withheld in 1989 of ₱54,104.00 or a total tax credit of ₱200,130.
00 and credit
SECOND DIVISION
G.R. No. 119286 October 13, 2004
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE,respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income
taxes from annual to quarterly have created problems, especially on the matter of tax
refunds.1 In this case, the Court is called to resolve the question of whether alleged
excess taxes paid by a corporation during a taxable year should be refunded or credited
against its tax liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the
lease of two (2) parcels of land at Paseo de Roxas in Makati City, seeks a review of
the Decision2 of the Court of Appeals dismissing its petition for review of the resolution 3 of
the Court of Tax Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year
1989 declaring a gross income of ₱1,855,000.00, deductions of ₱1,775,991.00,
net income of ₱79,009.00, an income tax due thereon in the amount of
₱27,653.00, prior year’s excess credit of ₱146,026.00, and creditable taxes
balance of ₱172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for "the refund of
excess creditable withholding and income taxes for the years 1989 and 1990 in
the aggregate amount of ₱147,036.15."
On December 27, 1991 alleging that the prescriptive period for refunds for 1989
would expire on December 30, 1991 and that it was necessary to interrupt the
prescriptive period, petitioner filed with the respondent Court of Tax Appeals a
petition for review praying for the refund of "₱54,104.00 representing creditable
taxes withheld from income payments of petitioner for the calendar year ending
December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer and by way of
special and/or affirmative defenses averred the following: a) the petition states no
cause of action for failure to allege the dates when the taxes sought to be
refunded were paid; b) petitioner’s claim for refund is still under investigation by
respondent Commissioner; c) the taxes claimed are deemed to have been paid
and collected in accordance with law and existing pertinent rules and regulations;
d) petitioner failed to allege that it is entitled to the refund or deductions claimed;
e) petitioner’s contention that it has available tax credit for the current and prior
year is gratuitous and does not ipso facto warrant the refund; f) petitioner failed to
show that it has complied with the provision of Section 230 in relation to Section
204 of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent
Commissioner "to refund in favor of petitioner the amount of ₱54,104.00,
representing excess creditable withholding taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the decision, alleging
that the ₱54,104.00 ordered to be refunded "has already been included and is
part and parcel of the ₱172,477.00 which petitioner automatically applied as tax
credit for the succeeding taxable year 1990."
In a resolution dated October 21, 1993 Respondent Court reconsidered its
decision of July 29, 1993 and dismissed the petition for review, stating that it has
"overlooked the fact that the petitioner’s 1989 Corporate Income Tax Return
(Exh. "A") indicated that the amount of ₱54,104.00 subject of petitioner’s claim
for refund has already been included as part and parcel of the ₱172,477.00
1
 which the petitioner automatically applied as tax credit for the succeeding taxable
year 1990."
Petitioner filed a Motion for Reconsideration which was denied by respondent
Court on March 10, 1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals.
Resolving the twin issues of whether petitioner is entitled to a refund of ₱54,104.00
representing creditable taxes withheld in 1989 and whether petitioner applied such
creditable taxes withheld to its 1990 income tax liability, the appellate court held that
petitioner is not entitled to a refund because it had already elected to apply the total
amount of ₱172,447.00, which includes the ₱54,104.00 refund claimed, against its
income tax liability for 1990. The appellate court elucidated on the reason for its dismissal
of petitioner’s claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for
the year 1989, it filled up the box stating that the total amount of ₱172,477.00
shall be applied against its income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount
to be applied as tax credit to the succeeding taxable year, but merely marked an
"x" to the box indicating "to be applied as tax credit to the succeeding taxable
year." Unlike what petitioner had done when it filed its income tax return for the
year 1988, it specifically stated that out of the ₱146,026.00 the entire refundable
amount, only ₱64,623.00 will be made available as tax credit, while the amount
of ₱81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax
credit to succeeding taxable year," which signified that instead of refund,
petitioner will apply the total amount of ₱172,447.00, which includes the amount
of ₱54,104.00 sought to be refunded, as tax credit for its tax liabilities in 1990.
Thus, there is really nothing left to be refunded to petitioner for the year 1989. To
grant petitioner’s claim for refund is tantamount to granting twice the refund
herein sought to be refunded, to the prejudice of the Government.
The Court of Appeals denied petitioner’s Motion for Reconsideration7 dated November 8,
1994 in its Resolution8dated February 21, 1995 because the motion merely restated the
grounds which have already been considered and passed upon in its Decision.9
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the
evidence presented before the lower courts conclusively shows that it did not apply the
₱54,104.00 to its 1990 income tax liability; that the Decision subject of the instant petition
is inconsistent with a final decision11 of the Sixteenth Division of the appellate court in
C.A.-G.R. Sp. No. 32890 involving the same parties and subject matter; and that the
affirmation of the questioned Decision would lead to absurd results in the manner of
claiming refunds or in the application of prior years’ excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on
behalf of respondents asserting that the claimed refund of ₱54,104.00 was, by
petitioner’s election in its Corporate Annual Income Tax Return for 1989, to be applied
against its tax liability for 1990. Not having submitted its tax return for 1990 to show
whether the said amount was indeed applied against its tax liability for 1990, petitioner’s
election in its tax return stands. The OSG also contends that petitioner’s election to apply
its overpaid income tax as tax credit against its tax liabilities for the succeeding taxable
year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the
issue in this case is not whether the amount of ₱54,104.00 was included as tax credit to
be applied against its 1990 income tax liability but whether the same amount was actually
applied as tax credit for 1990. Petitioner claims that there is no need to show that the
amount of ₱54,104.00 had not been automatically applied against its 1990 income tax
liability because the appellate court’s decision in C.A.-G.R. Sp. No. 32890 clearly held
that petitioner charged its 1990 income tax liability against its tax credit for 1988 and not
1989. Petitioner also disputes the OSG’s assertion that the taxpayer’s election as to the
application of excess taxes is irrevocable averring that there is nothing in the law that
prohibits a taxpayer from changing its mind especially if subsequent events leave the
latter no choice but to change its election.
The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s 1988 tax return
shows a prior year’s excess credit of ₱81,403.00, creditable tax withheld of ₱92,750.00
and tax due of ₱27,127.00. Petitioner indicated that the prior year’s excess credit of
₱81,403.00 was to be refunded, while the remaining amount of ₱64,623.00 (₱92,750.00 -
₱27,127.00) shall be considered as tax credit for 1989. However, in its 1989 tax return,
petitioner included the ₱81,403.00 which had already been segregated for refund in the
computation of its excess credit, and specified that the full amount of
₱172,479.00* (₱81,403.00 + ₱64,623.00 + ₱54,104.00** - ₱27,653.00***) be considered
as its tax credit for 1990. Considering that it had obtained a favorable ruling for the refund
of its excess credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for 1989
should be the excess credit to be applied against its 1990 tax liability. In fine, the OSG
2
argues that by its own election, petitioner can no longer ask for a refund of its creditable
taxes withheld in 1989 as the same had been applied against its 1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and
required the parties to simultaneously file their respective memoranda within 30 days
from notice. In compliance with this directive, petitioner submitted
its Memorandum16 dated September 18, 1997 in due time, while the OSG filed
its Memorandum17 dated April 27, 1998 only on April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion
reached by an agency such as the CTA which is, by the very nature of its functions,
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority.18
This interdiction finds particular application in this case since the CTA, after careful
consideration of the merits of the Commissioner of Internal Revenue’s motion for
reconsideration, reconsidered its earlier decision which ordered the latter to refund the
amount of ₱54,104.00 to petitioner. Its resolution cannot be successfully assailed based,
as it is, on the pertinent laws as applied to the facts.
Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00,
representing its 1988 excess credit of ₱146,026.00 and 1989 creditable tax of
₱54,104.00 less tax due for 1989, which it elected to apply as tax credit for the
succeeding taxable year.19 According to petitioner, it successively utilized this amount
when it obtained refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA
Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability, leaving a
balance of ₱54,104.00, the amount subject of the instant claim for refund. 20Represented
mathematically, petitioner accounts for its claim in this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to
be applied as tax credit for the succeeding taxable
year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R.
Sp. No. 32300)
₱146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R.
Sp. No. 32890)
₱87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied
as of April 15, 1991
₱54,104.00 Balance as of April 15, 1991 now subject of the
instant claim for refund21
Other than its own bare allegations, however, petitioner offers no proof to the effect that
its creditable tax of ₱172,477.00 was applied as claimed above. Instead, it anchors its
assertion of entitlement to refund on an alleged finding in C.A.-G.R. Sp. No.
3289022 involving the same parties to the effect that petitioner charged its 1990 income
tax liability to its tax credit for 1988 and not its 1989 tax credit. Hence, its excess
creditable taxes withheld of ₱54,104.00 for 1989 was left untouched and may be
refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the
Court of Appeals make a categorical determination that petitioner’s tax liability for 1990
was applied against its 1988 tax credit. The statement adverted to by petitioner was
actually presented in the appellate court’s decision in CA-G.R. Sp No. 32890 as part of
petitioner’s own narration of facts. The pertinent portion of the decision reads:
It would appear from petitioner’s submission as follows:
x x x since it has already applied to its prior year’s excess credit of ₱81,403.00
(which petitioner wanted refunded when it filed its 1988 Income Tax Return on
April 14, 1989) the income tax liability for 1988 of ₱28,127.00 and the income tax
liability for 1989 of ₱27,653.00, leaving a balance refundable of ₱25,623.00
subject of C.T.A. Case No. 4439, the ₱92,750.00 (₱64,623.00 plus ₱28,127.00,
since this second amount was already applied to the amount refundable of
₱81,403.00) should be the refundable amount. But since the taxpayer again used
part of it to satisfy its income tax liability of ₱33,240.00 for 1990, the amount
refundable was ₱59,510.00, which is the amount prayed for in the claim for
refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for
1988, 1989, and 1990, when it filed a claim for refund of ₱59,510.00 in this case
3
 (CTA Case No. 4528). Hence, the present claim should be resolved together with
the previous claims.23
The confusion as to petitioner’s entitlement to a refund could altogether have been
avoided had it presented its tax return for 1990. Such return would have shown whether
petitioner actually applied its 1989 tax credit of ₱172,477.00, which includes the
₱54,104.00 creditable taxes withheld for 1989 subject of the instant claim for refund,
against its 1990 tax liability as it had elected in its 1989 return, or at least, whether
petitioner’s tax credit of ₱172,477.00 was applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable
to petitioner after deducting its tax liability for 1990. As it is, we only have petitioner’s
allegation that its tax due for 1990 was ₱33,240.00 and that this was applied against its
remaining tax credits using its own "first in, first out" method of computation.
It would have been different had petitioner not included the ₱54,104.00 creditable taxes
for 1989 in the total amount it elected to apply against its 1990 tax liabilities. Then, all that
would have been required of petitioner are: proof that it filed a claim for refund within the
two (2)-year prescriptive period provided under Section 230 of the NIRC; evidence that
the income upon which the taxes were withheld was included in its return; and to
establish the fact of withholding by a copy of the statement (BIR Form No. 1743.1) issued
by the payor24 to the payee showing the amount paid and the amount of tax withheld
therefrom. However, since petitioner opted to apply its aggregate excess credits as tax
credit for 1990, it was incumbent upon it to present its tax return for 1990 to show that the
claimed refund had not been automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that
the facts stated therein are true and correct.25 Without the tax return, it is error to grant a
refund since it would be virtually impossible to determine whether the proper taxes have
been assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court.
Petitioner could very well have attached a copy of its final adjustment return for 1990
when it filed its claim for refund on November 13, 1991. Annex "B" of its Petition for
Review26 dated December 26, 1991 filed with the CTA, in fact, states that its annual tax
return for 1990 was submitted in support of its claim. Yet, petitioner’s tax return for 1990
is nowhere to be found in the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s
allegation that it did not present evidence to prove that its claimed refund had already
been automatically credited against its 1990 tax liability, the CTA would not have
reconsidered its earlier Decision. As it is, the absence of petitioner’s 1990 tax return was
the principal basis of the CTA’s Resolution reconsidering its earlier Decision to grant
petitioner’s claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for
review before the Court of Appeals. The appellate court, being a trier of facts, is
authorized to receive it in evidence and would likely have taken it into account in its
disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its
1990 tax return, it presented other evidence to prove its claim that it did not apply and
could not have applied the amount in dispute as tax credit. Importantly, petitioner therein
attached a copy of its final adjustment return for 1990 to its motion for reconsideration
before the CTA buttressing its claim that it incurred a net loss and is thus entitled to
refund. Considering this fact, the Court held that there is no reason for the BIR to
withhold the tax refund.
In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund
is fatal to its cause. After all, it is axiomatic that a claimant has the burden of proof to
establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines
(NIRC) provides:
Sec. 69. Final Adjustment Return.—Every corporation liable to tax under Section
24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly income
4
 tax liabilities for the taxable quarters of the succeeding taxable
year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. – A
final or an adjustment return on B.I.R. Form No. 1702 covering the total taxable
income of the corporation for the preceding calendar or fiscal year shall be filed
on or before the 15th day of the fourth month following the close of the calendar
or fiscal year. The return shall include all the items of gross income and
deductions for the taxable year. The amount of income tax to be paid shall be the
balance of the total income tax shown on the final or adjustment return after
deducting therefrom the total quarterly income taxes paid during the preceding
first three quarters of the same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed
and shown in the adjustment or final corporate income tax return shall either (a)
be refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return its
intention whether to request for refund of the overpaid income tax or claim for
automatic credit to be applied against its income tax liabilities for the quarters of
the succeeding taxable year by filling up the appropriate box on the corporate tax
return (B.I.R. Form No. 1702). [Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the corporation is entitled to
a refund of the excess estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding year. The carrying forward
of any excess or overpaid income tax for a given taxable year is limited to the succeeding
taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or
overpaid income tax for a given taxable year then is limited to the succeeding taxable
year only," we ruled that since the case involved a claim for refund of overpaid taxes for
1993, petitioner could only have applied the 1993 excess tax credits to its 1994 income
tax liabilities. To further carry-over to 1995 the 1993 excess tax credits is violative of
Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation
of its total excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes
withheld of ₱54,104.00 or a total of ₱172,477.00, as its total excess credit to be applied
as tax credit for 1990. By its own disclosure, petitioner effectively combined its 1988 and
1989 tax credits and applied its 1990 tax due of ₱33,240.00 against the total, and not
against its creditable taxes for 1989 only as allowed by Section 69. This is a clear
admission that petitioner’s 1988 tax credit was incorrectly and illegally applied against its
1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have
its excess taxes applied as tax credit for the succeeding taxable year, such election is not
final. Prior verification and approval by the Commissioner of Internal Revenue is required.
The availment of the remedy of tax credit is not absolute and mandatory. It does not
confer an absolute right on the taxpayer to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the taxpayer. 30
Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking
of boxes in Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the
proper management of claims for refund or tax credit by leading tax authorities to the
direction they should take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No.
842431 emphasizes that it is imperative to indicate in the tax return or the final adjustment
return whether a tax credit or refund is sought by making the taxpayer’s choice
irrevocable. Section 76 provides:
SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section
27 shall file a final adjustment return covering the total taxable income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
5
 In case the corporation is entitled to a tax credit or refund of the excess estimated Puno, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.
quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax
credit certificate shall be allowed therefore. [Emphasis supplied]

As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of
its quarterly tax payments made during the taxable year is not equal to the total tax due
for that year: (a) pay the balance of the tax still due; (b) carry-over the excess credit; or
(c) be credited or refunded the amount paid. If the taxpayer has paid excess quarterly
income taxes, it may be entitled to a tax credit or refund as shown in its final adjustment
return which may be carried over and applied against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable years. However, once the
taxpayer has exercised the option to carry-over and to apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding taxable years, such
option is irrevocable for that taxable period and no application for cash refund or issuance
of a tax credit certificate shall be allowed.

Had this provision been in effect when the present claim for refund was filed, petitioner’s
excess credits for 1988 could have been properly applied to its 1990 tax liabilities.
Unfortunately for petitioner, this is not the case.

