act may be made to the effect as law been made between delegation of power to make the laws which necessarily involves a discretion as to what
after it leaves the hands of the legislature. It is true that laws may be made effective on it shall be, which constitutionally may not be done, and delegation of authority or discretion as to its
certain contingencies, as by proclamation of the executive or the adoption by the people of a execution to be exercised under and in pursuance of the law, to which no valid objection can be made. The
particular community. In Wayman vs. Southard, the Supreme Court of the United States Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility and
ruled that the legislature may delegate a power not legislative which it may itself rightfully practicability. (Emphasis supplied).[48]
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 Clearly, the legislature may delegate to executive officers or bodies the power to determine certain
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 facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made
declaration of legislative power to administrative agencies: The principle which permits the to depend, but the legislature must prescribe sufficient standards, policies or limitations on their
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 authority.[49] While the power to tax cannot be delegated to executive agencies, details as to the enforcement
that at the time this authority is granted, the rule of public policy, which is the essence of
and administration of an exercise of such power may be left to them, including the power to determine the
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 existence of facts on which its operation depends.[50]
administrative action is to be taken, and that, under other circumstances, different or no
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
action at all is to be taken. What is thus left to the administrative official is not the
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating
legislative determination of what public policy demands, but simply the ascertainment of
information and making recommendations is the kind of subsidiary activity which the legislature may perform
what the facts of the case require to be done according to the terms of the law by which he
through its members, or which it may delegate to others to perform. Intelligent legislation on the complicated
is governed. The efficiency of an Act as a declaration of legislative will must, of course,
problems of modern society is impossible in the absence of accurate information on the part of the legislators,
come from Congress, but the ascertainment of the contingency upon which the Act shall
and any reasonable method of securing such information is proper.[51] The Constitution as a continuously
take effect may be left to such agencies as it may designate. The legislature, then, may
operative charter of government does not require that Congress find for itselfevery fact upon which it desires to
provide that a law shall take effect upon the happening of future specified contingencies
base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite
leaving to some other person or body the power to determine when the specified
to application of legislative policy to particular facts and circumstances impossible for Congress itself properly to
contingency has arisen. (Emphasis supplied).[46]
investigate.[52]
 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. [53] 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.[54]
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."[55]
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.[56] 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.[57] 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.[58]
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.[59]
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.[60]
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.[61]
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.[62]
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.[63]
It simply means that sources of revenues must be adequate to meet government expenditures and
their variations.[64]
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.
catastrophe. Whether the law is indeed sufficient to answer the states economic dilemma is not for the Court to
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.[65]
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
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.[66]
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.[67]
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.[68]
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.[79]
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. (Emphasis supplied)
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.[83]
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.[84]
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 The disputed sales tax is also equitable. It is imposed only on sales of goods or
for its unconstitutionality, the 70% limitation stays. 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
B. Uniformity and Equitability of Taxation 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
Article VI, Section 28(1) of the Constitution reads: 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.
The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. 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
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
tax on domestic carriers was removed.[93] Power producers are now exempt from paying franchise tax.[94]
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.[86] 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
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods
rate, from a previous 32%.[95] Intercorporate dividends of non-resident foreign corporations are still subject to
and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC,
15% final withholding tax but the tax credit allowed on the corporations domicile was increased to 20%.[96] The
provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of services and
Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. [97] Even
use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.
the sale by an artist of his works or services performed for the production of such works was not spared.
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 All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise
class.[87]
rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
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.[88] Also, basic marine and agricultural food products in their original state are still not C. Progressivity of Taxation
subject to the tax,[89] 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:[90]
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. [98]
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)[99]

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
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.

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.
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. . . .

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
Let us likewise disabuse our minds from the notion that the judiciary is the
the Tolentino case, thus:
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 Constitution does not really prohibit the imposition of indirect taxes which, like the independence of the three, and a zealous regard of the prerogatives of each, knowing full
the VAT, are regressive. What it simply provides is that Congress shall evolve a progressive well that one is not the guardian of the others and that, for official wrong-doing, each may be
system of taxation. The constitutional provision has been interpreted to mean simply that brought to account, either by impeachment, trial or by the ballot box.[100]
direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds true now. All things
minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977))
considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
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
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the
168207, 168461, 168463, and 168730, are hereby DISMISSED.
present Art. VI, 28 (1) was taken. Sales taxes are also regressive.

There being no constitutional impediment to the full enforcement and implementation of R.A. No.
9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein
decision.
interest per annum, beginning August 31, 1962 and August 31 of every year thereafter until the year
1972, while the purchase price of the M/S GENERAL LIM was to be paid by General Shipping to the
Commission under a deferred payment plan in 10 equal yearly installments of P723,132.68, bearing 3%
interest per annum beginning September 30 of every year until the year 1972. (Exhs. 9, p. 4 and A-2,
both cases) (See Respondents' brief, p. 4.)

SO ORDERED. Delivered in Japan to its respective buyers, acting on behalf of the Commission, the vessels, upon their departure
from Tokyo, on the maiden trip thereof to the Philippines, were issued, by the Philippine Vice-Consul in said city,
G.R. Nos. L-21633-34 June 29, 1967 provisional certificates of Philippine registry in the name of the Commission, so that the vessels could proceed to
the Philippines and secure therein the respective final registration document.