Taxation is a destructive power which interferes with the personal and property rights of
the people and takes from them a portion of their property for the support of the
government. And since taxes are what we pay for civilized society, or are the lifeblood of
the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor
of the taxing authority. A claim of refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is the exception.32

WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of
Appeals is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

6

EN BANC
G.R. No. 147062-64 December 14, 2001
REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT (PCGG), petitioner,
vs.
COCOFED, ET AL. and BALLARES, ET AL.,1 EDUARDO M. COJUANGCO JR. and
the SANDIGANBAYAN (First Division) respondents.
PANGANIBAN, J.:
The right to vote sequestered shares of stock registered in the names of private
individuals or entitles and alleged to have been acquired with ill-gotten wealth shall, as a
rule, be exercised by the registered owner. The PCGG may, however, be granted such
voting right provided in can (1) show prima facie evidence that the wealth and/or the
shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the
assets, thus necessitating their continued sequestration and voting by the government
until a decision, ruling with finality on their ownership, is promulgated by the proper
court.1âwphi1.nêt
However, the foregoing "two-tiered" test does not apply when the sequestered stocks are
acquired with funds that are prima facie public in character or, at least, are affected with
public interest. Inasmuch as the subject UCPB shares in the present case were
undisputably acquired with coco levy funds which are public in character, then the right to
vote them shall be exercised by the PCGG. In sum, the "public character" test, not the
"two-tiered" one, applies in the instant controversy.
The Case
Before us is a Petition for Certiorari with a prayer for the issuance of a temporary
restraining order and/or a writ of preliminary injunction under Rule 65 of the Rules of
Court, seeking to set aside the February 28, 2001 Order2 of the First Division of the
Sandiganbayan3 in Civil Case Nos. 0033-A, 0033-B and 0033-F. The pertinent portions of
the assailed Order read as follows:
"In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as
Eduardo Cojuangco, et al., who were acknowledged to be registered
stockholders of the UCPB are authorized, as are all other registered stockholders
of the United Coconut Planters Bank, until further orders from this Court, to
exercise their rights to vote their shares of stock and themselves to be voted
upon in the United Coconut Planters Bank (UCPB) at the scheduled
Stockholders' Meeting on March 6, 2001 or on any subsequent continuation or
resetting thereof, and to perform such acts as will normally follow in the exercise
of these rights as registered stockholders.
"Since by way of form, the pleadings herein had been labeled as praying for an
injunction, the right of the movants to exercise their right as abovementioned will
be subject to the posting of a nominal bond in the amount of FIFTY THOUSAND
PESOS (P50,000.00) jointly for the defendants COCOFED, et al. and Ballares, et
al., as well as all other registered stockholders of sequestered shares in that
bank, and FIFTY THOUSAND PESOS (P50,000.00) for Eduardo Cojuangco, Jr.,
et al., to answer for any undue damage or injury to the United Coconut Planters
Bank as may be attributed to their exercise of their rights as registered
stockholders."4
The Antecedents
The very roots of this case are anchored on the historic events that transpired during the
change of government in 1986. Immediately after the 1986 EDSA Revolution, then
President Corazon C. Aquino issued Executive Order (EO) Nos. 1,5 26 and 14.7
"On the explicit premise that 'vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and close
associates both here and abroad,' the Presidential Commission on Good Government
(PCGG) was created by Executive Order No. 1 to assist the President in the recovery of
the ill-gotten wealth thus accumulated whether located in the Philippines or abroad."8
7
Executive Order No. 2 states that the ill-gotten assets and properties are in the form of
bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world.9
Executive Order No. 14, on the other hand, empowered the PCGG, with the assistance of
the Office of the Solicitor General and other government agencies, inter alia, to file and
prosecute all cases investigated by it under EO Nos. 1 and 2.
Pursuant to these laws, the PCGG issued and implemented numerous sequestrations,
freeze orders and provisional takeovers of allegedly ill-gotten companies, assets and
properties, real or personal.10
Among the properties sequestered by the Commission were shares of stock in the United
Coconut Planters Bank (UCPB) registered in the names of the alleged "one million
coconut farmers," the so-called Coconut Industry Investment Fund companies (CIIF
companies) and Private Respondent Eduardo Cojuangco Jr. (hereinafter "Cojuangco").
In connection with the sequestration of the said UCPB shares, the PCGG, on July 31,
1987, instituted an action for reconveyance, reversion, accounting, restitution and
damages docketed as Case No. 0033 in the Sandiganbayan.
On November 15, 1990, upon Motion11 of Private Respondent COCOFED, the
Sandiganbayan issued a Resolution12 lifting the sequestration of the subject UCPB
shares on the ground that herein private respondents – in particular, COCOFED and the
so-called CIIF companies – had not been impleaded by the PCGG as parties-defendants
in its July 31, 1987 Complaint for reconveyance, reversion, accounting, restitution and
damages. The Sandiganbayan ruled that the Writ of Sequestration issued by the
Commission was automatically lifted for PCGG's failure to commence the corresponding
judicial action within the six-month period ending on August 2, 1987 provided under
Section 26, Article XVIII of the 1987 Constitution. The anti-graft court noted that though
these entities were listed in an annex appended to the Complaint, they had not been
named as parties-respondents.
This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari
docketed as GR No. 96073 in this Court. Meanwhile, upon motion of Cojuangco, the anti-
graft court ordered the holding of elections for the Board of Directors of UCPB. However,
the PCGG applied for and was granted by this Court a Restraining Order enjoining the
holding of the election. Subsequently, the Court lifted the Restraining Order and ordered
the UCPB to proceed with the election of its board of directors. Furthermore, it allowed
the sequestered shares to be voted by their registered owners.
The victory of the registered shareholders was fleeting because the Court, acting on the
solicitor general's Motion for Clarification/Manifestation, issued a Resolution on February
16, 1993, declaring that "the right of petitioners [herein private respondents] to vote stock
in their names at the meetings of the UCPB cannot be conceded at this time. That right
still has to be established by them before the Sandiganbayan. Until that is done, they
cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to
vote them."13 The dispositive portion of the said Resolution reads as follows:
"IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution
dated March 3, 1992 and, pending resolution on the merits of the action at bar,
and until further orders, suspends the effectivity of the lifting of the sequestration
decreed by the Sandiganbayan on November 15, 1990, and directs the
restoration of the status quo ante, so as to allow the PCGG to continue voting the
shares of stock under sequestration at the meetings of the United Coconut
Planters Bank."14
On January 23, 1995, the Court rendered its final Decision in GR No. 96073, nullifying
and setting aside the November 15, 1990 Resolution of the Sandiganbayan which, as
earlier stated, lifted the sequestration of the subject UCPB shares. The express
impleading of herein Respondents COCOFED et al. was deemed unnecessary because
"the judgment may simply be directed against the shares of stock shown to have been
issued in consideration of ill-gotten wealth."15 Furthermore, the companies "are simply
the res in the actions for the recovery of illegally acquires wealth, and there is, in
principle, no cause of action against them and no ground to implead them as defendants
in said case."16
A month thereafter, the PCGG – pursuant to an Order of the Sandiganbayan –
subdivided Case No. 0033 into eight Complaints and docketed them as Case Nos. 0033-
A to 0033-H.
Six years later, on February 13, 2001, the Board of Directors of UCPB received from the
ACCRA Law Office a letter written on behalf of the COCOFED and the alleged nameless
one million coconut farmers, demanding the holding of a stockholders' meeting for the
purpose of, among others, electing the board of directors. In response, the board
approved a Resolution calling for a stockholders' meeting on March 6, 2001 at three
o'clock in the afternoon.
8
On February 23, 2001, "COCOFED, et al. and Ballares, et al." filed the "Class Action the PCGG to vote said sequestered shares, Respondent Sandiganbayan, with
Omnibus Motion"17 referred to earlier in Sandiganbayan Civil Case Nos. 0033-A, 0033-B grave abuse of discretion, issued its Order dated February 20, 2001 enjoining
and 0033-F, asking the court a quo: PCGG from voting the sequestered shares of stock in UCPB.