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners,

vs.
BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO., INC., respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and F. Malate, Jr.
for petitioners.
Claudio Teehankee and Leocadio de Asis for respondents.
CONCEPCION, C.J.:
Appeal by the Government from a decision of the Court of Tax Appeals, reversing of the decisions of the
Commissioner of Internal Revenue and the Commissioner of Customs, in Cases No. 956 and 957 of said Court,
holding Botelho Shipping Corporation and General Shipping Co., Inc. — hereinafter referred to collectively as the
Buyers — liable for the payment of the sum of P483,433.00 and P494,824.00, respectively, as compensating
taxes on the vessels "M/S Maria Rosello" and "M/S General Lim."
On August 30, 1960, the Reparations Commission of the Philippines — hereinafter referred to as the Commission
— and Botelho Shipping Corporation — hereinafter referred to as Botelho — entered into a "Contract of
Conditional Purchase and Sale of Reparations Goods," whereby the former agreed to sell to Botelho for
P6,798,888.88 the vessel "M/S Maria Rosello," procured by the Commission from Japan, pursuant to the
provisions of the Philippine-Japanese Reparations Agreement of May 9, 1956. On September 19, 1960, the
Commission signed a similar contract with General Shipping Co., Inc. — hereinafter referred to as General
Shipping — for the sale thereto of "M/S General Lim" at the price of P6,951,666.66. Both agreements, couched in
identical terms, except as to price, stipulated that:
a) The Reparations Commission "retains title to and ownership of the above described vessel until it is
fully paid for." (Exh. "A", p. 2, both cases)
b) The stipulated purchase price of the M/S MARIA ROSELLO was to be paid by Botelho to the
Commission under a deferred payment plan in 10 equal yearly installments of P717,333.49, bearing 3%
Upon arrival at the port of Manila, the Buyer filed the corresponding applications for registration of the vessels,
but, the Bureau of Customs placed the same under custody and refused to give due course to said applications,
unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. As the Commissioner
of Customs refused to reconsider the stand taken by his office, the Buyers simultaneously filed with the Court of
Tax Appeals their respective petitions for review, against the Commissioner of Customs and the Commissioner of
Internal Revenue — hereinafter referred to collectively as Appellants — with urgent motion for suspension of
the collection of said tax. After a joint hearing on this motion, the same was, on October 31, 1960, granted by the
Tax Court, upon the sum of a P500,000.00 bond by each one of the Buyers.
On June 17, 1961, while these cases were pending trial in said Court, Republic Act No. 3079 amended Republic
Act No. 1789 — the Original Reparations Act, under which the aforementioned contracts with the Buyers had
been executed — by exempting buyers of reparations goods acquired from the Commission, from liability for the
compensating tax. Moreover, section 20 of Republic Act No. 3079, provides:
x x x This Act shall take effect upon its approval, except that the amendment contained in Section
seven hereof relating to the requirements of procurement orders including the requirement of down
payment by private applicant end-users shall not apply to procurement orders already duty issued and
verified at the time of the passage of this amendatory Act, and except further that the amendment
contained in Section ten relating to the insurance of the reparations goods by the end-users upon
delivery shall apply also to goods covered by contracts already entered into by the Commission and
end-user prior to the approval of this amendatory Act as well as goods already delivered to the end-
user, and except further that the amendments contained in Sections eleven and twelve hereof relating
to the terms of installment payments on capital goods disposed of to private parties, and the execution
of a performance bond before delivery of reparations goods, shall not apply to contracts for the
utilization of reparations goods already entered into by the Commission and the end-users prior to the
approval of this amendatory Act: Provided, That any end-user may apply for the renovation of his
utilization contract with the Commission in order to avail of any provision of this amendatory Act which
is more favorable to an applicant end-user than has heretofore been granted in like manner and to the
same extent as an end-user filing his application after the approval of this amendatory Act, and the
 Commission may agree to such renovation on condition that the end-user shall voluntarily assume all
the new obligations provided for in this amendatory Act.
Invoking the provisions of this section 20, the Buyers applied, therefore, for the renovation of their utilizations
contracts with the Commission, which granted the application, and, then, filed with the Tax Court, their
supplemental petitions for review. Subsequently, the parties submitted Stipulations of Fact and, after a joint
trial, at which they introduced additional evidence, said Court rendered the appealed decision, reversing the
decisions herein Appellants, and declared said Buyers exempt from the compensating tax sought to be assessed
against the vessels aforementioned. Hence, these appeals by the Government G.R. No. L-21633 refers to the case
as regards "M/S Maria Rosello," whereas "M/S General Lim" is the subject-matter of G.R. No. L-21634.
It seems clear that, under Republic Act No. 1789 — pursuant to which the contracts of Conditional Purchase and
Sale in question had been executed — the vessels "M/S Maria Rosello" and "M/S General Lim" were subject to
compensating tax. Indeed, Section 14 of said Act provides that "reparations goods obtained by private parties
shall be exempt only from the payment of customs duties, consular fees and the special import tax." Although
this Section was amended by R.A. No. 3079, to include the compensating tax" among the exemptions
enumerated therein, such amendment took place, not only after the contracts involved in these appeals had
been perfected and partly consummated, but, also, after the corresponding compensating tax had become due
and payment thereof demanded by Appellants herein. It is, moreover, obvious that said additional exemption
should not and cannot be given retroactive operation, in the absence of a manifest intent of Congress to do this
effect. The issue in the cases at bar hinges on whether or not such intent is clear.
Appellants maintain the negative, upon the ground that a tax exemption must be clear and explicit; that there is
no express provision for the retroactivity of the exemption, established by Republic Act No. 3079, from the
compensating tax; that the favorable provisions, which are referred to in section 20 thereof, cannot include the
exemption from compensating tax; and, that Congress could not have intended any retroactive exemption,
considering that the result thereof would be prejudicial to the Government.
The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no
tax exemption of any kind whatsoever, even if Congress should wish to create one, because every such
exemption implies a waiver of the right to collect what otherwise would be due to the Government, and, in this
sense, is prejudicial thereto. In fact, however, tax exemptions may and do exist, such as the one prescribed in
section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, which, by the way, is "clear and
explicit," thus, meeting the first ground of appellant's contention. It may not be amiss to add that no tax
exemption — like any other legal exemption or exception — is given without any reason therefor. In much the
same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-
making body considers sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed,
section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable
provisions, namely, the voluntary assumption, by the end-user who bought reparations goods prior to June 17,
1961 of "all the new obligations provided for in" said Act.
The argument adduced in support of the third ground is that the view adopted by the Tax Court would operate
to grant exemption to particular persons, the Buyers herein. It should be noted, however, that there is no
constitutional injunction against granting tax exemptions to particular persons. In fact, it is not unusual to grant
legislative franchises to specific individuals or entities, conferring tax exemptions thereto. What the fundamental
law forbids is the denial of equal protection, such as through unreasonable discrimination or
classification.1äwphï1.ñët
Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not
particular persons, but persons belonging to a particular class. Indeed, appellants do not assail the
constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval of
Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the Commission. From the
viewpoint of Constitutional Law, especially the equal protection clause, there is no difference between the grant
of exemption to said end-users, and the extension of the grant to those whose contracts of purchase and sale
mere made before said date, under Republic Act No. 1789.
It is true that Republic Act No. 3079 does not explicitly declare that those who purchased reparations goods prior
to June 17, 1961, are exempt from the compensating tax. It does not say so, because they do not really enjoy
such exemption, unless they comply with the proviso in Section 20 of said Act, by applying for the renovation of
their respective utilization contracts, "in order to avail of any provision of the Amendatory Act which is more
favorable" to the applicant. In other words, it is manifest, from the language of said section 20, that the same
intended to give such buyers the opportunity to be treated "in like manner and to the same extent as an end-
user filing his application after this approval of this Amendatory Act." Like the "most-favored-nation-clause" in
international agreements, the aforementioned section 20 thus seeks, not to discriminate or to create an
exemption or exception, but to abolish the discrimination, exemption or exception that would otherwise result,
in favor of the end-user who bought after June 17, 1961 and against one who bought prior thereto. Indeed, it is
difficult to find a substantial justification for the distinction between the one and the other. As correctly held by
the Tax Court in Philippine Ace Lines, Inc. v. Commissioner of Internal Revenue (C.T.A. Nos. 964 and 984, January
25, 1963), and reiterated in the cases under consideration:
x x x In providing that the favorable provision of Republic Act No. 3079 shall be available to applicants
for renovation of their utilization contracts, on condition that said applicants shall voluntarily assume
all the new obligations provided in the new law, the law intends to place persons who acquired
reparations goods before the enactment of the amendatory Act on the same footing as those who
acquire reparations goods after its enactment. This is so because of the provision that once an
application for renovation of a utilization contract has been approved, the favorable provisions of said
Act shall be available to the applicant "in like manner and to the same extent, as an end-user filing his
application alter the approval of this amendatory Act." To deny exemption from compensating tax to
one whose utilization contract has been renovated, while granting the exemption to one who files an
application for acquisition of reparations goods after the approval of the new law, would be contrary to
the express mandate of the new law, that they both be subject to the same privileges in like manner
 and to the same extent. It would be manifest distortion of the literal meaning and purpose of the new
law.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed in toto, without any
pronouncement as to costs. It is so ordered.
G.R. Nos. L-21633-34 June 29, 1967
COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners,
vs.
BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO., INC., respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and F. Malate, Jr.
for petitioners.
Claudio Teehankee and Leocadio de Asis for respondents.
CONCEPCION, C.J.:
Appeal by the Government from a decision of the Court of Tax Appeals, reversing of the decisions of the
Commissioner of Internal Revenue and the Commissioner of Customs, in Cases No. 956 and 957 of said Court,