"1. To enjoin the PCGG from voting the UCPB shares of stock registered in the "B.
respective names of the more than one million coconut farmers; and
The Respondent Sandiganbayan violated petitioner's right to due process by
"2. To enjoin the PCGG from voting the SMC shares registered in the names of taking cognizance of the Class Action Omnibus Motion dated 23 February 2001
the 14 CIIF holding companies including those registered in the name of the despite gross lack of sufficient notice and by issuing the writ of preliminary
PCGG."18 injunction despite the obvious fact that there was no actual pressing necessity or
urgency to do so."
On February 28, 2001, respondent court, after hearing the parties on oral argument,
issued the assailed Order. In its Resolution dated April 17, 2001, the Court defined the issue to be resolved in the
instant case simply as follows:
Hence, this Petition by the Republic of the Philippines represented by the PCGG. 19
This Court's Ruling
The case had initially been raffled to this Court's Third Division which, by a vote of 3-
2,20 issued a Resolution21requiring the parties to maintain the status quo existing before The Petition is impressed with merit.
the issuance of the questioned Sandiganbayan Order dated February 28, 2001. On
March 7, 2001, Respondent COCOFED et al. moved that the instant Petition be heard by Main Issue:
the Court en banc.22 The Motion was unanimously granted by the Third Division.
Who May Vote the Sequestered Shares of Stock?
On March 13, 2001, the Court en banc resolved to accept the Third Division's referral. 23 It
heard the case on Oral Argument in Baguio City on April 17, 2001. During the hearing, it
Simply stated, the gut substantive issue to be resolved in the present Petition is: "Who
admitted the intervention of a group of coconut farmers and farm worker organizations,
may vote the sequestered UCPB shares while the main case for their reversion to the
the Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa ng
State is pending in the Sandiganbayan?"
Niyugan (PKSMMN). The coalition claims that its members have been excluded from the
benefits of the coconut levy fund. Inter alia, it joined petitioner in praying for the exclusion
of private respondents in voting the sequestered shares. This Court holds that the government should be allowed to continue voting those shares
inasmuch as they were purchased with coconut levy funds – that are prima facie public in
character or, at the very least, are "clearly affected with public interest."
Issues
General Rule: Sequestered Shares
Petitioner submits the following issues for our consideration:24
Are Voted by the Registered Holder
"A.
At the outset, it is necessary to restate the general rule that the registered owner of the
Despite the fact that the subject sequestered shares were purchased with
shares of a corporation exercises the right and the privilege of voting. 25 This principle
coconut levy funds (which were declared public in character) and the continuing
applies even to shares that are sequestered by the government, over which the PCGG as
effectivity of Resolution dated February 16, 1993 in G.R. No. 96073 which allows
9
a mere conservator cannot, as a general rule, exercise acts of dominion.26On the other
hand, it is authorized to vote these sequestered shares registered in the names of private
persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered
test devised by the Court in Cojuangco v. Calpo27 and PCGG v. Cojuangco Jr.,28 as
follows:
(1) Is there prima facie evidence showing that the said shares are ill-gotten and
thus belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating their continued
sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?
Sequestered Shares Acquired with Public Funds are an Exception
From the foregoing general principle, the Court in Baseco v. PCGG29 (hereinafter
"Baseco") and Cojuangco Jr. v. Roxas30 ("Cojuangco-Roxas") has provided two clear
"public character" exceptions under which the government is granted the authority to vote
the shares:
(1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds
somehow landed in private hands.
The exceptions are based on the common-sense principle that legal fiction must yield to
truth; that public property registered in the names of non-owners is affected with trust
relations; and that the prima facie beneficial owner should be given the privilege of
enjoying the rights flowing from the prima facie fact of ownership.
In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was
placed under sequestration by the PCGG. Explained the Court:
"The facts show that the corporation known as BASECO was owned and
controlled by President Marcos 'during his administration, through nominees, by
taking undue advantage of his public office and/or using his powers, authority, or
influence,' and that it was by and through the same means, that BASECO had
taken over the business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities."31
Given this factual background, the Court discussed PCGG's right over BASECO in the
following manner:
"Now, in the special instance of a business enterprise shown by evidence to have
been 'taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos,' the PCGG is given power and
authority, as already adverted to, to 'provisionally take (it) over in the public
interest or to prevent * * (its) disposal or dissipation;' and since the term is
obviously employed in reference to going concerns, or business enterprises in
operation, something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation, running, or
management of the business itself."32
Citing an earlier Resolution, it ruled further:
"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction
in respondents' calling and holding of a stockholders' meeting for the election of
directors as authorized by the Memorandum of the President * * (to the PCGG)
dated June 26, 1986, particularly, where as in this case, the government can,
through its designated directors, properly exercise control and management over
what appear to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of BASECO
have failed to show any right or even any shareholding in said
corporation."33 (Italics supplied)
The Court granted PCGG the right to vote the sequestered shares because they
appeared to be "assets belonging to the government itself." The Concurring Opinion of
Justice Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P.
Feliciano, explained this principle as follows:
"I have no objection to according the right to vote sequestered stock in case of a
take-over of business actually belonging to the government or whose
capitalization comes from public funds but which, somehow, landed in the hands
of private persons, as in the case of BASECO. To my mind, however, caution
and prudence should be exercised in the case of sequestered shares of an on-
going private business enterprise, specially the sensitive ones, since the true and
10
 real ownership of said shares is yet to be determined and proven more
conclusively by the Courts."34 (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas35 in this wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote
the shares in a corporation and elect the members of the board of directors. The
only conceivable exception is in a case of a takeover of a business belonging to
the government or whose capitalization comes from public funds, but which
landed in private hands as in BASECO."36 (Italics supplied)
The "public character" test was reiterated in many subsequent cases; most recently,
in Antiporda v. Sandiganbayan.37 Expressly citing Conjuangco-Roxas,38 this Court said
that in determining the issue of whether the PCGG should be allowed to vote
sequestered shares, it was crucial to find out first whether these were purchased with
public funds, as follows:
"It is thus important to determine first if the sequestered corporate shares came
from public funds that landed in private hands."39
In short, when sequestered shares registered in the names of private individuals or
entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test is
applied. However, when the sequestered shares in the name of private individuals or
entities are shown, prima facie, to have been (1) originally government shares, or (2)
purchased with public funds or those affected with public interest, then the two-tiered test
does not apply. Rather, the public character exceptions in Baseco v.
PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the shares.
UCPB Shares Were Acquired With Coconut Levy Funds
In the present case before the Court, it is not disputed that the money used to purchase
the sequestered UCPB shares came from the Coconut Consumer Stabilization Fund
(CCSF), otherwise known as the coconut levy funds.
This fact was plainly admitted by private respondent's counsel, Atty. Teresita J.
Herbosa, during the Oral Arguments held on April 17, 2001 in Baguio City, as follows:
"Justice Panganiban:
"In regard to the theory of the Solicitor General that the funds used to purchase
[both] the original 28 million and the subsequent 80 million came from the CCSF,
Coconut Consumers Stabilization Fund, do you agree with that?
"Atty. Herbosa:
"Yes, Your Honor.
xxx xxx xxx
"Justice Panganiban:
"So it seems that the parties [have] agreed up to that point that the funds used to
purchase 72% of the former First United Bank came from the Coconut Consumer
Stabilization Fund?
"Atty. Herbosa:
"Yes, Your Honor."40
Indeed in Cocofed v. PCGG,41 this Court categorically declared that the UCPB
was acquired "with the use of the Coconut Consumers Stabilization Fund in
virtue of Presidential Decree No. 755, promulgated on July 29, 1975."
Coconut Levy Funds Are Affected With Public Interest
Having conclusively shown that the sequestered UCPB shares were purchased with
coconut levies, we hold that these funds and shares are, at the very least, "affected with
public interest."
The Resolution issued by the Court on February 16, 1993 in Republic v.
Sandiganbayan42 stated that coconut levy funds were "clearly affected with public
interest"; thus, herein private respondents – even if they are the registered shareholders
– cannot be accorded the right to vote them. We quote the said Resolution in part, as
follows:
11
 "The coconut levy funds being 'clearly affected with public interest, it follows that
the corporations formed and organized from those funds, and all assets acquired
therefrom should also be regarded as 'clearly affected with public interest.'"43
xxx xxx xxx
"Assuming, however, for purposes of argument merely, the lifting of
sequestration to be correct, may it also be assumed that the lifting of
sequestration removed the character of the coconut levy companies of being
affected with public interest, so that they and their stock and assets may now be
considered to be of private ownership? May it be assumed that the lifting of
sequestration operated to relieve the holders of stock in the coconut levy
companies – affected with public interest – of the obligation of proving how that
stock had been legitimately transferred to private ownership, or that those
stockholders who had had some part in the collection, administration, or
disposition of the coconut levy funds are now deemed qualified to acquire said
stock, and freed from any doubt or suspicion that they had taken advantage of
their special or fiduciary relation with the agencies in charge of the coconut levies
and the funds thereby accumulated? The obvious answer to each of the
questions is a negative one. It seems plain that the lifting of sequestration has no
relevance to the nature of the coconut levy companies or their stock or property,
or to the legality of the acquisition by private persons of their interest therein, or
to the latter's capacity or disqualification to acquire stock in the companies or any
property acquired from coconut levy funds.
"This being so, the right of the [petitioners] to vote stock in their names at the
meetings of the UCPB cannot be conceded at this time. That right still has to be
established by them before the Sandiganbayan. Until that is done, they cannot be
deemed legitimate owners of UCPB stock and cannot be accorded the right to
vote them."44 (Italics supplied)
It is however contended by respondents that this Resolution was in the nature of a
temporary restraining order. As such, it was supposedly interlocutory in character and
became functus oficio when this Court decided GR No. 96073 on January 23, 1995.
This argument is aptly answered by petitioner in its Memorandum, which we quote:
"The ruling made in the Resolution dated 16 February 1993 confirming the public
nature of the coconut levy funds and denying claimants their purported right to
vote is an affirmation of doctrines laid down in the cases of COCOFED v.
PCGG supra, Baseco v. PCGG, supra, and Cojuangco v. Roxas, supra.
Therefore it is of no moment that the Resolution dated 16 February 1993 has not
been ratified. Its jurisprudential based remain."45 (Italics supplied)
To repeat, the foregoing juridical situation has not changed. It is still the truth today: "the
coconut levy funds are clearly affected with public interest." Private respondents have not
"demonstrated satisfactorily that they have legitimately become private funds."
If private respondents really and sincerely believed that the final Decision of the Court
in Republic v. Sandiganbayan(GR No. 96073, promulgated on January 23, 1995) granted
them the right to vote, why did they wait for the lapse of six long years before definitively
asserting it (1) through their letter dated February 13, 2001, addressed to the UCPB
Board of Directors, demanding the holding of a shareholders' meeting on March 6, 2001;
and (2) through their Omnibus Motion dated February 23, 2001 filed in the court a quo,
seeking to enjoin PCGG from voting the subject sequestered shares during the said
stockholders' meeting? Certainly, if they even half believed their submission now – that
they already had such right in 1995 – why are they suddenly and imperiously claiming
it only now?
It should be stressed at this point that the assailed Sandiganbayan Order dated February
28, 2001 – allowing private respondents to vote the sequestered shares – is not based on
any finding that the coconut levies and the shares have "legitimately become private
funds." Neither is it based on the alleged lifting of the TRO issued by this Court on
February 16, 1993. Rather, it is anchored on the grossly mistaken application of the two-
tiered test mentioned earlier in this Decision.
To stress, the two-tiered test is applied only when the sequestered asset in the hands of
a private person is alleged to have been acquired with ill-gotten wealth. Hence, in PCGG
v. Cojuangco,47 we allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the
San Miguel Corporation (SMC) registered in his name but alleged to have been acquired
with ill-gotten wealth. We did so on his representation that he had acquired them with
borrowed funds and upon failure of the PCGG to satisfy the "two-tiered" test. This test
was, however, not applied to sequestered SMC shares that were purchased with coco
levy funds.
In the present case, the sequestered UCPB shares are confirmed to have been acquired
with coco levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right
to vote them is not subject to the "two-tiered test" but to the public character of their
acquisition, which per Antiporda v. Sandiganbayan cited earlier, must first be determined.
12
Coconut Levy Funds Are Prima Facie Public Funds
To avoid misunderstanding and confusion, this Court will even be more categorical and
positive than its earlier pronouncements: the coconut levy funds are not only affected
with public interest; they are, in fact, prima facie public funds.
Public funds are those moneys belonging to the State or to any political subdivision of the
State; more specifically, taxes, customs duties and moneys raised by operation of law for
the support of the government or for the discharge of its
obligations.48 Undeniably, coconut levy funds satisfy this general definition of public
funds, because of the following reasons:
1. Coconut levy funds are raised with the use of the police and taxing powers of
the State.
2. They are levies imposed by the State for the benefit of the coconut industry
and its farmers.
3. Respondents have judicially admitted that the sequestered shares were
purchased with public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of private
respondents, has treated them as public funds.
6. The very laws governing coconut levies recognize their public character.
We shall now discuss each of the foregoing reasons, any one of which is enough to show
their public character.
1. Coconut Levy Funds Are Raised Through the State's Police and Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties, exacted by the State by virtue of
its sovereignty for the support of government and for all public needs.49
Based on this definition, a tax has three elements, namely: a) it is an enforced
proportional contribution from persons and properties; b) it is imposed by the State by
virtue of its sovereignty; and c) it is levied for the support of the government. The coconut
levy funds fall squarely into these elements for the following reasons:
(a) They were generated by virtue of statutory enactments imposed on the
coconut farmers requiring the payment of prescribed amounts. Thus, PD No.
276, which created the Coconut Consumer Stabilization Fund (CCSF), mandated
the following:
"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its
equivalent in other coconut products, shall be imposed on every first sale, in
accordance with the mechanics established under RA 6260, effective at the start
of business hours on August 10, 1973.
"The proceeds from the levy shall be deposited with the Philippine National Bank
or any other government bank to the account of the Coconut Consumers
Stabilization Fund, as a separate trust fund which shall not form part of the
general fund of the government."50
The coco levies were further clarified in amendatory laws, specifically PD No.
96151 and PD No. 146852 – in this wise:
"The Authority (Philippine Coconut Authority) is hereby empowered to impose
and collect a levy, to be known as the Coconut Consumers Stabilization Fund
Levy, on every one hundred kilos of copra resecada, or its equivalent in other
coconut products delivered to, and/or purchased by, copra exporters, oil millers,
desiccators and other end-users of copra or its equivalent in other coconut
products. The levy shall be paid by such copra exporters, oil millers, desiccators
and other end-users of copra or its equivalent in other coconut products under
such rules and regulations as the Authority may prescribe. Until otherwise
prescribed by the Authority, the current levy being collected shall be continued." 53
Like other tax measures, they were not voluntary payments or donations by the
people. They were enforced contributions exacted on pain of penal sanctions, as
provided under PD No. 276:
"3. Any person or firm who violates any provision of this Decree or the rules and
regulations promulgated thereunder, shall, in addition to penalties already
prescribed under existing administrative and special law, pay a fine of not less
13
 than P2,500 or more than P10,000, or suffer cancellation of licenses to operate,
or both, at the discretion of the Court."54
Such penalties were later amended thus:
"Whenever any person or entity willfully and deliberately violates any of the
provisions of this Act, or any rule or regulation legally promulgated hereunder by
the Authority, the person or persons responsible for such violation shall be
punished by a fine of not more than P20,000.00 and by imprisonment of not more
than five years. If the offender be a corporation, partnership or a juridical person,
the penalty shall be imposed on the officer or officers authorizing, permitting or
tolerating the violation. Aliens found guilty of any offenses shall, after having
served his sentence, be immediately deported and, in the case of a naturalized
citizen, his certificate of naturalization shall be cancelled."55
(b) The coconut levies were imposed pursuant to the laws enacted by the proper
legislative authorities of the State. Indeed, the CCSF was collected under PD No.
276, issued by former President Ferdinand E. Marcos who was then exercising
legislative powers.56
(c) They were clearly imposed for a public purpose. There is absolutely no
question that they were collected to advance the government's avowed policy of
protecting the coconut industry. This Court takes judicial notice of the fact that the
coconut industry is one of the great economic pillars of our nation, and coconuts
and their byproducts occupy a leading position among the country's export
products; that it gives employment to thousands of Filipinos; that it is a great
source of the state's wealth; and that it is one of the important sources of foreign
exchange needed by our country and, thus, pivotal in the plans of a government
committed to a policy of currency stability.
Taxation is done not merely to raise revenues to support the government, but also to
provide means for the rehabilitation and the stabilization of a threatened industry, which
is so affected with public interest as to be within the police power of the State, as held
in Caltex Philippines v. COA57 and Osmeña v. Orbos.58
Even if the money is allocated for a special purpose and raised by special means, it is still
public in character. In the case before us, the funds were even used to organize and
finance State offices. In Cocofed v. PCGG,59 the Court observed that certain agencies or
enterprises "were organized and financed with revenues derived from coconut levies
imposed under a succession of laws of the late dictatorship x x x with deposed Ferdinand
Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting
coconut industry monopoly."60 The Court continued: "x x x. It cannot be denied that the
coconut industry is one of the major industries supporting the national economy. It is,
therefore, the State's concern to make it a strong and secure source not only of the
livelihood of a significant segment of the population, but also of export earnings the
sustained growth of which is one of the imperatives of economic stability. x x x." 61
2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its
Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds even though
they may be held for a special public purpose.
In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the coconut levy
funds to the sugar levy funds, both being special public funds acquired through the
taxing and police powers of the State. The sugar levy funds, which are strikingly
similar to the coconut levies in their imposition and purpose, were declared public funds
by this Court in Gaston v. Republic Planters Bank,62 from which we quote:
"The stabilization fees collected are in the nature of a tax which is within the
power of the state to impose for the promotion of the sugar industry (Lutz vs.
Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D. No. 388). The
collections made accrue to a 'Special Fund,' a 'Development and Stabilization
Fund,' almost identical to the 'Sugar Adjustment and Stabilization Fund' created
under Section 6 of Commonwealth Act 567. The tax collected is not in a pure
exercise of the taxing power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The levy is primarily in the
exercise of the police power of the State. (Lutz vs. Araneta, supra.)."63
The Court further explained:64
"The stabilization fees in question are levied by the State upon sugar millers,
planters and producers for a special purpose – that of 'financing the growth and
development of the sugar industry and all its components, stabilization of the
domestic market including the foreign market.' The fact that the State has taken
possession of moneys pursuant to law is sufficient to constitute them as state
funds, even though they are held for a special purpose (Lawrence v. American
Surety Co., 263 Mich 586. 294 ALR 535, cited in 42 Am. Jur., Sec. 2., p. 718).
Having been levied for a special purpose, the revenues collected are to be
treated as a special fund, to be, in the language of the statute, 'administered in
14
 trust' for the purpose intended. Once the purpose has been fulfilled or
abandoned, the balance, if any, is to be transferred to the general funds of the
Government. That is the essence of the trust intended (see 1987 Constitution,
Art. VI, Sec. 29[3], lifted from the 1935 Constitution, Article VI, Sec. 23[1]. (Italics
supplied)
"The character of the Stabilization Fund as a special fund is emphasized by the
fact that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987 Constitution, Article VI, Sec. 29[1], 1973
Constitution, Article VIII, Sec. 18[1]).
"That the fees were collected from sugar producers, planters and millers, and
that the funds were channeled to the purchase of shares of stock in respondent
Bank do not convert the funds into a trust fund for their benefit nor make them the
beneficial owners of the shares so purchased. It is but rational that the fees be
collected from them since it is also they who are to be benefited from the
expenditure of the funds derived from it. The investment in shares of respondent
Bank is not alien to the purpose intended because of the Bank's character as a
commodity bank for sugar conceived for the industry's growth and development.
Furthermore, of note is the fact that one-half (1/2) or P0.50 per picul, of the
amount levied under P.D. No. 388 is to be utilized for the 'payment of salaries
and wages of personnel, fringe benefits and allowances of officers and
employees of PHILSUCOM' thereby immediately negating the claim that the
entire amount levied is in trust for sugar, producers, planters and millers.
"To rule in petitioners' favor would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private persons. The Stabilization Fund is to be utilized for
the benefit of the entire sugar industry, 'and all its components, stabilization of
the domestic market including the foreign market,' the industry being of vital
importance to the country's economy and to national interest."
In the same manner, this Court has also ruled that the oil stabilization funds were public
in character and subject to audit by COA. It ruled in this wise:
"Hence, it seems clear that while the funds collected may be referred to as taxes,
they are exacted in the exercise of the police power of the State. Moreover, that
the OPSF is a special fund is plain from the special treatment given it by E.O.
137. It is segregated from the general fund; and while it is placed in what the law
refers to as a 'trust liability account,' the fund nonetheless remains subject to the
scrutiny and review of the COA. The Court is satisfied that these measures
comply with the constitutional description of a 'special fund.' Indeed, the practice
is not without precedent."65
In his Concurring Opinion in Kilosbayan v. Guingona,66 Justice Florentino P. Feliciano
explained that the funds raised by the On-line Lottery System were also public in nature.
In his words:
"x x x. In the case presently before the Court, the funds involved are clearly
public in nature. The funds to be generated by the proposed lottery are to be
raised from the population at large. Should the proposed operation be as
successful as its proponents project, those funds will come from well-nigh every
town and barrio of Luzon. The funds here involved are public in another very real
sense: they will belong to the PCSO, a government owned or controlled
corporation and an instrumentality of the government and are destined for
utilization in social development projects which, at least in principle, are designed
to benefit the general public. x x x. The interest of a private citizen in seeing to it
that public funds, from whatever source they may have been derived, go only to
the uses directed and permitted by law is as real and personal and substantial as
the interest of a private taxpayer in seeing to it that tax monies are not
intercepted on their way to the public treasury or otherwise diverted from uses
prescribed or allowed by law. It is also pertinent to note that the more successful
the government is in raising revenues by non-traditional methods such as
PAGCOR operations and privatization measures, the lesser will be the pressure
upon the traditional sources of public revenues, i.e., the pocket books of
individual taxpayers and importers."67
Thus, the coconut levy funds – like the sugar levy and the oil stabilization funds, as well
as the monies generated by the On-line Lottery System – are funds exacted by the State.
Being enforced contributions, the are prima faciepublic funds.
3. Respondents Judicially Admit That the Levies Are Government Funds.
Equally important as the fact that the coconut levy funds were raised through the taxing
and police powers of the State is respondents' effective judicial admission that these
levies are government funds. As shown by the attachments to their
pleadings,68 respondents concede that the Coconut Consumers Stabilization Fund
(CCSF) and the Coconut Investment Development Fund "constitute government funds x
x x for the benefit of coconut farmers."
15
 "Collections on both levies constitute government funds. However, unlike other
taxes that the Government levies and collects such as income tax, tariff and
customs duties, etc., the collections on the CCSF and CIDF are, by express
provision of the laws imposing them, for a definite purpose, not just for any
governmental purpose. As stated above part of the collections on the CCSF levy
should be spent for the benefit of the coconut farmers. And in respect of the
collections on the CIDF levy, P.D. 582 mandatorily requires that the same should
be spent exclusively for the establishment, operation and maintenance of a
hybrid coconut seed garden and the distribution, for free, to the coconut farmers
of the hybrid coconut seednuts produced from that seed garden.
"On the other hand, the laws which impose special levies on specific industries,
for example on the mining industry, sugar industry, timber industry, etc., do not,
by their terms, expressly require that the collections on those levies be spent
exclusively for the benefit of the industry concerned. And if the enabling law thus
so provide, the fact remains that the governmental agency entrusted with the
duty of implementing the purpose for which the levy is imposed is vested with the
discretionary power to determine when and how the collections should be
appropriated."69
4. The COA Audit Shows the Public Nature of the Funds.
Under COA Office Order No. 86-9470 dated April 15, 1986,70 the COA reviewed the
expenditure and use of the coconut levies allocated for the acquisition of the UCPB. The
audit was aimed at ascertaining whether these were utilized for the purpose for which
they had been intended.71 Under the 1987 Constitution, the powers of the COA are as
follows:
"The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities x x x."72
Because these funds have been subjected to COA audit, there can be no other
conclusion than that are prima faciepublic in character.
5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut Authority
regarding the character of the coconut levy funds, the Bureau of Internal Revenue has
affirmed that these funds are public in character. It held as follows: "[T]he coconut levy is
not a public trust fund for the benefit of the coconut farmers, but is in the nature of a tax
and, therefore, x x x public funds that are subject to government administration and
disposition."73
Furthermore, the executive branch treats the coconut levies as public funds. Thus,
Executive Order No. 277, issued on September 24, 1995, directed the mode of treatment,
utilization, administration and management of the coconut levy funds. It provided as
follows:
'(a) The coconut levy funds, which include all income, interests, proceeds or
profits derived therefrom, as well as all assets, properties and shares of stocks
procured or obtained with the use of such funds, shall be treated, utilized,
administered and managed as public funds consistent with the uses and
purposes under the laws which constituted them and the development priorities
of the government, including the government's coconut productivity,
rehabilitation, research extension, farmers organizations, and market promotions
programs, which are designed to advance the development of the coconut
industry and the welfare of the coconut farmers."74 (Italics supplied)
Doctrinally, acts of the executive branch are prima facie valid and binding, unless
declared unconstitutional or contrary to law.
6. Laws Governing Coconut Levies Recognize Their Public Nature.
Finally and tellingly, the very laws governing the coconut levies recognize their public
character. Thus, the third Whereas clause of PD No. 276 treats them as special funds for
a specific public purpose. Furthermore, PD No. 711 transferred to the general funds of
the State all existing special and fiduciary funds including the CCSF. On the other hand,
PD No. 1234 specifically declared the CCSF as a special fund for a special purpose,
which should be treated as a special account in the National Treasury.
Moreover, even President Marcos himself, as the sole legislative/executive authority
during the martial law years, struck off the phrase which is a private fund of the coconut
farmers from the original copy of Executive Order No. 504 dated May 31, 1978, and we
quote:
16
 "WHEREAS, by means of the Coconut Consumers Stabilization Fund
('CCSF'), which is the private fund of the coconut farmers (deleted), essential
coconut-based products are made available to household consumers at
socialized prices." (Emphasis supplied)
The phrase in bold face -- which is the private fund of the coconut farmers – was
crossed out and duly initialed by its author, former, President Marcos. This deletion,
clearly visible in "Attachment C" of petitioner's Memorandum,75 was a categorical
legislative intent to regard the CCSF as public, not private, funds.
Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to
the Government
Having shown that the coconut levy funds are not only affected with public interest, but
are in fact prima facie public funds, this Court believes that the government should be
allowed to vote the questioned shares, because they belong to it as the prima
facie beneficial and true owner.
As stated at the beginning, voting is an act of dominion that should be exercised by the
share owner. One of the recognized rights of an owner is the right to vote at meetings of
the corporation. The right to vote is classified as the right to control. 76 Voting rights may
be for the purpose of, among others, electing or removing directors, amending a charter,
or making or amending by laws.77 Because the subject UCPB shares were acquired with
government funds, the government becomes their prima facie beneficial and true owner.
Ownership includes the right to enjoy, dispose of, exclude and recover a thing without
limitations other than those established by law or by the owner.78 Ownership has been
aptly described as the most comprehensive of all real rights.79 And the right to vote
shares is a mere incident of ownership. In the present case, the government has been
shown to be the prima facie owner of the funds used to purchase the shares. Hence, it
should be allowed the rights and privileges flowing from such fact.
And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should continue
to vote those shares until and unless private respondents are able to demonstrate, in the
main cases pending before the Sandiganbayan, that "they [the sequestered UCPB
shares] have legitimately become private."
Procedural and Incidental Issues:
Grave Abuse of Discretion, Improper Arguments and Intervenors' Relief
Procedurally, respondents argue that petitioner has failed to demonstrate that the
Sandiganbayan committed grave abuse of discretion, a demonstration required in every
petition under Rule 65.80
We disagree. We hold that the Sandiganbayan gravely abused its discretion when it
contravened the rulings of this Court in Baseco and Cojuangco-Roxas – thereby
unlawfully, capriciously and arbitrarily depriving the government of its right to vote
sequestered shares purchased with coconut levy funds which are prima facie public
funds.
Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or
contravenes the Constitution, the law or existing jurisprudence. In one case, 81 this Court
ruled that the lower court's resolution was "tantamount to overruling a judicial
pronouncement of the highest Court x x x and unmistakably a very grave abuse of
discretion."82
The Public Character of Shares Is a Valid Issue
Private respondents also contend that the public nature of the coconut levy funds was not
raised as an issue before the Sandiganbayan. Hence, it could not be taken up before this
Court.
Again we disagree. By ruling that the two-tiered test should be applied in evaluating
private respondents' claim of exercising voting rights over the sequestered shares, the
Sandiganbayan effectively held that the subject assets were private in character. Thus, to
meet this issue, the Office of the Solicitor General countered that the shares were not
private in character, and that quite the contrary, they were and are public in nature
because they were acquired with coco levy funds which are public in character. In short,
the main issue of who may vote the shares cannot be determined without passing upon
the question of the public/private character of the shares and the funds used to acquire
them. The latter issue, although not specifically raised in the Court a quo, should still be
resolved in order to fully adjudicate the main issue.
Indeed, this Court has "the authority to waive the lack of proper assignment of errors if
the unassigned errors closely relate to errors properly pinpointed out or if the unassigned
17
errors refer to matters upon which the determination of the questions raised by the errors
properly assigned depend."83
Therefore, "where the issues already raised also rest on other issues not specifically
presented as long as the latter issues bear relevance and close relation to the former and
as long as they arise from matters on record, the Court has the authority to include them
in its discussion of the controversy as well as to pass upon them."84
No Positive Relief For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are trying to
enforce in another Sandiganbayan case docketed as SB Case No. 0187. 85 In that case,
they seek the recovery of the subject UCPB shares from herein private respondents and
the corporations controlled by them. Therefore, the rights sought to be protected and the
reliefs prayed for by intervenors are still being litigated in the said case. The purported
rights they are invoking are mere expectancies wholly dependent on the outcome of that
case in the Sandiganbayan.
Clearly, we cannot rule on intervenors' alleged right to vote at this time and in this case.
That right is dependent upon the Sandiganbayan's resolution of their action for the
recovery of said sequestered shares. Given the patent fact that intervenors are not
registered stockholders of UCPB as of the moment, their asserted rights cannot be ruled
upon in the present proceedings. Hence, no positive relief can be given them now, except
insofar as they join petitioner in barring private respondents from voting the subject
shares.
Epilogue
In sum, we hold that the Sandiganbayan committed grave abuse of discretion in grossly
contradicting and effectively reversing existing jurisprudence, and in depriving the
government of its right to vote the sequestered UCPB shares which are prima facie public
in character.
In making this ruling, we are in no way preempting the proceedings the Sandiganbayan
may conduct or the final judgment it may promulgate in Civil Case Nos. 0033-A, 0033-B
and 0033-F. Our determination here is merely prima facie, and should not bar the anti-
graft court from making a final ruling, after proper trial and hearing, on the issues and
prayers in the said civil cases, particularly in reference to the ownership of the subject
shares
We also lay down the caveat that, in declaring the coco levy funds to be prima
facie public in character, we are not ruling in any final manner on their classification –
whether they are general or trust or special funds – since such classification is not at
issue here. Suffice it to say that the public nature of the coco levy funds is decreed by the
Court only for the purpose of determining the right to vote the shares, pending the final
outcome of the said civil cases.
Neither are we resolving in the present case the question of whether the shares held by
Respondent Cojuangco are, as he claims, the result of private enterprise. This factual
matter should also be taken up in the final decision in the cited cases that are pending in
the court a quo. Again suffice it to say that the only issue settled here is the right of
PCGG to vote the sequestered shares, pending the final outcome of said cases.
This matter involving the coconut levy funds and the sequestered UCPB shares has been
straddling the courts for about 15 years. What we are discussing in the present Petition,
we stress, is just an incident of the main cases which are pending in the anti-graft court –
the cases for the reconveyance, reversion and restitution to the State of these UCPB
shares.
The resolution of the main cases has indeed been long overdue. Every effort, both by the
parties and the Sandiganbayan, should be exerted to finally settle this controversy.
WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE.
The PCGG shall continue voting the sequestered shares until Sandiganbayan Civil Case
Nos. 0033-A, 0033-B and 0033-F are finally and completely resolved. Furthermore, the
Sandiganbayan is ORDERED to decide with finality the aforesaid civil cases within a
period of six (6) months from notice. It shall report to this Court on the progress of the
said cases every three (3) months, on pain of contempt. The Petition in Intervention
is DISMISSED inasmuch as the reliefs prayed for are not covered by the main issues in
this case. No costs.
SO ORDERED.
Davide, Jr., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Pardo,
Buena, Ynares-Santiago, De Leon, Jr., and Sandoval-Gutierrez, JJ., concur.
18
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased
Antonio Jayme Ledesma,plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of
emergency, due to the threat to our industry by the imminent imposition of export taxes
upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its
preferential position in the United States market"; wherefore, the national policy was
expressed "to obtain a readjustment of the benefits derived from the sugar industry by the
component elements thereof" and "to stabilize the sugar industry so as to prepare it for
the eventuality of the loss of its preferential position in the United States market and the
imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while
section 3 levies on owners or persons in control of lands devoted to the cultivation of
sugar cane and ceded to others for a consideration, on lease or otherwise —
a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization
Fund,' and shall be paid out only for any or all of the following purposes or to
attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United States
market, and ultimately to insure its continued existence notwithstanding the loss
of that market and the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof — the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field — so that all might continue
profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the
production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines
may, until the adjourment of the next regular session of the National Assembly,
make the necessary disbursements from the fund herein created (1) for the
establishment and operation of sugar experiment station or stations and the
undertaking of researchers (a) to increase the recoveries of the centrifugal sugar
factories with the view of reducing manufacturing costs, (b) to produce and
propagate higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of raising sugar cane,
(d) to improve the buying quality of denatured alcohol from molasses for motor
fuel, (e) to determine the possibility of utilizing the other by-products of the
industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which
would help rehabilitate and stabilize the industry, and (2) for the improvement of
living and working conditions in sugar mills and sugar plantations, authorizing him
19
 to organize the necessary agency or agencies to take charge of the expenditure
and allocation of said funds to carry out the purpose hereinbefore enumerated,
and, likewise, authorizing the disbursement from the fund herein created of the
necessary amount or amounts needed for salaries, wages, travelling expenses,
equipment, and other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of
Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the
sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop
years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiff's
opinion is not a public purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act,
and particularly of section 6 (heretofore quoted in full), will show that the tax is levied with
a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police
power.
This Court can take judicial notice of the fact that sugar production is one of the great
industries of our nation, sugar occupying a leading position among its export products;
that it gives employment to thousands of laborers in fields and factories; that it is a great
source of the state's wealth, is one of the important sources of foreign exchange needed
by our government, and is thus pivotal in the plans of a regime committed to a policy of
currency stability. Its promotion, protection and advancement, therefore redounds greatly
to the general welfare. Hence it was competent for the legislature to find that the general
welfare demanded that the sugar industry should be stabilized in turn; and in the wide
field of its police power, the lawmaking body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist the added strain of
the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed.
835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo,
103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in
Florida —
The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so great
a portion of the population of the State is affected to such an extent by public
interests as to be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is
a matter of public concern, it follows that the Legislature may determine within
reasonable bounds what is necessary for its protection and expedient for its promotion.
Here, the legislative discretion must be allowed fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are oppressive in character. If
objective and methods are alike constitutionally valid, no reason is seen why the state
may not levy taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean,
301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that "inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael
vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised
under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of
the sugar industry, since it is that very enterprise that is being protected. It may be that
other industries are also in need of similar protection; that the legislature is not required
by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel.
Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there are other instances to
which it might have been applied;" and that "the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the
devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, utilization of by-products and solution of allied problems, as well as to the
20
improvements of living and working conditions in sugar mills or plantations, without any
part of such money being channeled directly to private persons, constitutes expenditure
of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed.
472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and
Concepcion, JJ., concur.

21
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23645 October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications, and
DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by
Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts
shall order for the period from August nineteen to September thirty every year the
printing and issue of semi-postal stamps of different denominations with face
value showing the regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps: Provided, That no
such additional charge of five centavos shall be imposed on newspapers. The
additional proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National Treasury to be
expended by the Philippine Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four
(4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28,
1958), and 10 (July 15, 1960). All these administrative orders were issued with the
approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from
August 19 to September 30, 1957, for lack of time. However, two denominations
of such stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will
soon be released for use by the public on their mails to be posted during the
same period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year starting in 1958, no
mail matter of whatever class, and whether domestic or foreign, posted at any
Philippine Post Office and addressed for delivery in this country or abroad, shall
be accepted for mailing unless it bears at least one such semi-postal stamp
showing the additional value of five centavos intended for the Philippine
Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one
such semi-postal stamp if posted during the period above stated starting with the
year 1958, in addition to being charged the usual postage prescribed by existing
regulations. In the case of business reply envelopes and cards mailed during said
period, such stamp should be collected from the addressees at the time of
delivery. Mails entitled to franking privilege like those from the office of the
President, members of Congress, and other offices to which such privilege has
been granted, shall each also bear one such semi-postal stamp if posted during
the said period.
Mails posted during the said period starting in 1958, which are found in street or
post-office mail boxes without the required semi-postal stamp, shall be returned
to the sender, if known, with a notation calling for the affixing of such stamp. If the
sender is unknown, the mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to
franking privilege which are not exempted from the payment of the five centavos
intended for the Philippine Tuberculosis Society, such extra charge may be
collected in cash, for which official receipt (General Form No. 13, A) shall be
issued, instead of affixing the semi-postal stamp in the manner hereinafter
indicated:
22
1. Second-class mail. — Aside from the postage at the second-class rate, the
extra charge of five centavos for the Philippine Tuberculosis Society shall be
collected on each separately-addressed piece of second-class mail matter, and
the total sum thus collected shall be entered in the same official receipt to be
issued for the postage at the second-class rate. In making such entry, the total
number of pieces of second-class mail posted shall be stated, thus: "Total charge
for TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered
separate from the postage in both of the official receipt and the Record of
Collections.
2. First-class and third-class mail permits. — Mails to be posted without postage
affixed under permits issued by this Bureau shall each be charged the usual
postage, in addition to the five-centavo extra charge intended for said society.
The total extra charge thus received shall be entered in the same official receipt
to be issued for the postage collected, as in subparagraph 1.
3. Metered mail. — For each piece of mail matter impressed by postage meter
under metered mail permit issued by this Bureau, the extra charge of five
centavos for said society shall be collected in cash and an official receipt issued
for the total sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. — Upon delivery of business reply cards
and envelopes to holders of business reply permits, the five-centavo charge
intended for said society shall be collected in cash on each reply card or
envelope delivered, in addition to the required postage which may also be paid in
cash. An official receipt shall be issued for the total postage and total extra
charge received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. — Government agencies, officials, and
other persons entitled to the franking privilege under existing laws may pay in
cash such extra charge intended for said society, instead of affixing the semi-
postal stamps to their mails, provided that such mails are presented at the post-
office window, where the five-centavo extra charge for said society shall be
collected on each piece of such mail matter. In such case, an official receipt shall
be issued for the total sum thus collected, in the manner stated in subparagraph
1.
Mail under permits, metered mails and franked mails not presented at the post-
office window shall be affixed with the necessary semi-postal stamps. If found in
mail boxes without such stamps, they shall be treated in the same way as herein
provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications
received for mailing under any class of mail matter, including newspapers and magazines
admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at
the post office in San Fernando, Pampanga. Because this letter, addressed to a certain
Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special anti-
TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of
First Instance of Pampanga, to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it violates the equal protection
clause of the Constitution as well as the rule of uniformity and equality of taxation. The
lower court declared the statute and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents'
contention that declaratory relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While conceding that the mailing by the
petitioner of a letter without the additional anti-TB stamp was a violation of Republic Act
1635, as amended, the trial court nevertheless refused to dismiss the action on the
ground that under section 6 of Rule 64 of the Rules of Court, "If before the final
termination of the case a breach or violation of ... a statute ... should take place, the
action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, section 1 so provides.
Section 6 of the same rule, which allows the court to treat an action for declaratory relief
as an ordinary action, applies only if the breach or violation occurs after the filing of the
action but before the termination thereof.3
23
Hence, if, as the trial court itself admitted, there had been a breach of the statute before
the firing of this action, then indeed the remedy of declaratory relief cannot be availed of,
much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did
not constitute a breach of the statute because the statute appears to be addressed only
to postal authorities. The statute, it is true, in terms provides that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps." It does not follow,
however, that only postal authorities can be guilty of violating it by accepting mails
without the payment of the anti-TB stamp. It is obvious that they can be guilty of violating
the statute only if there are people who use the mails without paying for the additional
anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so in the
matter of the anti-TB stamp the mere attempt to use the mails without the stamp
constitutes a violation of the statute. It is not required that the mail be accepted by postal
authorities. That requirement is relevant only for the purpose of fixing the liability of postal
officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because
this suit was filed not only with respect to the letter which he mailed on September 15,
1963, but also with regard to any other mail that he might send in the future. Thus, in his
complaint, the petitioner prayed that due course be given to "other mails without the
semi-postal stamps which he may deliver for mailing ... if any, during the period covered
by Republic Act 1635, as amended, as well as other mails hereafter to be sent by or to
other mailers which bear the required postage, without collection of additional charge of
five centavos prescribed by the same Republic Act." As one whose mail was returned,
the petitioner is certainly interested in a ruling on the validity of the statute requiring the
use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution.
More specifically the claim is made that it constitutes mail users into a class for the
purpose of the tax while leaving untaxed the rest of the population and that even among
postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar exemption
to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails.
As such the objections levelled against it must be viewed in the light of applicable
principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the
subjects of taxation and to grant exemptions.4 This power has aptly been described as "of
wide range and flexibility."5 Indeed, it is said that in the field of taxation, more than in
other areas, the legislature possesses the greatest freedom in classification. 6 The reason
for this is that traditionally, classification has been a device for fitting tax programs to local
needs and usages in order to achieve an equitable distribution of the tax burden. 7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent such relationship the
selection of mail users is constitutionally impermissible. This is altogether a different
proposition. As explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between
classification made by the legislation and its purpose is undoubtedly true in some
contexts, it has no application to a measure whose sole purpose is to raise
revenue ... So long as the classification imposed is based upon some standard
capable of reasonable comprehension, be that standard based upon ability to
produce revenue or some other legitimate distinction, equal protection of the law
has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at
527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S.
56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the
clearest demonstration that it sanctions invidious discrimination, which is all that the
Constitution forbids. The remedy for unwise legislation must be sought in the legislature.
Now, the classification of mail users is not without any reason. It is based on ability to
pay, let alone the enjoyment of a privilege, and on administrative convinience. In the
allocation of the tax burden, Congress must have concluded that the contribution to the
anti-TB fund can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For
it is now a settled principle of law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class."9 In the case of the anti-TB
24
stamps, undoubtedly, the single most important and influential consideration that led the
legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through the
regular means of collection. On the other hand, by placing the duty of collection on postal
authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a
class. Mail users were already a class by themselves even before the enactment of the
statue and all that the legislature did was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences
that exist in fact is living law; to disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant exemption
must likewise be conceded as a necessary corollary. Tax exemptions are too common in
the law; they have never been thought of as raising issues under the equal protection
clause.
It is thus erroneous for the trial court to hold that because certain mail users are
exempted from the levy the law and administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The application of the lower courts theory
would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of
the tax in order to foster what it conceives to be a beneficent enterprise.11 This is the
case of newspapers which, under the amendment introduced by Republic Act 2631, are
exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and
such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which lists
the various offices and instrumentalities of the Government exempt from the payment of
the anti-TB stamp, is but a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to
the exclusion of other diseases which, it is said, are equally a menace to public health.
But it is never a requirement of equal protection that all evils of the same genus be
eradicated or none at all.13 As this Court has had occasion to say, "if the law presumably
hits the evil where it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not
levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living in an organized society, established
and safeguarded by the devotion of taxes to public purposes. Any other view would
preclude the levying of taxes except as they are used to compensate for the burden on
those who pay them and would involve the abandonment of the most fundamental
principle of government — that it exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail or
the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge
for the transaction, operating equally on all persons within the class regardless of the
amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other
$172. The inequality of the tax, so far as actual values are concerned, is
manifest. But, here again equality in this sense has to yield to practical
considerations and usage. There must be a fixed and indisputable mode of
ascertaining a stamp tax. In another sense, moreover, there is equality. When the
taxes on two sales are equal, the same number of shares is sold in each case;
that is to say, the same privilege is used to the same extent. Valuation is not the
only thing to be considered. As was pointed out by the court of appeals, the
familiar stamp tax of 2 cents on checks, irrespective of income or earning
capacity, and many others, illustrate the necessity and practice of sometimes
substituting count for weight ...17
25
According to the trial court, the money raised from the sales of the anti-TB stamps is
spent for the benefit of the Philippine Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out, the Society is not really the
beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as a special fund and as such need
not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is
one of the grounds on which the lower court invalidated Republic Act 1631, as amended,
namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for
certain classes of mail matters (such as mail permits, metered mails, business reply
cards, etc.), the five-centavo charge may be paid in cash instead of the purchase of the
anti-TB stamp. It further states that mails deposited during the period August 19 to
September 30 of each year in mail boxes without the stamp should be returned to the
sender, if known, otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may
be necessary to prevent a failure of the undertaking. The authority given to the
Postmaster General to raise funds through the mails must be liberally construed,
consistent with the principle that where the end is required the appropriate means are
given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of
the additional charge but also that of the regular postage. In the case of business reply
cards, for instance, it is obvious that to require mailers to affix the anti-TB stamp on their
cards would be to make them pay much more because the cards likewise bear the
amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do
not bear the anti-TB stamp, but a declaration therein that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamp" is a declaration that such
mail matter is nonmailable within the meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a restatement of the law for the
guidance of postal officials and employees. As for Administrative Order 9, we have
already said that in listing the offices and entities of the Government exempt from the
payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.
Separate Opinions
FERNANDO, J., concurring:
I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635 as
amended by Republic Act No. 2631 and the majority opinion expounded with Justice
Castro's usual vigor and lucidity subject to one qualification. With all due recognition of its
inherently persuasive character, it would seem to me that the same result could be
achieved if reliance be had on police power rather than the attribute of taxation, as the
constitutional basis for the challenged legislation.
1. For me, the state in question is an exercise of the regulatory power connected with the
performance of the public service. I refer of course to the government postal function, one
of respectable and ancient lineage. The United States Constitution of 1787 vests in the
federal government acting through Congress the power to establish post offices. 1 The
first act providing for the organization of government departments in the Philippines,
approved Sept. 6, 1901, provided for the Bureau of Post Offices in the Department of
Commerce and Police.2 Its creation is thus a manifestation of one of the many services in
which the government may engage for public convenience and public interest. Such
being the case, it seems that any legislation that in effect would require increase cost of
postage is well within the discretionary authority of the government.
It may not be acting in a proprietary capacity but in fixing the fees that it collects for the
use of the mails, the broad discretion that it enjoys is undeniable. In that sense, the
principle announced in Esteban v. Cabanatuan City,3 in an opinion by our Chief Justice,
while not precisely controlling furnishes for me more than ample support for the validity of
the challenged legislation. Thus: "Certain exactions, imposable under an authority other
than police power, are not subject, however, to qualification as to the amount chargeable,
unless the Constitution or the pertinent laws provide otherwise. For instance, the rates of
taxes, whether national or municipal, need not be reasonable, in the absence of such
constitutional or statutory limitation. Similarly, when a municipal corporation fixes the fees
for the use of its properties, such as public markets, it does not wield the police power, or
even the power of taxation. Neither does it assert governmental authority. It exercises
merely a proprietary function. And, like any private owner, it is — in the absence of the
26
aforementioned limitation, which does not exist in the Charter of Cabanatuan City
(Republic Act No. 526) — free to charge such sums as it may deem best, regardless of
the reasonableness of the amount fixed, for the prospective lessees are free to enter into
the corresponding contract of lease, if they are agreeable to the terms thereof or,
otherwise, not enter into such contract."
2. It would appear likewise that an expression of one's personal view both as to
the attitude and awareness that must be displayed by inferior tribunals when the "delicate
and awesome" power of passing on the validity of a statute would not be inappropriate.
"The Constitution is the supreme law, and statutes are written and enforced in
submission to its commands."4 It is likewise common place in constitutional law that a
party adversely affected could, again to quote from Cardozo, "invoke, when constitutional
immunities are threatened, the judgment of the courts."5
Since the power of judicial review flows logically from the judicial function of ascertaining
the facts and applying the law and since obviously the Constitution is the highest law
before which statutes must bend, then inferior tribunals can, in the discharge of their
judicial functions, nullify legislative acts. As a matter of fact, in clear cases, such is not
only their power but their duty. In the language of the present Chief Justice: "In fact,
whenever the conflicting claims of the parties to a litigation cannot properly be settled
without inquiring into the validity of an act of Congress or of either House thereof, the
courts have, not only jurisdiction to pass upon said issue but, also, the duty to do
so, which cannot be evaded without violating the fundamental law and paving the way to
its eventual destruction."6
Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must
ever be kept in mind. Thus: "It must be evident to any one that the power to declare a
legislative enactment void is one which the judge, conscious of the fallibility of the human
judgment, will shrink from exercising in any case where he can conscientiously and with
due regard to duty and official oath decline the responsibility."7
There must be a caveat however to the above Cooley pronouncement. Such should not
be the case, to paraphrase Freund, when the challenged legislation imperils freedom of
the mind and of the person, for given such an undesirable situation, "it is freedom that
commands a momentum of respect." Here then, fidelity to the great ideal of liberty
enshrined in the Constitution may require the judiciary to take an uncompromising and
militant stand. As phrased by us in a recent decision, "if the liberty involved were freedom
of the mind or the person, the standard of its validity of governmental acts is much more
rigorous and exacting."8
So much for the appropriate judicial attitude. Now on the question of awareness of the
controlling constitutional doctrines.
There is nothing I can add to the enlightening discussion of the equal protection aspect
as found in the majority opinion. It may not be amiss to recall to mind, however, the
language of Justice Laurel in the leading case of People v. Vera,9 to the effect that the
basic individual right of equal protection "is a restraint on all the three grand departments
of our government and on the subordinate instrumentalities and subdivisions thereof, and
on many constitutional powers, like the police power, taxation and eminent
domain."10 Nonetheless, no jurist was more careful in avoiding the dire consequences to
what the legislative body might have deemed necessary to promote the ends of public
welfare if the equal protection guaranty were made to constitute an insurmountable
obstacle.
A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite
evident from the various citations from his pen found in the majority opinion. For him, it
would be a misreading of the equal protection clause to ignore actual conditions and
settled practices. Not for him the at times academic and sterile approach to constitutional
problems of this sort. Thus: "It would be a narrow conception of jurisprudence to confine
the notion of 'laws' to what is found written on the statute books, and to disregard the
gloss which life has written upon it. Settled state practice cannot supplant constitutional
guaranties, but it can establish what is state law. The Equal Protection Clause did not
write an empty formalism into the Constitution. Deeply embedded traditional ways of
carrying out state policy, such as those of which petitioner complains, are often tougher
and truer law than the dead words of the written text."11 This too, from the same
distinguished jurist: "The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same."12
Now, as to non-delegation. It is to be admitted that the problem of non-delegation of
legislative power at times occasions difficulties. Its strict view has been announced by
Justice Laurel in the aforecited case of People v. Verain this language. Thus: "In testing
whether a statute constitutes an undue delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its terms and provisions when it left the
hands of the legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature. .... In United States v. Ang Tang Ho ..., this court adhered to
the foregoing rule; it held an act of the legislature void in so far as it undertook to
authorize the Governor-General, in his discretion, to issue a proclamation fixing the price
of rice and to make the sale of it in violation of the proclamation a crime."13
27
Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor
General,14 specially where the delegation deals not with an administrative function but
one essentially and eminently legislative in character. What could properly be stigmatized
though to quote Justice Cardozo, is delegation of authority that is "unconfined and
vagrant, one not canalized within banks which keep it from overflowing."15