holding Botelho Shipping Corporation and General Shipping Co., Inc. — hereinafter referred to collectively as the
Buyers — liable for the payment of the sum of P483,433.00 and P494,824.00, respectively, as compensating
taxes on the vessels "M/S Maria Rosello" and "M/S General Lim."
On August 30, 1960, the Reparations Commission of the Philippines — hereinafter referred to as the Commission
— and Botelho Shipping Corporation — hereinafter referred to as Botelho — entered into a "Contract of
Conditional Purchase and Sale of Reparations Goods," whereby the former agreed to sell to Botelho for
P6,798,888.88 the vessel "M/S Maria Rosello," procured by the Commission from Japan, pursuant to the
provisions of the Philippine-Japanese Reparations Agreement of May 9, 1956. On September 19, 1960, the
Commission signed a similar contract with General Shipping Co., Inc. — hereinafter referred to as General
Shipping — for the sale thereto of "M/S General Lim" at the price of P6,951,666.66. Both agreements, couched in
identical terms, except as to price, stipulated that:
a) The Reparations Commission "retains title to and ownership of the above described vessel until it is
fully paid for." (Exh. "A", p. 2, both cases)
b) The stipulated purchase price of the M/S MARIA ROSELLO was to be paid by Botelho to the
Commission under a deferred payment plan in 10 equal yearly installments of P717,333.49, bearing 3%
interest per annum, beginning August 31, 1962 and August 31 of every year thereafter until the year
1972, while the purchase price of the M/S GENERAL LIM was to be paid by General Shipping to the
Commission under a deferred payment plan in 10 equal yearly installments of P723,132.68, bearing 3%
interest per annum beginning September 30 of every year until the year 1972. (Exhs. 9, p. 4 and A-2,
both cases) (See Respondents' brief, p. 4.)
Delivered in Japan to its respective buyers, acting on behalf of the Commission, the vessels, upon their departure
from Tokyo, on the maiden trip thereof to the Philippines, were issued, by the Philippine Vice-Consul in said city,
provisional certificates of Philippine registry in the name of the Commission, so that the vessels could proceed to
the Philippines and secure therein the respective final registration document.
Upon arrival at the port of Manila, the Buyer filed the corresponding applications for registration of the vessels,
but, the Bureau of Customs placed the same under custody and refused to give due course to said applications,
unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. As the Commissioner
of Customs refused to reconsider the stand taken by his office, the Buyers simultaneously filed with the Court of
Tax Appeals their respective petitions for review, against the Commissioner of Customs and the Commissioner of
Internal Revenue — hereinafter referred to collectively as Appellants — with urgent motion for suspension of
the collection of said tax. After a joint hearing on this motion, the same was, on October 31, 1960, granted by the
Tax Court, upon the sum of a P500,000.00 bond by each one of the Buyers.
On June 17, 1961, while these cases were pending trial in said Court, Republic Act No. 3079 amended Republic
Act No. 1789 — the Original Reparations Act, under which the aforementioned contracts with the Buyers had
been executed — by exempting buyers of reparations goods acquired from the Commission, from liability for the
compensating tax. Moreover, section 20 of Republic Act No. 3079, provides:
x x x This Act shall take effect upon its approval, except that the amendment contained in Section
seven hereof relating to the requirements of procurement orders including the requirement of down
payment by private applicant end-users shall not apply to procurement orders already duty issued and
verified at the time of the passage of this amendatory Act, and except further that the amendment
contained in Section ten relating to the insurance of the reparations goods by the end-users upon
delivery shall apply also to goods covered by contracts already entered into by the Commission and
end-user prior to the approval of this amendatory Act as well as goods already delivered to the end-
user, and except further that the amendments contained in Sections eleven and twelve hereof relating
to the terms of installment payments on capital goods disposed of to private parties, and the execution
of a performance bond before delivery of reparations goods, shall not apply to contracts for the
utilization of reparations goods already entered into by the Commission and the end-users prior to the
approval of this amendatory Act: Provided, That any end-user may apply for the renovation of his
utilization contract with the Commission in order to avail of any provision of this amendatory Act which
is more favorable to an applicant end-user than has heretofore been granted in like manner and to the
same extent as an end-user filing his application after the approval of this amendatory Act, and the
Commission may agree to such renovation on condition that the end-user shall voluntarily assume all
the new obligations provided for in this amendatory Act.
Invoking the provisions of this section 20, the Buyers applied, therefore, for the renovation of their utilizations
contracts with the Commission, which granted the application, and, then, filed with the Tax Court, their
supplemental petitions for review. Subsequently, the parties submitted Stipulations of Fact and, after a joint
trial, at which they introduced additional evidence, said Court rendered the appealed decision, reversing the
decisions herein Appellants, and declared said Buyers exempt from the compensating tax sought to be assessed
against the vessels aforementioned. Hence, these appeals by the Government G.R. No. L-21633 refers to the case
as regards "M/S Maria Rosello," whereas "M/S General Lim" is the subject-matter of G.R. No. L-21634.
It seems clear that, under Republic Act No. 1789 — pursuant to which the contracts of Conditional Purchase and
Sale in question had been executed — the vessels "M/S Maria Rosello" and "M/S General Lim" were subject to
compensating tax. Indeed, Section 14 of said Act provides that "reparations goods obtained by private parties
shall be exempt only from the payment of customs duties, consular fees and the special import tax." Although
this Section was amended by R.A. No. 3079, to include the compensating tax" among the exemptions
enumerated therein, such amendment took place, not only after the contracts involved in these appeals had
been perfected and partly consummated, but, also, after the corresponding compensating tax had become due
and payment thereof demanded by Appellants herein. It is, moreover, obvious that said additional exemption
should not and cannot be given retroactive operation, in the absence of a manifest intent of Congress to do this
effect. The issue in the cases at bar hinges on whether or not such intent is clear.
Appellants maintain the negative, upon the ground that a tax exemption must be clear and explicit; that there is
no express provision for the retroactivity of the exemption, established by Republic Act No. 3079, from the
compensating tax; that the favorable provisions, which are referred to in section 20 thereof, cannot include the
exemption from compensating tax; and, that Congress could not have intended any retroactive exemption,
considering that the result thereof would be prejudicial to the Government.
The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no
tax exemption of any kind whatsoever, even if Congress should wish to create one, because every such
exemption implies a waiver of the right to collect what otherwise would be due to the Government, and, in this
sense, is prejudicial thereto. In fact, however, tax exemptions may and do exist, such as the one prescribed in
section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, which, by the way, is "clear and
explicit," thus, meeting the first ground of appellant's contention. It may not be amiss to add that no tax
exemption — like any other legal exemption or exception — is given without any reason therefor. In much the
same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-
making body considers sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed,
section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable
provisions, namely, the voluntary assumption, by the end-user who bought reparations goods prior to June 17,
1961 of "all the new obligations provided for in" said Act.
The argument adduced in support of the third ground is that the view adopted by the Tax Court would operate
to grant exemption to particular persons, the Buyers herein. It should be noted, however, that there is no
constitutional injunction against granting tax exemptions to particular persons. In fact, it is not unusual to grant
legislative franchises to specific individuals or entities, conferring tax exemptions thereto. What the fundamental
law forbids is the denial of equal protection, such as through unreasonable discrimination or
classification.1äwphï1.ñët
Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not
particular persons, but persons belonging to a particular class. Indeed, appellants do not assail the
constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval of
Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the Commission. From the
viewpoint of Constitutional Law, especially the equal protection clause, there is no difference between the grant
of exemption to said end-users, and the extension of the grant to those whose contracts of purchase and sale
mere made before said date, under Republic Act No. 1789.
It is true that Republic Act No. 3079 does not explicitly declare that those who purchased reparations goods prior
to June 17, 1961, are exempt from the compensating tax. It does not say so, because they do not really enjoy
such exemption, unless they comply with the proviso in Section 20 of said Act, by applying for the renovation of
their respective utilization contracts, "in order to avail of any provision of the Amendatory Act which is more
favorable" to the applicant. In other words, it is manifest, from the language of said section 20, that the same
intended to give such buyers the opportunity to be treated "in like manner and to the same extent as an end-
user filing his application after this approval of this Amendatory Act." Like the "most-favored-nation-clause" in
international agreements, the aforementioned section 20 thus seeks, not to discriminate or to create an
exemption or exception, but to abolish the discrimination, exemption or exception that would otherwise result,
in favor of the end-user who bought after June 17, 1961 and against one who bought prior thereto. Indeed, it is
difficult to find a substantial justification for the distinction between the one and the other. As correctly held by
the Tax Court in Philippine Ace Lines, Inc. v. Commissioner of Internal Revenue (C.T.A. Nos. 964 and 984, January
25, 1963), and reiterated in the cases under consideration:
x x x In providing that the favorable provision of Republic Act No. 3079 shall be available to applicants
for renovation of their utilization contracts, on condition that said applicants shall voluntarily assume
all the new obligations provided in the new law, the law intends to place persons who acquired
reparations goods before the enactment of the amendatory Act on the same footing as those who
acquire reparations goods after its enactment. This is so because of the provision that once an
application for renovation of a utilization contract has been approved, the favorable provisions of said
Act shall be available to the applicant "in like manner and to the same extent, as an end-user filing his
application alter the approval of this amendatory Act." To deny exemption from compensating tax to
one whose utilization contract has been renovated, while granting the exemption to one who files an
application for acquisition of reparations goods after the approval of the new law, would be contrary to
the express mandate of the new law, that they both be subject to the same privileges in like manner
and to the same extent. It would be manifest distortion of the literal meaning and purpose of the new
law.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed in toto, without any Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject
pronouncement as to costs. It is so ordered. which shall be expressed in the title thereof.