This is not the situation as it presents itself to us. What was delegated was power not
legislative in character. Justice Laurel himself, in a later case, People v.
Rosenthal,16 admitted that within certain limits, there being a need for coping with the
more intricate problems of society, the principle of "subordinate legislation" has been
accepted, not only in the United States and England, but in practically all modern
governments. This view was reiterated by him in a 1940 decision, Pangasinan
Transportation Co., Inc. v. Public Service Commission.17 Thus: "Accordingly, with the
growing complexity 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 powers by the legislature, and toward
the approval of the practice by the courts."

In the light of the above views of eminent jurists, authoritative in character, of both the
equal protection clause and the non-delegation principle, it is apparent how far the lower
court departed from the path of constitutional orthodoxy in nullifying Republic Act No.
1635 as amended. Fortunately, the matter has been set right with the reversal of its
decision, the opinion of the Court, manifesting its fealty to constitutional law precepts,
which have been reiterated time and time again and for the soundest of reasons.

28
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 106611 July 21, 1994
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
Palaez, Adriano & Gregorio for private respondent.
REGALADO, J.:
The judicial proceedings over the present controversy commenced with CTA Case No.
4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of
Internal Revenue to grant a refund to herein private respondent Citytrust Banking
Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount
reflected in its 1983 income tax return on the ground of prescription.1 That judgment of
the tax court was affirmed by respondent Court of Appeals in its judgment in CA-G.R. SP
No. 26839.2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified and/or set
aside.
It appears that in a letter dated August 26, 1986, herein private respondent corporation
filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over total
quarterly payments over the actual income tax due, plus carried-over withholding tax
payments on government securities and rental income, as computed in its final income
tax return for the calendar year ending December 31, 1985.3
Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive
period, Citytrust filed a petition with the Court of Tax Appeals, docketed therein as CTA
Case No. 4099, claiming the refund of its income tax overpayments for the years 1983,
1984 and 1985 in the total amount of P19,971,745.00. 4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust incurred
a net loss in 1985 does not ipso facto merit a refund; that the amounts of P6,611,223.00,
P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment,
taxes withheld on proceeds of government securities investments, as well as on rental
income, respectively, are not properly documented; that assuming arguendo that
petitioner is entitled to refund, the right to claim the same has prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292
and 295 of the National Internal Revenue Code of 1977, as amended, since the petition
was filed only on August 28, 1986.5
On February 20, 1991, the case was submitted for decision based solely on the
pleadings and evidence submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the repeated failure of the Tax
Credit/Refund Division of the BIR to transmit the records of the case, as well as the
investigation report thereon, to the Solicitor General.6
However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and
motion praying for the suspension of the proceedings in the said case on the ground that
the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already being
processed by the Tax Credit/Refund Division of the BIR, and that said bureau was only
awaiting the submission by Citytrust of the required confirmation receipts which would
show whether or not the aforestated amount was actually paid and remitted to the BIR.7
Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals
already acquired jurisdiction over the case, it could no longer be divested of the same;
and, further, that the proceedings therein could not be suspended by the mere fact that
the claim for refund was being administratively processed, especially where the case had
already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1,
Y-2 and Y-3 adduced in the case, which clearly showed that there was an overpayment
of income taxes and for which a tax credit or refund was due to Citytrust. The Foregoing
29
exhibits are allegedly conclusive proof of and an admission by herein petitioner that there These credits are smaller than the claimed amount
had been an overpayment of income taxes.8 because only the above figures are well supported by
the various exhibits presented during the hearing.
The tax court denied the motion to suspend proceedings on the ground that the case had
already been submitted for decision since February 20, 1991.9 No pronouncement as to costs.

Thereafter, said court rendered its decision in the case, the decretal portion of which SO ORDERED.10
declares:
The order for refund was based on the following findings of the Court of Tax Appeals: (1)
WHEREFORE, in view of the foregoing, petitioner is entitled to a refund the fact of withholding has been established by the statements and certificates of
but only for the overpaid taxes incurred in 1984 and 1985. The withholding taxes accomplished by herein private respondent's withholding agents, the
refundable amount as shown in its 1983 income tax return is hereby authenticity of which were neither disputed nor controverted by herein petitioner; (2) no
denied on the ground of prescription. Respondent is hereby ordered to evidence was presented which could effectively dispute the correctness of the income tax
grant a refund to petitioner Citytrust Banking Corp. in the amount of return filed by herein respondent corporation and other material facts stated therein; (3)
P13,314,506.14 representing the overpaid income taxes for 1984 and no deficiency assessment was issued by herein petitioner; and (4) there was an audit
1985, recomputed as follows: report submitted by the BIR Assessment Branch, recommending the refund of overpaid
taxes for the years concerned (Exhibits Y to Y-3), which enjoys the presumption of
1984 Income tax due P 4,715,533.00 regularity in the performance of official duty.11
Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits — A motion for the reconsideration of said decision was initially filed by the Solicitor General
W/T on int. on gov't. sec. 1,921,245.37* on the sole ground that the statements and certificates of taxes allegedly withheld are not
W/T on rental inc. 26,604.30* 18,162,448.67 conclusive evidence of actual payment and remittance of the taxes withheld to the
——————— ——————— BIR.12 A supplemental motion for reconsideration was thereafter filed, wherein it was
Tax Overpayment (13,446,915.67) contended for the first time that herein private respondent had outstanding unpaid
Less: FCDU payable 150,252.00 deficiency income taxes. Petitioner alleged that through an inter-office memorandum of
——————— the Tax Credit/Refund Division, dated August 8, 1991, he came to know only lately that
Amount refundable for 1984 P (13,296,663.67) Citytrust had outstanding tax liabilities for 1984 in the amount of P56,588,740.91
representing deficiency income and business taxes covered by Demand/Assessment
1985 Income tax due (loss) P — 0 — Notice No. FAS-1-84-003291-003296.13
Less: W/T on rentals 36,716.47*
——————— Oppositions to both the basic and supplemental motions for reconsideration were filed by
Tax Overpayment (36,716.47)* private respondent Citytrust.14 Thereafter, the Court of Tax Appeals issued a resolution
Less: FCDU payable 18,874.00 denying both motions for the reason that Section 52 (b) of the Tax Code, as implemented
——————— by Revenue Regulation
Amount Refundable for 1985 P (17,842.47) 6-85, only requires that the claim for tax credit or refund must show that the income
received was declared as part of the gross income, and that the fact of withholding was
* Note: duly established. Moreover, with regard to the argument raised in the supplemental
motion for reconsideration anent the deficiency tax assessment against herein petitioner,
the tax court ruled that since that matter was not raised in the pleadings, the same cannot

30
be considered, invoking therefor the salutary purpose of the omnibus motion rule which is
to obviate multiplicity of motions and to discourage dilatory pleadings. 15
As indicated at the outset, a petition for review was filed by herein petitioner with
respondent Court of Appeals which in due course promulgated its decision affirming the
judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to this
Court, maintaining that said respondent court erred in affirming the grant of the claim for
refund of Citytrust, considering that, firstly, said private respondent failed to prove and
substantiate its claim for such refund; and, secondly, the bureau's findings of deficiency
income and business tax liabilities against private respondent for the year 1984 bars such
payment.16
After a careful review of the records, we find that under the peculiar circumstances of this
case, the ends of substantial justice and public interest would be better subserved by the
remand of this case to the Court of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner
of Internal Revenue, was denied its day in court by reason of the mistakes and/or
negligence of its officials and employees. It can readily be gleaned from the records that
when it was herein petitioner's turn to present evidence, several postponements were
sought by its counsel, the Solicitor General, due to the unavailability of the necessary
records which were not transmitted by the Refund Audit Division of the BIR to said
counsel, as well as the investigation report made by the Banks/Financing and Insurance
Division of the said bureau/ despite repeated requests. 17 It was under such a
predicament and in deference to the tax court that ultimately, said records being still
unavailable, herein petitioner's counsel was constrained to submit the case for decision
on February 20, 1991 without presenting any evidence.
For that matter, the BIR officials and/or employees concerned also failed to heed the
order of the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule
7 of the Rules of the Court of Tax Appeals which provides that the Commissioner of
Internal Revenue and the Commissioner of Customs shall certify and forward to the Court
of Tax Appeals, within ten days after filing his answer, all the records of the case in his
possession, with the pages duly numbered, and if the records are in separate folders,
then the folders shall also be numbered.
The aforestated impassé came about due to the fact that, despite the filing of the
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals,
the Tax Refund Division of the BIR still continued to act administratively on the claim for
refund previously filed therein, instead of forwarding the records of the case to the Court
of Tax Appeals as ordered.18
It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents.19 In the performance of its governmental functions, the State
cannot be estopped by the neglect of its agent and officers. Although the Government
may generally be estopped through the affirmative acts of public officers acting within
their authority, their neglect or omission of public duties as exemplified in this case will
not and should not produce that effect.
Nowhere is the aforestated rule more true than in the field of taxation. 20 It is axiomatic
that the Government cannot and must not be estopped particularly in matters involving
taxes. Taxes are the lifeblood of the nation through which the government agencies
continue to operate and with which the State effects its functions for the welfare of its
constituents.21 The errors of certain administrative officers should never be allowed to
jeopardize the Government's financial position,22 especially in the case at bar where the
amount involves millions of pesos the collection whereof, if justified, stands to be
prejudiced just because of bureaucratic lethargy.
Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's
supplemental motion for reconsideration alleging bringing to said court's attention the
existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund and
at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the
facts stated therein are true and correct. The deficiency assessment, although not yet
final, created a doubt as to and constitutes a challenge against the truth and accuracy of
the facts stated in said return which, by itself and without unquestionable evidence,
cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment
is made in case of any list, statement, or return, which in the opinion of the Commissioner
of Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits
unless it is proved that the said list, statement, or return was not false nor fraudulent and
31
did not contain any understatement or undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith regarding annual depreciation of
oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax
due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved.23 This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden on
and a drain of government funds, and impede or delay the collection of much-needed
revenue for governmental operations.
will unhesitatingly react to any bane in the government service, with a replication of such
response being likewise expected by the people from the executive authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is
hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals for
further proceedings and appropriate action, more particularly, the reception of evidence
for petitioner and the corresponding disposition of CTA Case No. 4099 not otherwise
inconsistent with our adjudgment herein.
SO ORDERED.
Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to determine
once and for all in a single proceeding the true and correct amount of tax due or
refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only
just and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other's claim and to determine all matters
of dispute between them in one single case. It is important to note that in determining
whether or not petitioner is entitled to the refund of the amount paid, it would necessary
to determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer and, certainly,
a determination of this case would constitute res judicata on both parties as to all the
matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the
Government to lose its case in the tax court may hopefully be ascribed merely to the
ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself once again gives
substance to the public perception and suspicion that it is another proverbial tip in the
iceberg of venality in a government bureau which is pejoratively rated over the years.
What is so distressing, aside from the financial losses to the Government, is the erosion
of trust in a vital institution wherein the reputations of so many honest and dedicated
workers are besmirched by the acts or omissions of a few. Hence, the liberal view we
have here taken pro hac vice, which may give some degree of assurance that this Court

32
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
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.
33
Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.13 In fact, as the said court found,
the amount was earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation
of the Vegetable Oil Investment Corporation, inducing other persons to invest in
it.14 Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved.18
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made
as to how such payments were made, whether by check or in cash, and there is not
enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up the
total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement
was understandable, however, in view of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co. to
the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there
shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or
business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its
practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary
paid by a corporation may be a distribution of a dividend on stock. This is
likely to occur in the case of a corporation having few stockholders,
Practically all of whom draw salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not
paid wholly for services rendered, but the excessive payments are a
distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931,
30 O.G. No. 18, 325.)
34
It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove
the validity of the claimed deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has proved that the payment
of the fees was necessary and reasonable in the light of the efforts exerted by the payees
in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This
was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a

requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector, he
may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the
law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was
filed on time with the respondent court in accordance with Rep. Act No. 1125. And we
also find that the claimed deduction by the private respondent was permitted under the
Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in

toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

35
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-29059 December 15, 1987
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, cement was taxable as a manufactured product under Section
186, in connection with Section 194(4) of the said 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.
36
 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
37
 tax returns, in the same way that an income tax return cannot be SO ORDERED.
considered as a return for compensating tax for the purpose of
computing the period of prescription under Sec. 331. (Citing Bisaya Land Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur.
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.
38
 Republic of the Philippines reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and
SUPREME COURT Swiss Reinsurance Company stipulated that their contract shall be construed by the laws
Manila of the Philippines.

EN BANC Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the following premiums:
G.R. No. L-22074 April 30, 1965
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs. 1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or
Josue H. Gustilo and Ramirez and Ortigas for petitioner. pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of
Office of the Solicitor General and Attorney V.G. Saldajena for respondents. Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums, thus:
BENGZON, J.P., J.:
1953
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing Gross premium per investigation . . . . . . . . . . P768,580.00
business in the Philippines namely: Imperio Compañia de Seguros, La Union y El Fenix
Español, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Withholding tax due thereon at 24% . . . . . . . . P184,459.00
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance it Compromise for non-filing of withholding
100.00
has originally underwritten in the Philippines, in consideration for the assumption by the income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts
were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers
outside the Philippines, except the contract with Swiss Reinsurance Company, which was TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
signed by both parties in Switzerland. ==========
1954
The reinsurance contracts made the commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance. Gross premium per investigation . . . . . . . . . . P780.880.68
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks Withholding tax due thereon at 24% . . . . . . . . P184,411.00
ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered from 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering their affairs in the Compromise for non-filing of withholding
100.00
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
of the reinsurance premiums. Conflicts and/or differences between the parties under the
39

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not
subject to withholding tax. Its protest was denied and it appealed to the Court of Tax
Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive
portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine
Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum
of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner
of Internal Revenue's assessment for withholding tax on the reinsurance premiums ceded
in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising
from the original insurances in the Philippines were performed in the Philippines. The
liability of the foreign reinsurers commenced simultaneously with the liability of Philippine
Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in
Manila a register of the risks ceded to the foreign reinsurers. Entries made in such
register bound the foreign resinsurers, localizing in the Philippines the actual cession of
the risks and premiums and assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege
of doing insurance business in the Philippines were payable by the foreign reinsurers
when the same were not recoverable from the original assured. The foreign reinsurers
paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the latter of the affairs of the former
in the Philippines in regard to their reinsurance activities here. Disputes and differences
between the parties were subject to arbitration in the City of Manila. All the reinsurance
contracts, except that with Swiss Reinsurance Company, were signed by Philippine
Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same specifically provided that
its provision shall be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking,
as explained above, took place in the Philippines. These insurance premiums, therefore,
came from sources within the Philippines and, hence, are subject to corporate income
tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity
may consist of only a single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign corporation to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered
likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It
is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance premiums
in question were afforded protection by the government and the recipient foreign
40
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but
it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents. 3
In respect to the question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already been
answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And
since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding
tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships
(compañias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize
such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in
determining the amount to be withheld. According, in computing the withholding tax due
on the reinsurance premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc.
is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for
the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within 30
days from the date this judgement becomes final, there shall be collected a surcharged of
5% on the amount unpaid, plus interest at the rate of 1% a month from the date of
delinquency to the date of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a period of three (3)
years. With costs againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and
Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.
41
 Republic of the Philippines Amount
SUPREME COURT
Manila For the years 1982 to 1985 ₱8,280,696.00
For calendar year 1986 ₱2,481,975.60
FIRST DIVISION
Add : Surcharge ₱620,493.90 ₱3,102.469.50
G.R. No. 172509 February 4, 2015
₱11 ,383,165.50 6
CHINA BANKING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the
DECISION BIR. CBC raised the following defenses: (1) double taxation, as the bank had previously
paidthe DST on all its transactions involving sales of foreign bills of exchange to the
Central Bank; (2) absence of liability, as the liability for the DST in a sale of foreign
SERENO, CJ:
exchange through telegraphic transfers to the Central Bank falls on the buyer ―in this
case, the Central Bank; (3) due process violation, as the bank’s records were never
This Rule 45 Petition1 requires this Court to address the question of prescription of the formally examined by the BIR examiners; (4) validity of the assessment, as it did not
government's right to collect taxes. Petitioner China Banking Corporation (CBC) assails include the factual basis therefore; (5) exemption, as neither the taxexempt entity nor the
the Decision2 and Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA En other party was liable for the payment of DST before the effectivity of Presidential Decree
Banc Case No. 109. The CTA En Banc affirmed the Decision 4 in CTA Case No. 6379 of Nos. (PD) 1177 and 1931 for the years 1982 to 1986.7 In the protest, the taxpayer
the CTA Second Division, which had also affirmed the validity of Assessment No. FAS-5- requested a reinvestigation so as to substantiate its assertions.8
82/85-89-000586 and FAS-5-86-89-00587. The Assessment required petitioner CBC to
pay the amount of ₱11,383,165.50, plus increments accruing thereto, as deficiency
On 6 December 2001, more than 12 years after the filing of the protest, the
documentary stamp tax (DST) for the taxable years 1982 to 1986.
Commissioner of Internal Revenue (CIR) rendered a decision reiterating the deficiency
DST assessment and ordered the payment thereof plus increments within 30 days from
FACTS receipt of the Decision.9

Petitioner CBC is a universal bank duly organized and existing under the laws of the On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002,
Philippines. For the taxable years 1982 to 1986, CBC was engaged in transactions the CIR filed an Answer with a demand for CBC to pay the assessed DST.10
involving sales of foreign exchange to the Central Bank of the Philippines (now Bangko
Sentral ng Pilipinas), commonly known as SWAP transactions.5 Petitioner did not file tax
On 23 February 2005, and after trial on the merits, the CTA Second Division denied the
returns or pay tax on the SWAP transactions for those taxable years.
Petition of CBC. The CTA ruled that a SWAP arrangement should be treated as a
telegraphic transfer subject to documentary stamp tax.11
On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal
Revenue (BIR) finding CBC liable for deficiency DST on the sales of foreign bills of
On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied
exchangeto the Central Bank. The deficiency DST was computed as follows:
in a Resolution dated 14 July 2005.
Deficiency Documentary Stamp Tax