G.R. No. 109289 October 3, 1994 Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
RUFINO R. TAN, petitioner,
vs. Article III, Section 1 — No person shall be deprived of . . . property without due process of
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL law, nor shall any person be denied the equal protection of the laws.
REVENUE, respondents.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
G.R. No. 109446 October 3, 1994 respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO The Solicitor General espouses the position taken by public respondents.
C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs. The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as their respective memoranda.
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109289
Rufino R. Tan for and in his own behalf.
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or,
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446. at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

VITUG, J.:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of
Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending the National Internal Revenue Code, as Amended.
certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
pursuant to said law. amended, provide:

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory Sec. 21. Tax on citizens or residents. —
legislation.
xxx xxx xxx
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the
Practice of Profession. — A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year from all sources, other than
income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether (g) Interest paid or accrued within a taxable year on loans contracted from accredited
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or financial institutions which must be proven to have been incurred in connection with the
practices his profession herein, determined in accordance with the following schedule: conduct of a taxpayer's profession, trade or business.

Not over P10,000 3% For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to
Over P10,000 P300 + 9% answer for business or professional expenses as the case may be.
but not over P30,000 of excess over P10,000
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
Over P30,000 P2,100 + 15% amendatory law should be considered as having now adopted a gross income, instead of as having still retained
but not over P120,00 of excess over P30,000 the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been
reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting,
however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax
Over P120,000 P15,600 + 20%
concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue
but not over P350,000 of excess over P120,000
to be well provided under the new law.

Over P350,000 P61,600 + 30%

of excess over P350,000
Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under
Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items
specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable
income subject to tax under Section 21 (f) in the case of individuals engaged in business or
practice of profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through
such publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of
the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual
compendium of the law which could not have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be
uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets,
however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No.
7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects
of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose,
(3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR,
197 SCRA 52).

(f) Contributions made to the Government and accredited relief organizations for the What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly
rehabilitation of calamity stricken areas declared by the President; and shift the income tax system towards the schedular approach2 in the income taxation of individual taxpayers and
to maintain, by and large, the present global treatment3 on taxable corporations. We certainly do not view this
classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes
to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not.
With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down,
for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however,
has not been demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a
clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry
out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general professional partnership (GPP) and
the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net
profit of the partnership, only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners in their individual
capacities in the practice of their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that would
apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in
Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez,
minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on
the questioned implementing regulation of public respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression
of this bill. Do we speak here of individuals who are earning, I mean, who
earn through business enterprises and therefore, should file an income
tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the
SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to
partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional partnerships
are subject to the payment of income tax or that there is a difference in the tax treatment between individuals
engaged in business or in the practice of their respective professions and partners in general professional
partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income
tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax
exempt, but on the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is
explicit:
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or
 otherwise, shall be returned for taxation and the tax paid in accordance with the provisions
of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner —
(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general professional partnership is such an
example.4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner
does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation,
the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity
in the generation of income by, and the ultimate distribution of such income to, respectively, each of the
individual partners.

(2) Shall be deemed to have elected the itemized deductions, unless he

declares his distributive share of the gross income undiminished by his
share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession alone
or individually and one who does it through partnership (whether registered or not) with others in the exercise
of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive
investment income, under the present income tax system all individuals deriving income from any source
whatsoever are treated in almost invariably the same manner and under a common set of rules.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so
modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their
non-compensation income. There is no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals
who practice their respective professions individually and of those who do it through a general professional
partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496
SO ORDERED.
as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become
myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole
income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, G.R. No. 88291 May 31, 1991
the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons
who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality ERNESTO M. MACEDA, petitioner,
and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to vs.
income tax liability on their income from all sources) and of the generally accepted and internationally HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President; HON. VICENTE
recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on R. JAYME, in his capacity as Secretary of the Department of Finance; HON. SALVADOR MISON, in his capacity
their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in his capacity as Commissioner of Internal Revenue;
namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts NATIONAL POWER CORPORATION; the FISCAL INCENTIVES REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell
(irrevocable both as to corpus and as to income). Petroleum Corporation; Philippine National Oil Corporation; and Petrophil Corporation, respondents.