42
On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court,
however, dismissed the Petition for Review in a Decision dated 1 December 2005. CBC
filed a Motion for Reconsideration on 21 December 2005, but it was deniedin a 20 March
2006 Resolution.
The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the arguments it
raised at the CTA level and invoking for the first time the argument of prescription.
Petitioner CBC states that the government has three years from 19 April 1989, the date
the former received the assessment of the CIR, to collect the tax. Within that time frame,
however, neither a warrant of distraint or levy was issued, nor a collection case filed in
court.
On 17 October 2006, respondentCIR submitted its Comment in compliance with the
Court’s Resolution dated 26 June 2006.12 The Comment did not have any discussion on
the question of prescription.
On 21 February 2007, the Court issued a Resolution directing the parties to file their
respective Memoranda. Petitioner CBC filed its Memorandum 13 on 26 April 2007. The
CIR, on the other hand, filed on 17 April 2007 a Manifestation stating thatit was adopting
the allegations and authorities in its Comment in lieu of the required Memorandum.14
ISSUE
Given the facts and the arguments raised in this case, the resolution of this case hinges
on this issue: whether the right of the BIR to collect the assessed DST from CBC isbarred
by prescription.15
RULING OF THE COURT
We grant the Petition on the ground thatthe right of the BIR to collect the assessed DST
is barred by the statute of limitations.
Prescription Has Set In.
To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency
DST on 19 April 1989, whenthe applicable rule was Section 319(c) of the National
Internal Revenue Code of 1977, as amended.16 In that provision, the time limit for the
government to collect the assessed tax is set at three years, to be reckoned from the
date when the BIR mails/releases/sends the assessment notice to the taxpayer. Further,
Section 319(c) states that the assessed tax must be collected by distraint or levy and/or
court proceeding withinthe three-year period.
With these rules in mind, we shall now determine whether the claim of the BIR is barred
by time. In this case, the records do not show when the assessment notice was mailed,
released or sent to CBC. Nevertheless, the latest possible date that the BIR could have
released, mailed orsent the assessment notice was on the same date that CBC received
it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the BIR
had three years to collect the assessed DST. However, the records of this case show that
there was neither a warrant of distraint or levy servedon CBC's properties nor a collection
case filed in court by the BIR within the three-year period.
The attempt of the BIR to collect the tax through its Answer with a demand for CBC to
pay the assessed DST in the CTA on 11 March 2002 did not comply with Section 319(c)
ofthe 1977 Tax Code, as amended. The demand was made almost thirteen years from
the date from which the prescriptive period is to be reckoned. Thus, the attempt to collect
the tax was made way beyond the three-year prescriptive period.
The BIR’s Answer in the case filed before the CTA could not, by any means, have
qualified as a collection case as required by law. Under the rule prevailing at the time the
BIR filed itsAnswer, the regular courts, and not the CTA, had jurisdiction over
judicialactions for collection of internal revenue taxes. It was only on 23 April 2004, when
Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was expanded to
include, among others, original jurisdiction over collection cases in which the principal
amount involved is one million pesos or more. Consequently, the claim of the CIR for
deficiency DST from petitioner is forever lost, as it is now barred by time. This Court has
no other option but to dismiss the present case.
The running of the statute of limitations was not suspended by the request for
reinvestigation.
The fact that the taxpayer in this case may have requested a reinvestigation did not toll
the running of the three-year prescriptive period. Section 320 of the 1977 Tax Code
states:
Sec. 320. Suspension of running of statute.—The running of the statute of limitations
provided in Sections 318 or 319 on the making of assessment and the beginning of
distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is prohibited from making
the assessment or beginning distraint or levy or a proceeding in court and for sixty days
43
thereafter; when the taxpayer requests for a re-investigation which is granted by the
Commissioner;when the taxpayer cannot be located in the address given by him in the
return filed upon which a tax is being assessed or collected: Provided, That if the
taxpayer informs the Commissioner of any change in address, the running of the statute
of limitations will not be suspended; when the warrant of distraint and levy is duly served
upon the taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the taxpayer is out of
the Philippines. (Emphasis supplied)
The provision is clear. A request for reinvestigation alone will not suspend the statute of
limitations. Two things must concur: there must be a request for reinvestigation and the
CIR must have granted it. BPI v. Commissioner of Internal Revenue18 emphasized this
rule by stating:
In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for
a thorough reinvestigation of the assessment against him and placed at the disposal of
the Collector of Internal Revenue all the [evidence] he had for such purpose; yet, the
Collector ignored the request, and the records and documents were not at all examined.
Considering the given facts, this Court pronounced that—
x x x. The act of requesting a reinvestigation alone does not suspend the period. The
request should first be granted, in order to effect suspension. (Collector v. Suyoc
Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector
gaveappellee until April 1, 1949, within which to submit his evidence, which the latter did
one day before. There were no impediments on the part of the Collector to file the
collection case from April 1, 1949 x x x.
In Republic of the Philippines v. Acebedo, this Court similarly found that —
. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked
for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There is no evidence that
this request was considered or acted upon. In fact, on October 23, 1950 the then
Collector of Internal Revenue issued a warrant of distraint andlevy for the full amount of
the assessment (Exh. "D"), but there was follow-up of this warrant. Consequently, the
request for reinvestigation did not suspend the running of the period for filing an action for
collection. (Emphasis in the original)
The Court went on to declare thatthe burden of proof that the request for reinvestigation
had been actually granted shall be on the CIR. Such grant may be expressed in its
communications with the taxpayer or implied from the action of the CIR orhis authorized
representative in response to the request for reinvestigation.
There is nothing in the records of this case which indicates, expressly or impliedly, that
the CIR had granted the request for reinvestigation filed by BPI. What is reflected in the
records is the piercing silence and inaction of the CIR on the request for reinvestigation,
as he considered BPI's letters of protest to be.
In the present case, there is no showing from the records that the CIR ever granted the
request for reinvestigation filed by CBC. That being the case, it cannot be said that the
running of the three-year prescriptive period was effectively suspended.
Failure to raise prescription at the administrative level/lower court as a defense is of no
moment.
When the pleadings or the evidence on record show that the claim is barred by
prescription, the court must dismiss the claim even if prescription is not raised as a
defense.
We note that petitioner has raised the issue of prescription for the first time only before
this Court.While we are mindful of the established rule of remedial law that the defense of
prescription must be raised at the trial court that has also been applied for tax
cases.19 Thus, as a rule, the failure to raise the defense of prescription at the
administrative level prevents the taxpayer from raising it at the appeal stage.
This rule, however, is not absolute.
The facts of the present case are substantially identical to those in the 2014 case, Bank
of the Philippine Islands (BPI) v. Commissioner of Internal Revenue.20 In that case,
petitioner received an assessment notice from the BIR for deficiency DST based on
petitioner’s SWAP transactions for the year 1985 on 16 June 1989. On 23 June 1989,
BPI, through its counsel, filed a protest requesting the reinvestigation and/or
reconsideration of the assessment for lack of legal or factual bases. Almost ten years
later, the CIR, in a letter dated 4 August 1998, deniedthe protest. On 4 January 1999, BPI
filed a Petition for Review with the CTA. On 23 February 1999,the CIR filed an Answer
with a demand for BPI to pay the assessed DST. It was only when the case ultimately
reached this Court that the issue of prescription was brought up. Nevertheless, the Court
ruled that the CIR could no longer collect the assessed tax due to prescription. Basing its
ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as
follows:
44
In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the
assailed tax assessment may be invalidated because the statute of limitations on the
collection of the alleged deficiency DST had already expired, conformably with Section 1,
Rule 9 of the Rules of Court and the Bank of the Philippine Islands v. Commissioner of
Internal Revenue decision. However, to afford due process, the Court required both BPI
and CIR to submit their respective comments on the issue of prescription.
Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues
that the issue of prescription cannot be raised for the first time on appeal. The CIR further
alleges that even assuming that the issue of prescription can be raised, the protest letter
interrupted the prescriptive period to collect the assessed DST, unlike in the Bank of the
Philippine Islands case. x x x x
We deny the right of the BIR to collect the assessed DST on the ground of prescription.
Section 1, Rule 9 of the Rules of Court expressly provides that:
Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the same parties for
the same cause, or that the action is barred by prior judgment or by the statute of
limitations, the court shall dismiss the claim.
If the pleadings or the evidence on record show that the claim is barred by prescription,
the court is mandated to dismiss the claim even if prescription is not raised as a
defense.In Heirs of Valientes v. Ramas,we ruled that the CA may motu propriodismiss
the case on the ground of prescription despite failure to raise this ground on appeal. The
court is imbued with sufficient discretion to review matters, not otherwise assigned as
errors on appeal, if it finds that their consideration is necessary in arriving at a complete
and just resolution of the case. More so, when the provisions on prescription were
enacted to benefit and protect taxpayers from investigation after a reasonable period of
time.
Thus, we proceed to determine whether the period to collect the assessed DST for the
year 1985 has prescribed.
To determine prescription, what is essential only is that the facts demonstrating the lapse
of the prescriptive period were sufficiently and satisfactorily apparent on the record either
in the allegations of the plaintiff’s complaint, or otherwise established by the evidence.
Under the then applicable Section 319(c) [now, 222(c)] of the National Internal Revenue
Code (NIRC) of 1977, as amended, any internal revenue tax which has been assessed
within the period of limitation may be collected by distraint or levy, and/or court
proceeding within three years following the assessment of the tax. The assessment of the
tax is deemed made and the three-year period for collection of the assessed tax begins
to run on the date the assessment notice had been released, mailed or sent by the BIR to
the taxpayer.
In the present case, although there was no allegation as to when the assessment notice
had been released, mailed or sent to BPI, still, the latest date that the BIR could have
released, mailed or sent the assessment notice was on the date BPI received the same
on 16 June 1989. Counting the three-year prescriptive period from 16 June 1989, the BIR
had until 15 June 1992 to collect the assessed DST.But despite the lapse of 15 June
1992, the evidence established that there was no warrant of distraint or levy served on
BPI’s properties, or any judicial proceedings initiated by the BIR.
The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA
on 23 February 1999, which was several years beyond the three-year prescriptive period.
However, the BIR’s answer in the CTA was not the collection case contemplated by the
law. Before 2004 or the year Republic Act No. 9282 took effect, the judicial action to
collect internal revenue taxes fell under the jurisdiction of the regular trial courts, and not
the CTA. Evidently, prescription has set in to bar the collection of the assessed DST.
(Emphasis supplied)
BPI thus provides an exception to the rule against raising the defense of prescription for
the first timeon appeal: the exception arises when the pleadings or the evidence on
record show that the claim is barred by prescription.
In this case, the fact that the claim of the government is time-barred is a matter of record.
As can be seen from the previous discussion on the determination of the prescription of
the right of the government to claim deficiency DST, the conclusion that prescription has
set in was arrived at using the evidence on record. The date of receipt of the assessment
notice was not disputed, and the date of the attempt to collect was determined by merely
checking the records as to when the Answer of the CIR containing the demand to pay the
tax was filed.
Estoppel or waiver prevents the government from invoking the rule against raising the
issue of prescription for the first time on appeal.
In this case, petitioner may have raised the question of prescription only on appeal to this
Court. The BIR could have crushed the defense by the mere invocation of the rule
45
against setting up the defense of prescription only at the appeal stage. The government, Inasmuch as the government's claim for deficiency DST is barred by prescription, it is no
however, failed to do so. On the contrary, the BIR was silent despite having the longer necessary to dwell on the validity of the assessment.
opportunity to invoke the bar against the issue of prescription. It is worthy of note that the
Court ordered the BIR to file a Comment. The government, however, did not offer any WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision
argument in its Comment about the issue of prescription, even if petitioner raised it in the dated 1 December 2005 and its Resolution dated 20 March 2006 in CTA EB Case No.
latter’s Petition. It merely fell silent on the issue. It was given another opportunity to 109 are hereby REVERSED and SET ASIDE. A new ruling is entered DENYING
meetthe challenge when this Court ordered both parties to file their respective respondent's claim for deficiency DST in the amount of ₱11,383, 165.50.
memoranda. The CIR, however, merely filed a Manifestation thatit would no longer be
filing a Memorandum and, in lieu thereof,it would be merely adopting the arguments SO ORDERED.
raised in its Comment. Its silence spoke loudly of its intent to waive its right to object to
the argument of prescription.
MARIA LOURDES P.A. SERENO
Chief Justice
We are mindful of the rule in taxation that estoppeldoes not prevent the government from Chairperson
collecting taxes; it is not bound by the mistake or negligence of its agents. The rule
isbased on the political law concept "the king can do no wrong,"21 which likens a state to
a king: it does not commit mistakes, and it does not sleep on its rights. The analogy
fosters inequality between the taxpayer and the government, with the balance tilting in
favor of the latter. This concept finds justification in the theory and reality that government
is necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or
negligence of government officials should not bind the state, lest it bring harm to the
government and ultimately the people, in whom sovereignty resides.22

Republic v. Ker & Co. Ltd.23 involved a collection case for afinal and executory
assessment. The taxpayer nevertheless raised the prescription of the right to assess the
tax as a defense before the Court of First Instance. The Republic, instead of objecting to
the invocation of prescription as a defense by the taxpayer, litigated on the issue and
thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer, treating
the actuations of the government as a waiver of the right to invoke the defense of
prescription. Ker effectively applied to the government the rule of estoppel. Indeed, the
no-estoppel rule is not absolute.

The same ingredients in Ker - procedural matter and injustice -obtain in this case. The
procedural matter consists in the failure to raise the issue of prescription at the trial
court/administrative level, and injustice in the fact that the BIR has unduly delayed the
assessment and collection of the DST in this case. The fact is that it took more than 12
years for it to take steps to collect the assessed tax. The BIR definitely caused untold
prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable
for DST and, if so, for how much.

CONCLUSION

46
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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
47
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
48
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.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado and Davide, Jr., JJ.,
concur.
49
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 167330 June 12, 2008
PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore subject to
the documentary stamp tax (DST) imposed under Section 185 of Republic Act 8424 (Tax
Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it affirmatively in
its August 16, 2004 decision1 in CA-G.R. SP No. 70479. Petitioner Philippine Health Care
Providers, Inc. believes otherwise and assails the CA decision in this petition for review
under Rule 45 of the Rules of Court.
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization."2 Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.3
The pertinent part of petitioner's membership or health care agreement 4 provides:
VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on claims
for reimbursement] of this Agreement, Members shall have the following Benefits
under this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or suffers
injury which requires confinement in a participating Hospital[,] the services or
benefits stated below shall be provided to the Member free of charge, but in no
case shall [petitioner] be liable to pay more than P75,000.00 in benefits with
respect to anyone sickness, injury or related causes. If a member has exhausted
such maximum benefits with respect to a particular sickness, injury or related
causes, all accounts in excess of P75,000.00 shall be borne by the enrollee. It
is[,] however, understood that the payment by [petitioner] of the said maximum in
In-Patient Benefits to any one member shall preclude a subsequent payment of
benefits to such member in respect of an unrelated sickness, injury or related
causes happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are
used to dissolve blood clots in the vascular systems (i.e., trombolytic
agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
50
Condition for in-Patient Care. The provision of the services or benefits (vi) Urinalysis
mentioned in the immediately preceding paragraph shall be subject to the
following conditions: (vii) Fasting Blood Sugar (FBS)

(a) The Hospital Confinement must be approved by [petitioner's] (viii) SGPT

Physician, Participating Physician or [petitioner's] Medical Coordinator in
that Hospital prior to confinement. (ix) Creatinine

(b) The confinement shall be in a Participating Hospital and the

(x) Uric Acid
accommodation shall be in accordance with the Member[']s benefit
classification.
(xi) Resting Electrocardiogram
(c) Professional services shall be provided only by the [petitioner's]
Physicians or Participating Physicians. (xii) Pap Smear (Optional for women 40 years and above)

(d) If discharge from the Hospital has been authorized by [petitioner's] (b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical
attending Physician or Participating Physician and the Member shall fail Examination.
or refuse to do so, [petitioner] shall not be responsible for any charges
incurred after discharge has been authorized. The following tests are to be done as part of the Member[']s Annual
check-up program at [petitioner's] designated clinic, to wit:
Out-Patient Services. A Member is entitled free of charge to the following
services or benefits which shall be rendered or administered either in 1) Routine Physical Examination
[petitioner's] Clinic or in a Participating Hospital under the direction or supervision
of [petitioner's] Physician, Participating Physician or [petitioner's] Medical 2) CBC (Complete Blood Count)
Coordinator.
* Hemoglobin * Hematocrit
(a) Gold Plan Standard Annual Physical Examination on the anniversary
date of membership, to be done at [petitioner's] designated * Differential * RBC/WBC
hospital/clinic, to wit:
3) Chest X-ray
(i) Taking a medical history
4) Urinalysis
(ii) Physical examination
5) Fecalysis
(iii) Chest x-ray
(c) Preventive Health Care, which shall include:
(iv) Stool examination
(i) Periodic Monitoring of Health Problems
(v) Complete Blood Count
51
 (ii) Family planning counseling On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner a
formal demand letter and the corresponding assessment notices demanding the payment
(iii) Consultation and advices on diet, exercise and other healthy of deficiency taxes, including surcharges and interest, for the taxable years 1996 and
habits 1997 in the total amount of P224,702,641.18. The assessment represented the following:

(iv) Immunization but excluding drugs for vaccines used Value Added Tax DST
(VAT)
(d) Out-Patient Care, which shall include: 1996 P 45,767,596.23 P 55,746,352.19
1997 54,738,434.03 68,450,258.73
(i) Consultation, including specialist evaluation P 100,506,030.26 P 124,196,610.92

(ii) Treatment of injury or illness The deficiency DST assessment was imposed on petitioner's health care agreement with
the members of its health care program pursuant to Section 185 of the 1997 Tax Code
(iii) Necessary x-ray and laboratory examination which provides:

(iv) Emergency medicines needed for the immediate Section 185. Stamp tax on fidelity bonds and other insurance policies. - On all
policies of insurance or bonds or obligations of the nature of indemnity for
relief of symptoms loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employer's liability, plate, glass, steam boiler, burglar, elevator, automatic
(v) Minor surgery not requiring confinement
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for the
Emergency Care. Subject to the conditions and limitations in this Agreement and performance of the duties of any office or position, for the doing or not doing of
those specified below, a Member is entitled to receive emergency care [in case of anything therein specified, and on all obligations guaranteeing the validity or
emergency. For this purpose, all hospitals and all attending physician(s) in the legality of any bond or other obligations issued by any province, city, municipality,
Emergency Room automatically become accredited. In participating hospitals, or other public body or organization, and on all obligations guaranteeing the title
the member shall be entitled to the following services free of charge: (a) doctor's to any real estate, or guaranteeing any mercantile credits, which may be made or
fees, (b) emergency room fees, (c) medicines used for immediate relief and renewed by any such person, company or corporation, there shall be collected a
during treatment, (d) oxygen, intravenous fluids and whole blood and human documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or
blood products, (e) dressings, casts and sutures and (f) x-rays, laboratory and fractional part thereof, of the premium charged. (emphasis supplied)
diagnostic examinations and other medical services related to the emergency
treatment of the patient.]5 Provided, however, that in no case shall the total
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent
amount payable by [petitioner] for said Emergency, inclusive of hospital bill and
did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals
professional fees, exceed P75,000.00.
(CTA) seeking the cancellation of the deficiency VAT and DST assessments.
If the Member received care in a non-participating hospital, [petitioner] shall
On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:
reimburse [him]6 80% of the hospital bill or the amount of P5,000.00[,] whichever
is lesser, and 50% of the professional fees of non-participating physicians based
on [petitioner's] schedule of fees provided that the total amount[,] inclusive of WHEREFORE, in view of the foregoing, the instant Petition for Review is
hospital bills and professional fee shall not exceed P5,000.00. PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency
52
 VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January
20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No.
[231]-88 is declared void and without force and effect. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST
deficiency tax.
SO ORDERED.8
Respondent appealed the CTA decision to the CA9 insofar as it cancelled the DST
assessment. He claimed that petitioner's health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision.10 It held that petitioner's health care
agreement was in the nature of a non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of
Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from
collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19
and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per annum
from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until
the same shall have been fully paid.
SO ORDERED.11
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of insurance
but a contract for the provision on a prepaid basis of medical services, including medical
check-up, that are not based on loss or damage. Petitioner also insists that it is not
engaged in the insurance business. It is a health maintenance organization regulated by
the Department of Health, not an insurance company under the jurisdiction of the
Insurance Commission. For these reasons, petitioner asserts that the health care
agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law for
the creation, revision, or termination of specific legal relationships through the execution
of specific instruments.12 It is an excise upon the privilege, opportunity, or facility offered
at exchanges for the transaction of the business.13 In particular, the DST under Section
185 of the 1997 Tax Code is imposed on the privilege of making or renewing any
policy of insurance (except life, marine, inland and fire insurance), bond or
obligation in the nature of indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.14 The event insured against must be designated in the
contract and must either be unknown or contingent.15
Petitioner's health care agreement is primarily a contract of indemnity. And in the recent
case of Blue Cross Healthcare, Inc. v. Olivares,16 this Court ruled that a health care
agreement is in the nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the provision
of medical services. Petitioner does not actually provide medical or hospital services but
merely arranges for the same17 and pays for them up to the stipulated maximum amount
of coverage. It is also incorrect to say that the health care agreement is not based on loss
or damage because, under the said agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related expenses (such as professional
fees of physicians). The term "loss or damage" is broad enough to cover the monetary
expense or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of so-
called "out-patient services" (including physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and family planning counseling) is the
contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
53
prepaid. The expenses to be incurred by each member cannot be predicted beforehand,
if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the
services even if they are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency documentary stamp tax for 1996 and 1997, respectively, plus 25% surcharge
for late payment and 20% interest per annum from January 27, 2000 until full payment
thereof.
Costs against petitioner.