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, Villamor & Villamor Law Offices for petitioner.
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum Corporation.
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons.
Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its
deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are
independently subject to the payment of income tax.
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal
Incentives Review Board FIRB for exempting the National Power Corporation (NPC) from indirect tax and duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the
development of hydraulic power and the production of power from other sources.1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under—
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from
all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces,
cities and municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a
national policy the total electrification of the Philippines through the development of power from all sources to
meet the needs of industrial development and rural electrification which should be pursued coordinately and
supported by all instrumentalities and agencies of the government, including its financial institutions. 2 The
corporate existence of NPC was extended to carry out this policy, specifically to undertake the development of
hydro electric generation of power and the production of electricity from nuclear, geothermal and other sources,
as well as the transmission of electric power on a nationwide basis.3 Being a non-profit corporation, Section 13 of
the law provided in detail the exemption of the NPC from all taxes, duties, fees, imposts and other charges by the
government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act No.
6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees, imposts and other
charges imposed "directly or indirectly," on all petroleum products used by NPC in its operation. Presidential
Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax exemption in
general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their subsidiaries.4 However, said law empowered the
President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally,
the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty
exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued resolution
No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives
granted to government and private entities which had been restored under Presidential Decree Nos. 1931 and
1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of effectivity of such tax
and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges
effective March 10, 1987. On October 5, 1987, the President, through respondent Executive Secretary Macaraig,
Jr., confirmed and approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally
paid by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for
Customs duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its
crude oil importation.
Many of the factual statements are reproduced from the Senate Committee on Accountability of Public
Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and approved by the
Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was
promulgated abolishing the tax exemptions of all government-owned or-controlled corporations, the
oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered
to the NPC. This non-payment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7,
Annex "A")
During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of
NPC of petroleum products from the oil companies on the erroneous belief that the National Power
Corporation (NPC) was exempt from indirect taxes as reflected in the letter of Deputy Commissioner of
Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to
the NPC to purchase petroleum products from the oil companies without payment of specific tax (copy
of this letter is attached hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC
only after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions granted in
favor of government-owned or-controlled corporations and empowering the FIRB to recommend to
the President or to the Minister of Finance the restoration of the exemptions which were withdrawn.
"Specifically, Caltex paid the total amount of P58,020,110.79 in specific and ad valorem taxes for
deliveries of petroleum products to NPC covering the period from October 31, 1984 to April 27, 1985."
(par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion.
Beginning June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions, Caltex's
billings to NPC always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p,
7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April,
1985, NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the specific tax
component being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy
of which is hereto attached as Annex "C", restored the tax exemption privileges of NPC effective
retroactively to June 11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as
follows:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National
Power Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a
"refund of Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79. (par.
26, pp. 8-9, Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"),
Acting BIR Commissioner Ruben Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum
products from the oil companies free of specific and ad valorem taxes, during the period in
question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985—The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of
the FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax exemption privileges
of the National Power Corporation (NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-85.
(par. 40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed
the ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co.,
Ltd., a Korean contractor of NPC for its infrastructure projects, certified true copy of which is attached
hereto as petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by
P.D. 938, this Office is of the opinion, and so holds, that the scope of the tax exemption
privilege enjoyed by NPC under said section covers only taxes for which it is directly liable and
not on taxes which are only shifted to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug.
17, 1967) Since contractor's tax is directly payable by the contractor, not by NPC, your
request for exemption, based on the stipulation in the aforesaid contract that NPC shall
assume payment of your contractor's tax liability, cannot be granted for lack of legal basis."
(Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is
directly liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR,
through Ancheta, reversed its previous position of May 8, 1985 adopted by Ancheta himself favoring
NPC's indirect tax exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex
"F"), the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which PAL is
directly liable, and that the payment of specific and ad valorem taxes on petroleum products is a direct
liability of the manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions
retroactively from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached as
petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79
(corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q") dated
July 7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F," which was
assigned by NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987,
certified true copy of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and
15, Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial
settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the assigned
tax credit against its specific tax payments for two (2) months. (per memorandum dated July 28, 1986
of DCIR Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit
assigned to Caltex, the NPC reiterated its request for the release of the balance of its pending refunds
of taxes paid by respondents Petrophil, Shell and Caltex covering the period from June 11, 1984 to
early part of 1986 amounting to P410.58 million. (The claim of the first two (2) oil companies covers
the period from June 11, 1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to
early 1986). This request was denied on August 18, 1986, under BIR Ruling 152-86 (certified true copy
of which is attached hereto as petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege to buy
petroleum products covered only the period from June 11, 1984 up to June 30, 1985. It further
declared that, despite FIRB No. 1-86, NPC had already lost its tax and duty exemptions because it only
enjoys special privilege for taxes for which it is directly liable. This ruling, in effect, denied the P410
Million tax refund application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved
the motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p.
15)." (par. 29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR
Commissioner Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "J"), reversed his previous position and states this time that all deliveries of
petroleum products to NPC are tax exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled
"Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the Powers of the
Fiscal Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption
privilege and included in the exemption "those pertaining to its domestic purchases of petroleum and
petroleum products, and the restorations were made to retroact effective March 10, 1987, a certified
true copy of which is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoñez, Secretary of Justice, issued Opinion No. 77, series
of 1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section 2a (b), (c)
and (d) of Executive order No. 93 constitute undue delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the
Chairman of the FIRB a certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987, allegedly
pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by
letter dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the National
Power Corporation is still exempt from taxes, duties . . . on its local purchases of . . . petroleum
products . . ." declared that "NPC under the provisions of its Revised Charter retains its exemption from
duties and taxes imposed on the petroleum products purchased locally and used for the generation of
electricity," a certified true copy of which is attached hereto as petitioner's Annex "N." (par. 30, pp. 9-
10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988
but without the usual official form of "By the Authority of the President," a certified true copy of which
is hereto attached and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive Secretary are based on the
RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC pertaining
to its domestic purchases of petroleum products (petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported
that the Office of the President and the Department of Finance had ordered the BIR to refund the tax
payments of the NPC amounting to Pl.58 Billion which includes the P410 Million Tax refund already
rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988
of Undersecretary Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was
ordered released to NPC (par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan
requesting them to hold in abeyance the release of the Pl.58 billion and await the outcome of the
investigation in regard to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P" and
"P-1 " (par. 32, p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR
dated August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC until after
the termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs
custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil is one of the
petroleum products processed from the crude oil; and same is sold to NPC. After the sale, NPC applies
for tax credit covering the duties and ad valorem exemption under its Charter. Such applications are
processed by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of
NPC which, in turn assigns it to the oil firm that imported the crude oil. These certificates are
eventually used by the assignee-oil firms in payment of their other duty and tax liabilities with the
Bureau of Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought
by respondent NPC for refund from the Bureau of Customs for duties paid by the oil companies on the
importation of crude oil from which the processed products sold locally by them to NPC was derived.
However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which
conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the
herein petitioner was the sponsor, a much bigger figure was actually refunded to NPC representing
duties and ad valorem taxes paid to the Bureau of Customs by the oil companies on the importation of
crude oil from 1979 to 1985.
2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies
on the same ground that the NPC, since May 27, 1976 up to June 17, 1987 was never granted
any indirect tax exemption. So, the P1.58 billion represent taxes legally and properly paid by
the oil firms.
3. Start collection actions of specific or excise and ad valorem taxes due on petroleum
products sold to NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance
of EO 195).

26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled: B. For the Bureau of Customs (BOC) to do the following:

Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a 1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of
Formal and Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by petroleum products by NPC and allegedly granted under the NPC charter covering the years 1978-1988
Oil Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were ...
Made Possible By Their Availing of the Non-Existing Exemption of National Power
Corporation (NPC) from Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund
28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct
Totalling P1.55 Billion From the Department of Finance, Their Refusal to Pay Since 1976
the Bureau of Internal Revenue and of Customs to proceed with the processing of claims for tax
Customs Duties Amounting to Billions of Pesos on Imported Crude Oil Purportedly for the Use
credits/refunds of the NPC, respondent Executive Secretary rendered his ruling, the dispositive portion
of the National Power Corporation, the Non-Payment of Surtax on Windfall Profits from
of which reads:
Increases in the Price of Oil Products in August 1987 amounting Maybe to as Much as Pl.2
Billion Surtax Paid by Them in 1984 and For Other Purposes.
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by proper
authorities, that department and/or its line-tax bureaus may now proceed with the processing of the claims of
27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy
the National Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if there be any, in
formal inquiry on the matter, calling all parties interested to the witness stand including
accordance with the ruling of that Department dated May 20,1988, as confirmed by this Office on June 15, 1988 .
representatives from the different oil companies, and in due time submitted its Committee Report No.
. .5
474 . . . — The Blue Ribbon Committee recommended the following courses of action.

Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction
1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation
and/or restraining order, praying among others that:
(NPC) and its approval of Tax Credit memo covering said amount (Annex "P" hereto), dated
July 7, 1986, and cancel its approval of the Deed of Assignment (Annex "Q" hereto) by NPC to
Caltex, dated July 28, 1986, and collect from Caltex its tax liabilities which were erroneously 1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent
treated as paid or settled with the use of the tax credit certificate that NPC assigned to said FIRB Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other persons
firm.: acting for, under, and in their behalf from enforcing their resolution, orders and ruling, to wit:

1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
was issued. Therefore, the grant of a tax refund to NPC in the amount of P58
million was illegal, and therefore, null and void. Such refund was a nullity right from B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's
the beginning. Hence, it never transferred any right in favor of NPC. Annex "M");

C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
 D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").
2. Said temporary restraining order should also include respondent Commissioners of Customs Mison
and Internal Revenue Ong restraining them from processing and releasing any pending claim or
application by respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against
above-named respondents and all persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up
to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's
Annex "M");
The issues raised in the petition are the following:
3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for
P58,020,110.79 (petitioner's Annex "F");
7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987
(petitioner's Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the
Bureau of Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of
tax credit certificates from 1979 up to the present.
C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC
with the Bureau of Customs and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from
enforcing the abovequestioned resolution, orders and ruling of respondents Executive Secretary,
Secretary of Finance, and FIRB by processing and releasing respondent NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending
claims for refund of respondent NPC with the Bureau of Customs covering the period from 1985 to the
present; to cancel and invalidate the illegal payment made by respondents Caltex, Shell and PNOC by
using the tax credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell
and PNOC all the amounts appearing in said tax credit certificates which were used to settle their duty
and tax liabilities with the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending
claims for refund of respondent NPC with the Bureau of Internal Revenue covering the period from
June 11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just and equitable in the premises. 6
To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this
Honorable Court must resolve the following issues:
Main issue—
Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.
Corollary issues—
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax
exemption privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated
January 7, 1986 restoring NPC's tax exemption privilege effective July 1, 1985 included the restoration
of indirect tax exemption to NPC and
 2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was validly
issued, the nature and extent of the tax exemption privilege restored to NPC.7
In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required respondents to
comment thereon, within ten (10) days from notice. The respondents having submitted their comment, on
October 10, 1989 the Court required petitioner to file a consolidated reply to the same. After said reply was filed
by petitioner on November 15, 1989 the Court gave due course to the petition, considering the comments of
respondents as their answer to the petition, and requiring the parties to file simultaneously their respective
memoranda within twenty (20) days from notice. The parties having submitted their respective memoranda, the
petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the questioned orders and
resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected
Senator of the Philippines." Public respondent argues that petitioner must show he has sustained direct injury as
a result of the action and that it is not sufficient for him to have a mere general interest common to all members
of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the
ruling in Lozada when it involves illegal expenditure of public money. The petition questions the legality of the
tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil
companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also allege that the proper
remedy for petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125 instead of this
petition. However Section 11 of said law provides—
Sec. 11. Who may appeal; effect of appeal—Any person, association or corporation adversely affected
by a decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs
(Commissioner of Customs) or any provincial or City Board of Assessment Appeals may file an appeal in
the Court of Tax Appeals within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner of
Internal Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal who may
appeal to the Court of Tax Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal Revenue
to impose a tax assessment not found by him to be proper. It would be tantamount to a usurpation of executive
functions.9
Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with arbitrariness and
grave abuse as to go beyond statutory authority.10
Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an unlawful
exercise of jurisdiction11 or to prevent the oppressive exercise of legal authority.12 Precisely, petitioner questions
the lawfulness of the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an indirect
tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in.
Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for
their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue
after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone
else ."13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue
upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to
the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree No.
938, the exemption of NPC from indirect taxation was revoked and repealed. While petitioner concedes that NPC
enjoyed broad exemption privileges from both direct and indirect taxes on the petroleum products it used, under
Section 13 of Republic Act No, 6395 and more so under Presidential Decree No. 380, however, by the deletion of
the phrases "directly or indirectly" and "on all petroleum products used by the Corporation in the generation,
transmission, utilization and sale of electric power" he contends that the exemption from indirect taxes was
withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938
regarding the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax exemption. He
cites Philippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue.14 Petitioner emphasizes the principle in
taxation that the exception contained in the tax statutes must be strictly construed against the one claiming the
exemption, and that the rule that a tax statute granting exemption must be strictly construed against the one
claiming the exemption is similar to the rule that a statute granting taxing power is to be construed strictly, with
doubts resolved against its existence.15 Petitioner cites rulings of the BIR that the phrase exemption from "all
taxes, etc." from "all forms of taxes" and "in lieu of all taxes" covers only taxes for which the taxpayer is directly
liable.16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No. 1931,
the relevant provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from
the payment of duties, taxes . . . heretofore granted in favor of government-owned or controlled
corporations are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of
the Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the
exemptions withdrawn by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation
under C.A. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the NPC is hereby
required to furnish the FIRB on a periodic basis the particulars of items received or to be received through such
arrangements, for purposes of tax and duty exemptions privileges. 17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation (NPC)
under Commonwealth Act No. 120, as amended, are restored: Provided, That importations of fuel oil (crude oil
equivalent), and coal of the herein grantee shall be subject to the basic and additional import duties; Provided,
further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other
monetary benefits from deposit substitutes, trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and improvements owned
by it provided that the beneficial use of the property is not transferred to another pursuant to the provisions of
Sec. 10(a) of the Real Property Tax Code, as amended. 18
Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86. Indeed, they
were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the FIRB should make the
recommendation subject to the approval of "the President of the Philippines and/or the Minister of Finance."
While said Resolutions do not appear to have been approved by the President, they were nevertheless approved
by the Minister of Finance who is also duly authorized to approve the same. In fact it was the Minister of Finance
who signed and promulgated said resolutions.19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-86
which were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of Finance Cesar
E.A Virata, as Chairman of FIRB respectively, should be separately approved by said Minister of Finance as
required by P.D. 1931 is, a superfluity. An examination of the said resolutions which are reproduced in full in the
dissenting opinion show that the said officials signed said resolutions in the dual capacity of Chairman of FIRB
and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of
Albay,20wherein the Court observed that under P.D. No. 776 the power of the FIRB was only recommendatory
and requires the approval of the President to be valid. Thus, in said case the Court held that FIRB Resolutions
Nos. 10-85 and 1-86 not having been approved by the President were not valid and effective while the validity of
FIRB 17-87 was upheld as it was duly approved by the Office of the President on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended P.D. No.
776, it is clearly provided for that such FIRB resolution, may be approved by the "President of the Philippines
and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly approved by the
Minister of Finance, hence they are valid and effective. To this extent, this decision modifies or supersedes the
Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges enjoyed
by the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax exemption
privilege; and that it cannot be interpreted to cover indirect taxes under the principle that tax exemptions are
construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.
all sources to meet the need of rural electrification are primary objectives of the nation which shall be
pursued coordinately and supported by all instrumentalities and agencies of the government including
its financial institutions.
From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious.
Under Republic Act No. 358, its exemption is provided as follows:

Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a tax credit Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
certificate21 which was assigned to respondent Caltex through a deed of assignment approved by the BIR22 is from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
patently illegal. He also contends that the pending claim of respondent NPC in the amount of P410.58 million provinces, cities and municipalities."
with respondent BIR for the sale and delivery to it of bunker fuel by respondents Petrophil, Shell and Caltex from
July 1, 1985 up to 1986, being illegal, should not be released.
Under Republic Act No. 6395:

Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24, 1987. It
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
was issued under authority of Executive Order No. 93 dated December 17, 1986 which grants to the FIRB among
other Charges by Government and Governmental Instrumentalities.— The Corporation shall be non-
others, the power to recommend the restoration of the tax and duty exemptions/incentives withdrawn
profit and shall devote all its returns from its capital investment, as well as excess revenues from its
thereunder.
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
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect that the Corporation is hereby declared exempt:
powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93 "constitute undue
delegation of legislative power and is, therefore, unconstitutional." Petitioner observes that the FIRB did not
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
merely recommend but categorically restored the tax and duty exemption of the NPC so that the memorandum
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
of the respondent Executive Secretary dated October 5, 1987 approving the same is a surplusage.
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine in Philippine
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot create new indirect tax
provinces, cities, municipalities and other government agencies and instrumentalities;
exemption not otherwise granted in the NPC charter as amended by Presidential Decree No. 938.

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

The NPC is a non-profit public corporation created for the general good and welfare23 wholly owned by the
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
government of the Republic of the Philippines.24 From the very beginning of its corporate existence, the NPC
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on
enjoyed preferential tax treatment25 to enable the Corporation to pay the indebtedness and obligation and in
all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of
furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No.
electric power. (Emphasis supplied.)
6395"26 which provides:

Under Presidential Decree No. 380:

Sec. 1. Declaration of Policy—Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power from
 Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and
other Charges by the Government and Government Instrumentalities.— The Corporation shall be non-
profit and shall devote all its returns from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other governmental agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum produced used by the Corporation in the generation, transmission,
utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and
Other Charges by the Government and Government Instrumentalities.—The Corporation shall be non-
profit and shall devote all its returns from its capital investment as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay the indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section One of this Act, the
Corporation, including its subsidiaries hereby declared exempt from the payment of all forms of taxes,
duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings. (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all taxes,
duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395 enumerated the
details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the details of the
exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC "shall
devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To
enable the Corporation to pay the indebtedness and obligations and in furtherance and effective implementation
of the policy enunciated in Section one of this Act, . . ."27
The preamble of P.D. No. 938 states—
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit
character of the NPC has not been fully utilized because of restrictive interpretations of the taxing
agencies of the government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall be
construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so as to
enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes
granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.28
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of
non tax liability of such agencies.29
In the case of property owned by the state or a city or other public corporations, the express exemption should
not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the
state, since as to such property "exemption is the rule and taxation the exception."30
The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No. 6395
and P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are presumed
to be passed with deliberation and with knowledge of all existing ones on the subject, it is logical to conclude
that in passing a statute it is not intended to interfere with or abrogate a former law relating to the same subject
matter, unless the repugnancy between the two is not only irreconcilable but also clear and convincing as a
result of the language used, or unless the latter Act fully embraces the subject matter of the earlier.31 The first
effort of a court must always be to reconcile or adjust the provisions of one statute with those of another so as
to give sensible effect to both provisions.32
The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated
part or a particular provision alone.33 When construing a statute, the reason for its enactment should be kept in
mind and the statute should be construed with reference to its intended scope and purpose34 and the evil sought
to be remedied.35
The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric
generation of power and production of electricity from other sources, as well as the transmission of electric
power on a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied
in Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all
forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380 if it is to attain its
goals.
Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given
controlling weight.36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June 26, 1985
confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the letter of the
Secretary of Finance of February 19, 1987, the Memorandum of the Executive Secretary of October 9, 1987, by
authority of the President, confirming and approving FIRB Resolution No. 17-87, the letter of the Secretary of
Finance of May 20, 1988 to the Executive Secretary rendering his opinion as requested by the latter, and the
latter's reply of June 15, 1988, it was uniformly held that the grant of tax exemption to NPC under C.A. No. 120,
as amended, included exemption from payment of all taxes relative to NPC's petroleum purchases including
indirect taxes.37 Thus, then Secretary of Finance Vicente Jayme in his letter of May 20, 1988 to the Executive
Secretary Macaraig aptly stated the justification for this tax exemption of NPC —
The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes
imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested that the
change in language evidenced an intention to exempt NPC only from taxes directly imposed on or
payable by it; since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally
are levied on and paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The
principal authority relied on is the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of
Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised Charter, the strengthening of
NPC's preferential tax treatment was clearly the intention. To the extent that the explanatory "whereas
clauses" may disclose the intent of the law-maker, the changes effected by P.D. 938 can only be read as
being expansive rather than restrictive, including its version of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly.
The textbook distinction between a direct and an indirect tax may be based on the possibility of
shifting the incidence of the tax. A direct tax is one which is demanded from the very person intended
to be the payor, although it may ultimately be shifted to another. An example of a direct tax is the
personal income tax. On the other hand, indirect taxes are those which are demanded from one
person in the expectation and intention that he shall indemnify himself at the expense of another. An
example of this type of tax is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no
moment. What is more relevant is that when an "indirect tax" is paid by those upon whom the tax
ultimately falls, it is paid not as a tax but as an additional part of the cost or of the market price of the
commodity.
This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he
analyzed the nature of the percentage (sales) tax to determine whether it is a tax on the producer or
on the purchaser of the commodity. Under out Tax Code, the sales tax falls upon the manufacturer or
producer. The phrase "pass on" the tax was criticized as being inaccurate. Justice Castro says that the
tax remains on the manufacturer alone. The purchaser does not pay the tax; he pays an amount added
to the price because of the tax. Therefore, the tax is not "passed on" and does not for that reason
become an "indirect tax" on the purchaser. It is eminently possible that the law maker in enacting P.D.
938 in 1976 may have used lessons from the analysis of Chief Justice Castro in 1967 Philippine Acetylene
case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil
crunch had already drastically pushed up crude oil Prices from about $1.00 per bbl in 1971 to about $10
and a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was operating the Meralco
thermal plants under a lease agreement. The power generated by the leased plants was sold to Meralco
for distribution to its customers. This lease and sale arrangement was entered into for the benefit of the
consuming public, by reducing the burden on the swiftly rising world crude oil prices. This objective was
achieved by the use of NPC's "tax umbrella under its Revised Charter—the exemption from specific
taxes on locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have withdrawn the
exemption from tax on fuel oil to which NPC was already entitled and which exemption Government in
fact was utilizing to soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil
products sold to NPC, whether paid to them by NPC or no never entered into the rates charged by NPC
to its customers not even during those periods of uncertainty engendered by the issuance of P.D. 1931
and E. 0. 93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC
through its rates.
There is an import duty on the crude oil imported by the local refineries. After the refining process,
specific and ad valorem taxes are levied on the finished products including fuel oil or residue upon their
withdrawal from the refinery. These taxes are paid by the oil companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component. NPC
pays the oil companies' invoices including the duty component but net of the tax component. NPC then
applies for drawback of customs duties paid and for a credit in amount equivalent to the tax paid (by
the oil companies) on the products purchased. The tax credit is assigned to the oil companies—as
payment, in effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied
over time—There were instances when NPC paid the tax component that was shifted to it and then
applied for tax credit. There were also side issues raised because of P.D. 1931 and E.O. 93 which
withdrew all exemptions of government corporations. In these latter instances, the resolutions of the
Fiscal Incentives Review Board (FIRB) come into play. These incidents will not be touched upon for
purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without
need of fresh approvals) reflected in the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the
tax and duty component on the oil products, such amount will go into its fuel cost and be passed on to
its customers through corresponding increases in rates. Since 1974, when NPC operated the oil-fired
generating stations leased from Meralco (which plants it bought in 1979), until the present time, no tax
on fuel oil ever went into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me
by yet another circumstance. It is conceded that NPC at the very least, is exempt from taxes to which it
is directly liable. NPC therefore could very well have imported its fuel oil or crude residue for burning at
its thermal plants. There would have been no question in such a case as to its exemption from all duties
and taxes, even under the strictest interpretation that can be put forward. However, at the time P.D.
938 was issued in 1976, there were already operating in the Philippines three oil refineries. The
establishment of these refineries in the Philippines involved heavy investments, were economically
desirable and enabled the country to import crude oil and process / refine the same into the various
petroleum products at a savings to the industry and the public. The refining process produced as its
largest output, in volume, fuel oil or residue, whose conventional economic use was for burning in
electric or steam generating plants. Had there been no use locally for the residue, the oil refineries
would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass
the local oil refineries and import its fossil fuel requirements directly in order to avail itself of its
exemption from "direct taxes." The oil refineries had to keep operating both for economic development
and national security reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931
and E.O. 93 expressly excluded direct fuel oil importations, so as not to prejudice the continued
operations of the local oil refineries.
To answer your query therefore, it is the opinion of this Department that NPC under the provisions of
its Revised Charter retains its exemption from duties and taxes imposed on the petroleum products
purchased locally and used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and function to supervise and
control the collection of government revenues by the application and implementation of revenue laws.
It is prepared to take the measures supplemental to this ruling necessary to carry the same into full
effect.
As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties
paid on the fuel oil it used. The point is that while these levies were in fact paid to the government, no
part thereof was recovered from the sale of electricity produced. As a consequence, as of our most
recent information, some P1.55 B in claims represent amounts for which the oil suppliers and NPC are
"out-of-pocket. There would have to be specific order to the Bureaus concerned for the resumption of
the processing of these claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the said
opinion ruling of the latter was confirmed and its implementation was directed. 39
The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary of
Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was exempted from all
forms of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means exactly what it says, i.e., all
forms of taxes including those that were imposed directly or indirectly on petroleum products used in its
operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC extends
only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these rulings are
predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It involved
the sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC was enjoying tax
exemption from all taxes under Commonwealth Act No. 120, as amended by Republic Act No. 358 issued on June
4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff
cannot claim exemptions simply because the NPC, the buyer, was exempt.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum
products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating the
National Power Corporation, defining its powers, objectives and functions, and for other purposes), as
amended, are restored effective March 10, 1987, subject to the following conditions:

However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC whereby 1. The restoration of the tax and duty exemption privileges does not apply to the following:
Section 13 thereof was amended by emphasizing its non-profit character and expanding the extent of its tax
exemption. 1.1. Importation of fuel oil (crude equivalent) and coal;

As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells out 1.2. Commercially-funded importations (i.e., importations which include but are not limited
clearly the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380, the exemption to those financed by the NPC's own internal funds, domestic borrowings from any source
of NPC from indirect taxes was emphasized when it was specified to include those imposed "directly and whatsoever, borrowing from foreign-based private financial institutions, etc.); and
indirectly."
1.3. Interest income derived from any source.
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the same in
general terms to cover "all forms of taxes, duties, fees, imposts, etc." which, as hereinabove discussed, logically
2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition of
includes exemption from indirect taxes on petroleum products used in its operation.
relieved tax and duty payments for such expansion on an annual basis or as often as the FIRB may
require it to do so. This report shall be in addition to the usual FIRB reporting requirements on
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the authority incentive availment.40
of which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93 was promulgated,
by which FIRB Resolution 17-87 was issued.
Executive Order No. 93 provides as follows—

Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental
Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty
circumstances. As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380 and P.D.
incentives granted " to government and private entities are hereby withdrawn, except:
No. 838 appear to have been brought about by the earlier inconsistent rulings of the tax agencies due to the
doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the NPC from indirect taxes on
petroleum products it uses in its operation. Effectively, said amendments superseded if not abrogated the ruling a) those covered by the non-impairment clause of the Constitution;
in Philippine Acetylene that the tax exemption of NPC should be limited to direct taxes only.
b) those conferred by effective international agreements to which the Government of the
In the light of the foregoing discussion the first corollary issue must consequently be resolved in the affirmative, Republic of the Philippines is a signatory;
that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986
which restored NPC's tax exemption privileges included the restoration of the indirect tax exemption of the NPC c) those enjoyed-by enterprises registered with:
on petroleum products it used.
(i) the Board of Investments pursuant to Presidential Decree No. 1789, as
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which restored amended;
NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid and effective.
 (ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as
amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial
Authority pursuant to Presidential Decree No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instruction No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal Incentives Review
Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is
hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/of duty exemption that may be restored.
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax
and duty exemptions or preferential treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into
consideration the international commitments of the Philippines and the necessary
precautions such that the grant of subsidies does not become the basis for countervailing
action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that the
powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93 constitute undue
delegation of legislative power and is therefore unconstitutional. However, he was overruled by the respondent
Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The Executive Secretary, by
authority of the President, has the power to modify, alter or reverse the construction of a statute given by a
department secretary.41
A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The standards of
the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu vs. Ericta42 and in De la Llana vs. Alba43 this Court held:
"The standard may be either express or implied. If the former, the non-delegated objection is easily met. The
standard though does not have to be spelled out specifically. It could be implied from the policy and purpose of
the act considered as a whole."
In People vs. Rosenthal44 the broad standard of "public interest" was deemed sufficient. In Calalang vs.
Williams,45, it was "public welfare" and in Cervantes vs. Auditor General,46 it was the purpose of promotion of
"simplicity, economy and efficiency." And, implied from the purpose of the law as a whole, "national security"
was considered sufficient standard47 and so was "protection of fish fry or fish eggs.48
The observation of petitioner that the approval of the President was not even required in said Executive Order of
the tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not well-taken. On the
contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty exemptions extended by
the FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87 was approved by the
respondent Executive Secretary, by authority of the President, on October 15, 1987.49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated —
The latest in our jurisprudence indicates that delegation of legislative power has become the rule and
its non-delegation the exception. The reason is the increasing complexity of modern life and many
technical fields of governmental functions as in matters pertaining to tax exemptions. This is coupled
by the growing inability of the legislature to cope directly with the many problems demanding its
attention. The growth of society has ramified its activities and created peculiar and sophisticated
problems that the legislature cannot be expected reasonably to comprehend. Specialization even in
legislation has become necessary. To many of the problems attendant upon present day undertakings,
the legislature may not have the competence, let alone the interest and the time, to provide the
required direct and efficacious, not to say specific solutions.50
Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated the rationale in favor of delegation of
legislative functions—
One thing however, is apparent in the development of the principle of separation of powers and that is
that the maxim of delegatus non potest delegare or delegati potestas non potest delegare, adopted
this practice (Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale University Press, 1922,
Vol. 2, p. 167) but which is also recognized in principle in the Roman Law d. 17.18.3) has been made to
adapt itself to the complexities of modern government, giving rise to the adoption, within certain limits,
of the principle of subordinate legislation, not only in the United States and England but in practically all
modern governments. (People vs. Rosenthal and Osmeña, 68 Phil. 318, 1939). Accordingly, with the
growing complexities of modern life, the multiplication of the subjects of governmental regulation, and
the increased difficulty of administering the laws, there is a constantly growing tendency toward the
delegation of greater power by the legislative, and toward the approval of the practice by the Courts.
(Emphasis supplied.)
The legislative authority could not or is not expected to state all the detailed situations wherein the tax
exemption privileges of persons or entities would be restored. The task may be assigned to an administrative
body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such
presumption can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal
interpretation in favor of constitutionality of legislation should be adopted.52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as above
discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of June 1987
includes exemption from indirect taxes and duties on petroleum products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President Marcos
in 1984 are invalid as they were presumably promulgated under the infamous Amendment No. 6 and that as
they cover tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same cannot be passed
"without the concurrence of the majority of all the members of the Batasan Pambansa." And, even conceding
that the reservation of legislative power in the President was valid, it is opined that it was not validly exercised as
there is no showing that such presidential encroachment was justified under the conditions then existing.
Consequently, it is concluded that Executive Order No. 93, which was intended to implement said decrees, is also
illegal. The authority of the President to sub-delegate to the FIRB powers delegated to him is also questioned.
In Albay,54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree withdrew
tax exemptions of government-owned or controlled corporations including their subsidiaries but authorized the
FIRB to restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled that the tax exemptions
under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions were only recommendatory
and were not duly approved by the President of the Philippines as required by P.D. No. 776. 55 The Court also
sustained in Albaythe validity of Executive Order No. 93, and of the tax exemptions restored under FIRB
Resolution No. 17-87 which was issued pursuant thereto, as it was duly approved by the President as required by
said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided that:
All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive
issuances not inconsistent with this constitution shall remain operative until amended, repealed or
revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with the
Constitution.1âwphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938 which
amended the NPC charter by granting exemption to NPC from all forms of taxes. As above discussed, this
exemption of NPC covers direct and indirect taxes on petroleum products used in its operation. This is as it
should be, if We are to hold as invalid and inoperative the withdrawal of such tax exemptions under P.D. No.
1931 as well as under Executive Order No. 93 and the delegation of the power to restore these exemptions to
the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court ruled that
the NPC is liable for real estate taxes as of June 11, 1984 (the date of promulgation of P.D. No. 1931) when NPC
had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-86 were not validly issued.
The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is estimated to amount to P7.49
billion plus another P4.76 billion in fuel import duties the firm had earlier paid to the government which the NPC
now proposed to pass on to the consumers by another 33-centavo increase per kilowatt hour in power rates on
top of the 17-centavo increase per kilowatt hour that took effect just over a week ago., 56 Hence, another case
has been filed in this Court to stop this proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated August 24,
1975 was already amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB resolutions may be
approved not only by the President of the Philippines but also by the Minister of Finance. Such resolutions were
promulgated by the Minister of Finance in his own right and also in his capacity as FIRB Chairman. Thus, a
separate approval thereof by the Minister of Finance or by the President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and
consequently, Albaymust be considered superseded to this extent by this decision. This is because P.D. No. 938
which is the latest amendment to the NPC charter granting the NPC exemption from all forms of taxes certainly
covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the
country but more importantly, to assure cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite correct.1a\^/phi1 There are
various arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the custom
duties paid by the oil companies are added to the selling price paid by NPC. As to the specific and ad
valorem taxes, they are added a part of the seller's price, but NPC pays the price net of tax, on condition that
NPC would seek a tax refund to the oil companies. No tax component on fuel had been charged or recovered by
NPC from the consumers through its power rates. 58 Thus, this is not a case of tax evasion of the oil companies
but of tax relief for the NPC. The billions of pesos involved in these exemptions will certainly inure to the
ultimate good and benefit of the consumers who are thereby spared the additional burden of increased power
rates to cover these taxes paid or to be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may claim
the same privilege should be dispelled by the fact that (a) this decision particularly treats of only the exemption
of the NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on the
petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No. 6395 and Section 13(d) of
P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees, imposts and all other charges imposed
by the government on all petroleum products used in its operation only, which is the very exemption which this
Court deems to be carried over by the passage of P.D. No. 938. As a matter of fact in Section 13(d) of P.D. No.
380 it is specified that the aforesaid exemption from taxes, etc. covers those "directly or indirectly" imposed by
the "Republic of the Philippines, its provincies, cities, municipalities and other government agencies and
instrumentalities" on said petroleum products. The exemption therefore from direct and indirect tax on
petroleum products used by NPC cannot benefit the suppliers, importers and contractors of NPC of other
products or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the government. The amount
of revenue received or expected to be received by this tax exemption is, however, not going to any of the oil
companies. There would be no loss to the government. The said amount shall accrue to the benefit of the NPC, a
government corporation, so as to enable it to sustain its tremendous task of providing electricity for the country
and at the least cost to the consumers. Denying this tax exemption would mean hampering if not paralyzing the
operations of the NPC. The resulting increased revenue in the government will also mean increased power rates
to be shouldered by the consumers if the NPC is to survive and continue to provide our power
requirements.59 The greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-14264 April 30, 1963
RAYMUNDO B. TAN, JOSE ESGUERRA, ROMAN ABASTILLAS, ANTONIO QUEBRADO, ROMAN AGNES, ELISEO
AMANDY, NICOLAS SOTOMAYOR, INESTORIO TORRENUEVA and FELIPE TIOSAN, plaintiffs-appellees,
vs.
THE MUNICIPALITY OF PAGBILAO, ELIAS PORNOBI as Municipal Mayor of Pagbilao and CEFERINO CAPARROS
as Municipal Treasurer of Pagbilao, defendants-appellants.
Jose D. Villena for plaintiffs-appellees.
Claro M. Recto for defendants-appellants.
PAREDES, J.:
Defendant municipal corporation was the owner and operator of a wharf (Exhs. E & F). On May 31, 1956, the
municipal council of defendant municipality enacted Ordinance No. 11, series of 1956, imposing certain charges
and/or fees on articles or merchandises landed upon, or loaded from the said wharf and on the strip of shoreline
adjacent thereto, measuring 300 meters. The plaintiffs, who were fishermen, merchants and proprietors of
Padre Burgos, Quezon, had to pass Pagbilao in order to bring their goods consisting of fish, charcoal, copra,
firewood and other merchandise to Lucena. The merchandise were transported in bancas or motor boats from
Padre Burgos and unloaded on the Pagbilao wharf or on the shoreline, from where they were brought to Lucena
by trucks.
Pursuant to the Ordinance, defendant municipality required plaintiffs to pay the charges and fees, which they did
under protest. On January 7, 1957, alleging that the Ordinance was ultra vires, in that the fees prescribed therein
partake of the nature of import or export taxes, in the guise of wharfage or rental fees, the plaintiffs, instituted
an action, with the CFI of Quezon Province, praying:
 (1) That the said Municipal ordinance be declared null and void and of no legal effect; and 1) whether the defendant municipality can validly enact the ordinance in question and collect the
charges contained therein; and
(2) Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of P1,800.00 for fees
collected and paid under protest. 2) whether plaintiff Tan is entitled to a refund of the fees paid to the defendant municipality.

Defendants answering the complaint, interposed the following special defenses: Appellants contend that aside from the general powers of the council to enact ordinances and make regulations
(Sec. 2238 of the Administrative Code),certain provisions of said Code authorizes a municipality to establish a
1) that the fees collected at the wharf are intended for and actually being exclusively utilized in the wharf and collect wharfage fees, as compensation for its use, to wit —
repair, improvement, and maintenance of the same;
SEC. 2242. Certain legislative powers of mandatory character.— It shall be the duty of the municipal
2) that the municipality has made material and additional construction to date, and if the revenues council, conformably with law:
raised from these fees are sufficient, the wharf is intended to be lengthened along the 300 meters
distance by the river; xxx xxx xxx

3) the presence, day and night, of a municipal employee or of a policeman at the wharf, has resulted in (e) To regulate the construction, care, and use of streets, sidewalks, canals, wharves and piers of the
the prevailing peace, order, and security of cargoes, vessels, and of the operators therein; municipality, and prevent and remove obstacles and encroachment on the same.

4) the municipality also maintains a 300 candle power kerosene lantern at the wharf. SEC. 2318. Municipal ferries, wharves, markets, etc. — A municipal council shall have authority to
acquire or establish municipal ferries, wharves, markets, slaughterhouses, pounds, and cemeteries.
As counterclaim, defendants asked the payment of P6.00, for twelve truckloads of full-length bamboos, Public utilities thus owned by the municipality may be conducted by the municipal authorities upon
loaded on a vessel at the wharf for which no payment had been made, in spite of repeated demands. stipulated return to private parties.
The court a quo rendered the following judgment:
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
xxx xxx xxx approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1äwphï1.ñët
In the light of the foregoing, the Court is therefore of the opinion that Ordinance No. 11, Series of
1956, of defendant Municipality of Pagbilao, Quezon, is null and void for having been enacted without SEC. 2320. Establishment of certain public utilities by private parties under license.— Where provision is
lawful authority .... not made by a municipal council, pursuant to the provisions of the next two preceding sections hereof,
for maintaining or conducting ferries, wharves, markets, or slaughterhouses requisite for the needs of
the municipality, the council shall have authority, in its discretion, to let the privilege of establishing
xxx xxx xxx
and maintaining such utilities to private parties by license granted upon such terms as shall be fixed by
the council ....
WHEREFORE, judgment is hereby rendered ordering defendant municipality of PagbiIao, Quezon, to
pay to plaintiff Raymundo B. Tan the amount of P774.25, with legal interest thereon from the filing of
Aside from the above provisions, Executive Order No. 255, dated April 1, 1940, states:
the complaint, that is, from 4 February 1957, and dismissing defendants' counterclaim against
plaintiffs, with the parties bearing their own costs.
(6) Collection of berthing fees at municipal ports.-Municipalities may collect berthing fees at municipal ports,
pursuant to the provisions of section two thousand three hundred eighteen (2318) of the Revised Administrative
The above judgment is now before Us on appeal by the defendants, urging a reversal thereof on seven counts,
Code, not to exceed those specified in paragraph (3) hereof, provided that such collection shall be credited to a
which converge on the following legal issues:
special fund and used only for the maintenance and improvement of the port at which the collections are made.
Appellants further contended that the wharfage fees which section 3(t), of Commonwealth Act No. 472,
prohibits a municipality from collecting, are customs charges levied in connection with the exportation or
importation of goods abroad, through ports of entry, as contemplated in the Tariff and Customs Code, but not
the ordinary wharfage rentals which a municipality may collect for the use of its wharf, in relation to local trade
and local products.
On the other hand, the appellees maintain that the appellant municipality was devoid one right to pass the
ordinance in question, since the Revised Administrative Code also prohibits the imposition of tax on any goods or
merchandise carried into or out of the municipality. Section 2287 thereof, provides —
SEC. 2287. Fundamental principles governing municipal taxation. — ... It shall not be in the power of
the council to impose a tax in any form whatever upon goods and merchandise carried into the
municipality, or out of the same, and any attempt to impose an import or export tax upon such goods
in the guise of an unreasonable charge for wharfage, use of bridges or otherwise shall be void.
Moreover, any power granted by the Administrative Code to municipalities had been impliedly
repealed or withdrawn by Commonwealth Act No. 472, the pertinent portions of which read —
SEC. 3. It shall be beyond the power of the municipal council and municipal district council to impose
the following taxes, charges and fees:
xxx xxx xxx
Customs duties, registration, wharfage, tonnage and other kinds of customs fees, charges and duties.
In the light of the legal provisions applicable, We are of the opinion that the ordinance in question, is ultra vires,
and hence, null and void. The ordinance calls for a specific tax. It charges a specific sum, ranging from one
centavo and up, by the head or number, and requires no assessment beyond a listing and classification of the
objects to be charged..
A tax which imposes a specific sum by the head or number, or some standard weight or measurement,
and which requires no assessment beyond a listing and classification of the objects to be taxed is
specific tax. (We Wa Yu v. City of Lipa, G.R. No. L-9167, Sept. 27, 1956)
Aside from being a specific tax, its nature as wharfage fee is also clear from the import of the ordinance,
specifically paragraph 1, which recites -.
PANGKAT 1.— Ang lahat na mayari o tagapangasiwa ng mga sasakyan sa pantalang bayan, ay dapat magbigay-
alam sa kinauukulang katiwala ng pamahalaan, upang maisaayos ang pagdaung, pagbaba at pagsakay ng mga
kargamentos at iba pa.
The phraseology of the above paragraph points to the fact that the charges collected pursuant thereto,
correspond to the words "berthing, unloading and loading of cargoes or merchandise" which fall under the
category of wharfage fees. The change or the designation of the said fees as "rental of municipal property" did
not change their basic character as "wharfage fees". Being a specific tax, the municipality has no right to impose
the same, for taxation is an attribute of sovereignty which municipal corporation do not enjoy (Santo Lumber
Co., et al v. City of Cebu, et al., L-10196, Jan. 22, 1958; 54 O.G. 5327; Saldana v. City of Iloilo, L-10470, June 26,
1958). It shall not be in the power of the council to impose a tax in any form whatever upon goods and
merchandise carried into the municipality or out of the same, and any attempt to impose such tax in the guise of
wharfage fee or charge is void (Sec. 2287, Rev. Adm. Code). And being wharfage fee (Phil. Sugar Central v. Coll. of
Customs, 51 Phil. 131), it is likewise beyond the power of the municipal council and municipal district council to
impose (Sec. 3, Comm. Act No. 472, supra).
In the case at bar, aside from the fact that the right of the municipality to collect wharfage fees is doubtful for, at
most, its claim is based merely by inference, implications and deductions, which have no place in the
interpretation of the power to tax of a municipal corporation (Icard v. City Council of Baguio, et al., 46 Off. Gaz.,
Suppl. No. 11, p. 320; Medina, et al. v. City of Baguio, 48 Off. Gaz., 11, p. 4729) no less than two Secretaries of
the Department of Justice, (Secretaries Jose Abad Santos & Bengzon) expressed the opinion that, "in view of
section 3, paragraph (t), Commonwealth Act No. 472, which expressly forbids municipalities from imposing
wharfage fees, a municipal ordinance levying wharfage or berthing fees is illegal and void, ... (Opinion No. 373,
series of 1940 and No. 165, series of 1951). Opinions and rulings of officials of the government called upon to
execute or implement administrative laws command much respect and weight (Regalado v. Yulo, 61 Phil. 173;
Grapilon v. Mun. Council of Carigara, L-12347, May 30, 1961)
It should be noted that previous to the ordinance in question (No. 11), ordinance No. 9 was enacted by the same
municipal council, providing for "wharfage fees" for goods and merchandise only. But because the Provincial
Board ruled the to be null and void, because the prescribed fees were unreasonable and were obviously export
or import taxes in the guise of wharfage fees which are contrary to the provisions of section 2287 of the
Administrative Code, the municipal council of Pagbilao enacted Ordinance No. 11, providing for the wharfage of
boats and vessels and of goods and merchandise; and while it fixed the fees or charges for loading and unloading
goods and merchandise, it did not state the berthing fees for boats and vessels carrying the goods, all of which
go to show that the council wanted only to impose specific tax on the goods and merchandise, which was the
same objective it had, when the annulled Ordinance No. 9 was promulgated.
The question as to whether or not the charges paid should be returned, must be answered in the affirmative.
Not only were the payments made under protest, but they were also collected under an invalid ordinance. In a
number of cases, We have ruled that monies collected under invalid acts or tax laws are refundable, even if the
payments were voluntary (East Asiatic Co., Ltd. v. City of Davao, L-16253, Aug. 21, 1962).
It is insinuated that invalidating the ordinance would leave the municipality with no means to defray the
expenses for operation, repair and maintenance of the wharf in question. It would seem, however, that the
municipality will not be absolutely helpless and hopeless, for there is always some remedy somewhere, and
those indicated in sections 2318 and 2320 of the Adm. Code, (supra) may be availed of.
IN VIEW OF ALL THE FOREGOING, we find that the decision appealed from is in conformity with the law and
jurisprudence on the matter. The same should be, as it is hereby affirmed, in all respects. No costs
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity
as National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
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 motor vehicle (Sec.
59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by
a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are changes.
looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S.
506) This is true, 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 revenue, or if revenue is at least one of the real and substantial
purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101,
citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v.
Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs.
4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which
classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980,
pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax (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 quoted in the Calalang case. The same provision
appears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had in
mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor
vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a
tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any
motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more
apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could
have referred to an original tax and not one in addition to the tax already imposed on the registration, operation,
or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were
merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also
speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very
minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly
purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in
number and motor vehicles became absolute necessities without which modem life as we know it would stand
still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. An examination of Section 24 of the Tax Code as amended shows clearly that the law
Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes." intended all corporate taxpayers to pay income tax as provided by the statute. There can be
no doubt as to the power of Congress to repeal the earlier exemption it granted. Article XIV,
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended
Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one in 1973 expressly provide that no franchise shall be granted to any individual, firm, or
fifth or less of the amount collected is set aside for the operating expenses of the agency administering the corporation except under the condition that it shall be subject to amendment, alteration, or
program. repeal by the legislature when the public interest so requires. There is no question as to the
public interest involved. The country needs increased revenues. The repealing clause is clear
and unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not
May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL?
covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition
for lack of merit. The decision of the respondent court is affirmed.
The answer is NO.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the tax
The claim for refund is made for payments given in 1971. It is not clear from the records as to what payments exemption in the franchise of PAL was repealed during the period. However, an amended franchise was given to
were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:
repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked
by PAL in this case.
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
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July 11, 1985), this (b) hereunder will result in a lower taxes.)
Court ruled:
(a) The basic corporate income tax based on the grantee's annual net
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio taxable income computed in accordance with the provisions of the
Communications of the Philippines, Inc., was subject to both the franchise tax and income Internal Revenue Code; or
tax. In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the
effect that its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was
(b) A franchise tax of two per cent (2%) of the gross revenues. derived by
provided as "in lieu of any and all taxes of any kind, nature, or description levied, established,
the grantees from all specific. without distinction as to transport or
or collected by any authority whatsoever, municipal, provincial, or national from which taxes
nontransport corporations; provided that with respect to international
the grantee is hereby expressly exempted." The issue raised to this Court now is the validity
airtransport service, only the gross passengers, mail, and freight
of the respondent court's decision which ruled that the exemption under Republic Act No.
revenues. from its outgoing flights shall be subject to this law.
41-42). was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which
reads:
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
"(d) The provisions of existing special or general laws to the contrary
description imposed, levied, established, assessed, or collected by any municipal, city,
notwithstanding, all corporate taxpayers not specifically exempt under
provincial, or national authority or government, agency, now or in the future, including but
Sections 24 (c) (1) of this Code shall pay the rates provided in this section.
not limited to the following:
All corporations, agencies, or instrumentalities owned or controlled by
the government, including the Government Service Insurance System and
the Social Security System but excluding educational institutions, shall xxx xxx xxx
pay such rate of tax upon their taxable net income as are imposed by this
section upon associations or corporations engaged in a similar business
or industry. "
 (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.
SO ORDERED.
G.R. Nos. L-28508-9 July 7, 1989
ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of
overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558
respectively.
I April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions.
This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses
should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an
amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of
P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the
margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of
P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a
total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by
ESSO to the Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00
representing its overpayment on its income tax for 1959 and paying under protest the additional amount of
P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its
deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of
P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax
credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the
deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959
and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or
allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the
amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but
sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but
was affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on
P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the
Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue
measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit
remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the
National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and
which are related to the taxpayer's trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history of the
Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange
imposed by R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as
part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly,
properly originated in the House of Representatives. During its two and a half years of existence, the measure
was one of the major sources of revenue used to finance the ordinary operating expenditures of the
government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that —
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps
taken in the enactment of a law, or the history of the passage of the law through the legislature, may be resorted
to as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take
into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the
act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that
only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become
important. As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the
language of which is plain and unambiguous, since such legislative history may only be resorted to for the
purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a
tax but an exaction designed to curb the excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction designed to
discourage imports and encourage exports, and ultimately, 'curtail any excessive demand
upon the international reserve' in order to stabilize the currency. Originally adopted to cope
with balance of payment pressures, exchange restrictions have come to serve various
purposes, such as limiting non-essential imports, protecting domestic industry and when
combined with the use of multiple currency rates providing a source of revenue to the
government, and are in many developing countries regarded as a more or less inevitable
concomitant of their economic development programs. The different measures of exchange
control or restriction cover different phases of foreign exchange transactions, i.e., in
quantitative restriction, the control is on the amount of foreign exchange allowable. In the
case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the peso as
fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its
exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of
payments. By its nature, the margin levy is part of the rate of exchange as fixed by the
government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not
form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a
tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to
strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea was
expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue for
government operations, while the proceeds of the 20% retention, as we have seen, are
applied to strengthen the Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the
power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and
ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was an
expenditure necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
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; traveling expenses while away
from home in the pursuit of a trade or business; and rentals or other payments required to
be made as a condition to the continued use or possession, for the purpose of the trade or
 business, of property to which the taxpayer has not taken or is not taking title or in which he
has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations. — In the
case of a non-resident alien individual or a foreign corporation, the expenses deductible are
the necessary expenses paid or incurred in carrying on any business or trade conducted
within the Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be able to
prove that he is entitled to the deduction which the law allows. As previously adverted to,
the law allowing expenses as deduction from gross income for purposes of the income tax is
Section 30(a) (1) of the National Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any
trade or business.' An item of expenditure, in order to be deductible under this section of the
statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be
deductible as a business expense, three conditions are imposed, namely: (1) the expense
must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or business. In addition, not only must
the taxpayer meet the business test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and necessary does not justify
its deduction.
While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no
adequate or satisfactory definition of those terms is possible. Similarly, this Court has never
attempted to define with precision the terms 'ordinary and necessary.' There are however,
certain guiding principles worthy of serious consideration in the proper adjudication of
conflicting claims. Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the
payments be habitual or normal in the sense that the same taxpayer will have to make them
often; the payment may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction depends in each
case on the particular facts and the relation of the payment to the type of business in which
the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in
making the determination. Assuming that the expenditure is ordinary and necessary in the
operation of the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the extent and permanency of the
work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue
as follows:
Considering the foregoing test of what constitutes an ordinary and necessary deductible
expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to
its Head Office in New York appropriate and helpful in the taxpayer's business in the
Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs
of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of
realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the
Lopez case, the margin fees are not expenses in connection with the production or earning of
petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said
incomes; expenses for the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office in New York which is
already another distinct and separate income taxpayer.
xxx
Since the margin fees in question were incurred for the remittance of funds to petitioner's
Head Office in New York, which is a separate and distinct income taxpayer from the branch in
the Philippines, for its disposal abroad, it can never be said therefore that the margin fees
were appropriate and helpful in the development of petitioner's business in the Philippines
exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's
branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a
loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper
to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but
certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its
own trade or business. The petitioner merely presumed that all corporate expenses are necessary and
appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is
correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace
and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying
the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as
an ordinary and necessary expense paid or incurred in carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00
for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.

SO ORDERED.