Petitioner's health care agreement is substantially similar to that involved in Philamcare SO ORDERED.
Health Systems, Inc. v. CA.18 The health care agreement in that case entitled the
subscriber to avail of the hospitalization benefits, whether ordinary or emergency, listed Puno, C.J., Chairperson, Carpio, Azcuna, Leonardo-de Castro, JJ., concur.
therein. It also provided for "out-patient benefits" such as annual physical examinations,
preventive health care and other out-patient services. This Court ruled in Philamcare
Health Systems, Inc.:

[T]he insurable interest of [the subscriber] in obtaining the health care agreement
was his own health. The health care agreement was in the nature of non-life
insurance, which is primarily a contract of indemnity. Once the member
incurs hospital, medical or any other expense arising from sickness, injury or
other stipulated contingency, the health care provider must pay for the same to
the extent agreed upon under the contract.19 (emphasis supplied)

Similarly, the insurable interest of every member of petitioner's health care program in
obtaining the health care agreement is his own health. Under the agreement, petitioner is
bound to indemnify any member who incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingency to the extent agreed upon
under the contract.

Petitioner's contention that it is a health maintenance organization and not an insurance

company is irrelevant. Contracts between companies like petitioner and the beneficiaries
under their plans are treated as insurance contracts.20

Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity, or facility offered at exchanges for the transaction of the business.21 It is an
excise on the facilities used in the transaction of the business, separate and apart
from the business itself.22

WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the Court
of Appeals in CA-G.R. SP No. 70479 is AFFIRMED.

54
 EN BANC
[G.R. No. L-9408. October 31, 1956.]
EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, Respondents.
DECISION
BAUTISTA ANGELO, J.:
On March 31, 1952, Petitioner filed his income tax return for 1951 with the treasurer of
Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a
deductible item from his gross income pursuant to General Circular No. V-123 issued by
the Collector of Internal Revenue. This circular was issued pursuant to certain rules laid
down by the Secretary of Finance On the basis of said return, an assessment notice
demanding the payment of P9,419 was sent to Petitioner, who paid the tax in monthly
installments, the last payment having been made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal
Revenue, issued General Circular No. V-139 which not only revoked and declared void his
general Circular No. V- 123 but laid down the rule that losses of property which occurred
during the period of World War II from fires, storms, shipwreck or other casualty, or from
robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of
said property. As a consequence, the amount of P12,837.65 was disallowed as a deduction
from the gross income of Petitioner for 1951 and the Collector of Internal Revenue
demanded from him the payment of the sum of P3,546 as deficiency income tax for said
year. When the petition for reconsideration filed by Petitioner was denied, he filed a petition
for review with the Court of Tax Appeals. In due time, this court rendered decision affirming
the assessment made by Respondent Collector of Internal Revenue. This is an appeal
from said decision.
It appears that Petitioner claimed in his 1951 income tax return the deduction of the sum
of P12,837.65 as a loss consisting in a portion of his war damage claim which had been
duly approved by the Philippine War Damage Commission under the Philippine
Rehabilitation Act of 1946 but which was not paid and never has been paid pursuant to a
notice served upon him by said Commission that said part of his claim will not be paid until
the United States Congress should make further appropriation. He claims that said amount
of P12,837.65 represents a “business asset” within the meaning of said Act which he is
entitled to deduct as a loss in his return for 1951. This claim is untenable.
To begin with, assuming that said a mount represents a portion of the 75% of his war
damage claim which was not paid, the same would not be deductible as a loss in 1951
because, according to Petitioner, the last installment he received from the War Damage
Commission, together with the notice that no further payment would be made on his claim,
was in 1950. In the circumstance, said amount would at most be a proper deduction from
his 1950 gross income. In the second place, said amount cannot be considered as a
“business asset” which can be deducted as a loss in contemplation of law because its
collection is not enforceable as a matter of right, but is dependent merely upon the
generosity and magnanimity of the U. S. government. Note that, as of the end of 1945,
there was absolutely no law under which Petitioner could claim compensation for the
destruction of his properties during the battle for the liberation of the Philippines. And under
the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage
Commission merely depended upon its discretion to be exercised in the manner it may see
fit, but the non-payment of which cannot give rise to any enforceable right, for, under said
Act, “All findings of the Commission concerning the amount of loss or damage sustained,
the cause of such loss or damage, the persons to whom compensation pursuant to this title
is payable, and the value of the property lost or damaged, shall be conclusive and shall not
be reviewable by any court”. (section 113).
It is true that under the authority of section 338 of the National Internal Revenue Code the
Secretary of Finance, in the exercise of his administrative powers, caused the issuance of
General Circular No. V-123 as an implementation or interpretative regulation of section 30
of the same Code, under which the amount of P12,837.65 was allowed to be deducted “in
the year the last installment was received with notice that no further payment would be
made until the United States Congress makes further appropriation therefor”, but such
circular was found later to be wrong and was revoked. Thus, when doubts arose as to the
soundness or validity of such circular, the Secretary of Finance sought the advice of the
Secretary of Justice who, accordingly, gave his opinion the pertinent portion of which reads
as follows:chanroblesvirtuallawlibrary
“Yet it might be argued that war losses were not included as deductions for the year when
they were sustained because the taxpayers had prospects that losses would be
compensated for by the United States Government; chan roblesvirtualawlibrarythat since
only uncompensated losses are deductible, they had to wait until after the determination
by the Philippine War Damage Commission as to the compensability in part or in whole of
their war losses so that they could exclude from the deductions those compensated for by
the said Commission; chan roblesvirtualawlibraryand that, of necessity, such determination
could be complete only much later than in the year when the loss was sustained. This
contention falls to the ground when it is considered that the Philippine Rehabilitation Act
which authorized the payment by the United States Government of war losses suffered by
property owners in the Philippines was passed only on August 30, 1946, long after the
losses were sustained. It cannot be said therefore, that the property owners had any
conclusive assurance during the years said losses were sustained, that the compensation
was to be paid therefor. Whatever assurance they could have had, could have been based
55
only on some information less reliable and less conclusive than the passage of the Act the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or
itself. Hence, as diligent property owners, they should adopt the safest alternative by previous rulings of his predecessor in office because the construction of a statute by those
considering such losses deductible during the year when they were sustained.” administering it is not binding on their successors if thereafter the latter become satisfied
that a different construction should be given. [Association of Clerical Employees vs.
In line with this opinion, the Secretary of Finance, through the Collector of Internal
Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]
Revenue, issued General Circular No. V-139 which not only revoked and declared void his
previous Circular No. V — 123 but laid down the rule that losses of property which occurred “When the Commissioner determined in 1937 that the Petitioner was not exempt and never
during the period of World War II from fires, storms, shipwreck or other casualty, or from had been, it was his duty to determine, assess and collect the tax due for all years not
robbery, theft, or embezzlement are deductible for income tax purposes in the year of barred by the statutes of limitation. The conclusion reached and announced by his
actual destruction of said property. We can hardly argue against this opinion. Since we predecessor in 1924 was not binding upon him. It did not exempt the Petitioner from tax,
have already stated that the amount claimed does not represent a “business asset” that This same point was decided in this way in Stanford University Bookstore, 29 B. T. A.,
may be deducted as a loss in 1951, it is clear that the loss of the corresponding asset or 1280; chan roblesvirtualawlibraryaffd., 83 Fed. (2d) 710.” (Southern Maryland Agricultural
property could only be deducted in the year it was actually sustained. This is in line with Fair Association vs. Commissioner of Internal Revenue, 40 B. T. A., 549, 554).
section 30 (d) of the National Internal Revenue Code which prescribes that losses
With regard to the contention that General Circular No. V-139 cannot be given retroactive
sustained are allowable as deduction only within the corresponding taxable year.
effect because that would affect and obliterate the vested right acquired by Petitioner under
Petitioner’s contention that during the last war and as a consequence of enemy occupation the previous circular, suffice it to say that General Circular No. V-123, having been issued
in the Philippines “there was no taxable year” within the meaning of our internal revenue on a wrong construction of the law, cannot give rise to a vested right that can be invoked
laws because during that period they were unenforceable, is without merit. It is well known by a taxpayer. The reason is obvious:chanroblesvirtuallawlibrary a vested right cannot
that our internal revenue laws are not political in nature and as such were continued in spring from a wrong interpretation. This is too clear to require elaboration.
force during the period of enemy occupation and in effect were actually enforced by the
“It seems too clear for serious argument that an administrative officer cannot change a law
occupation government. As a matter of fact, income tax returns were filed during that period
enacted by Congress. A regulation that is merely an interpretation of the statute when once
and income tax payment were effected and considered valid and legal. Such tax laws are
determined to have been erroneous becomes nullity. An erroneous construction of the law
deemed to be the laws of the occupied territory and not of the occupying enemy.
by the Treasury Department or the collector of internal revenue does not preclude or estop
“Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once the government from collecting a tax which is legally due.” (Ben Stocker, et al., 12 B. T. A.,
established continues until changed by some competent legislative power. It is not changed 1351.)
merely by change of sovereignty.’ (Joseph H. Beale, Cases on Conflict of Laws, III,
“Art. 2254. — No vested or acquired right can arise from acts or omissions which are
Summary section 9, citing Commonwealth vs. Chapman, 13 Met., 68.) As the same author
against the law or which infringe upon the rights of others.” (Article 2254, New Civil Code.)
says, in his Treatise on the Conflict of Laws (Cambridge, 1916, section
131):chanroblesvirtuallawlibrary ‘There can be no break or interregnun in law. From the Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.
time the law comes into existence with the first-felt corporateness of a primitive people it
Paras, C.J., Padilla, Montemayor, Labrador, Concepcion, Reyes, J. B. L., Endencia
must last until the final disappearance of human society. Once created, it persists until a
change takes place, and when changed it continues in such changed condition until the and Felix, JJ., concur.
next change and so forever. Conquest or colonization is impotent to bring law to an
end; chan roblesvirtualawlibraryinspite of change of constitution, the law continues
unchanged until the new sovereign by legislative act creates a change.’“ (Co Kim Chan vs.
Valdes Tan Keh and Dizon, 75 Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General Circular No. V-
123 is vested exclusively in our courts in view of the principle of separation of powers and,
therefore, the Secretary of Finance acted without valid authority in revoking it and
approving in lieu thereof General Circular No. V-139. It cannot be denied, however, that
56
 Republic of the Philippines WHEREAS, the latest general revision of real property assessments
SUPREME COURT completed in 1984 has rendered the 1978 revised values obsolete;
Manila
WHEREAS, the collection of real property taxes based on the 1984 real
EN BANC property values was deferred to take effect on January 1, 1988 instead of
January 1, 1985, thus depriving the local government units of an
G.R. No. 76778 June 6, 1990 additional source of revenue;

FRANCISCO I. CHAVEZ, petitioner, WHEREAS, there is an urgent need for local governments to augment
vs. their financial resources to meet the rising cost of rendering effective
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in services to the people;
her capacity as Acting Municipal Treasurer of the Municipality of Las Piñas,
respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, NOW, THEREFORE, I. CORAZON C. AQUINO, President of the
INC., petitioner-intervenor. Philippines, do hereby order:

Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and
Oppression (Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners
Association.
SECTION 1. Real property values as of December 31, 1984 as
determined by the local assessors during the latest general revision of
assessments shall take effect beginning January 1, 1987 for purposes of
real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules
and regulations to implement this Executive Order.

MEDIALDEA, J.: SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby
repealed.
The petition seeks to declare unconstitutional Executive Order No. 73 dated November
25, 1986, which We quote in full, as follows (78 O.G. 5861): SEC. 4. All laws, orders, issuances, and rules and regulations or parts
thereof inconsistent with this Executive Order are hereby repealed or
modified accordingly.
EXECUTIVE ORDER No. 73

SEC. 5. This Executive Order shall take effect immediately.

PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES
BASED ON THE 1984 REAL PROPERTY VALUES, AS PROVIDED
FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE, AS On March 31, 1987, Memorandum Order No. 77 was issued suspending the
AMENDED implementation of Executive Order No. 73 until June 30, 1987.

WHEREAS, the collection of real property taxes is still based on the 1978
revision of property values;
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land.
He alleges the following: that Executive Order No. 73 accelerated the application of the
general revision of assessments to January 1, 1987 thereby mandating an excessive
increase in real property taxes by 100% to 400% on improvements, and up to 100% on
57
land; that any increase in the value of real property brought about by the revision of real
property values and assessments would necessarily lead to a proportionate increase in
real property taxes; that sheer oppression is the result of increasing real property taxes at
a period of time when harsh economic conditions prevail; and that the increase in the
market values of real property as reflected in the schedule of values was brought about
only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the
national association of owners-lessors, joins Chavez in his petition to declare
unconstitutional Executive Order No. 73, but additionally alleges the following: that
Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional one
percent (1%) tax on all property owners to raise funds for education, as real property tax
is admittedly a local tax for local governments; that the General Revision of Assessments
does not meet the requirements of due process as regards publication, notice of hearing,
opportunity to be heard and insofar as it authorizes "replacement cost" of buildings
(improvements) which is not provided in Presidential Decree No. 464, but only in an
administrative regulation of the Department of Finance; and that the Joint Local
Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and
unconstitutional as it imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order
No. 73 insofar as the revision of the assessments and the effectivity thereof are
concerned. It should be emphasized that Executive Order No. 73 merely directs, in
Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as
determined by the local assessors during the latest general revision of
assessments shall take effect beginning January 1, 1987 for purposes of
real property tax collection. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of
Presidential Decree No. 464 which provides, as follows:
SEC. 21. General Revision of Assessments. — Beginning with the
assessor shall make a calendar year 1978, the provincial or city general
revision of real property assessments in the province or city to take effect
January 1, 1979, and once every five years thereafter: Provided;
however, That if property values in a province or city, or in any
municipality, have greatly changed since the last general revision, the
provincial or city assesor may, with the approval of the Secretary of
Finance or upon bis direction, undertake a general revision of
assessments in the province or city, or in any municipality before the fifth
year from the effectivity of the last general revision.
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order
No. 73 has no legal basis as the general revision of assessments is a continuing process
mandated by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree
No. 464 which should be challenged as constitutionally infirm. However, Chavez failed to
raise any objection against said decree. It was ROAP which questioned the
constitutionality thereof. Furthermore, Presidential Decree No. 464 furnishes the
procedure by which a tax assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. — Any owner who is not
satisfied with the action of the provincial or city assessor in the
assessment of his property may, within sixty days from the date of
receipt by him of the written notice of assessment as provided in this
Code, appeal to the Board of Assessment Appeals of the province or
city, by filing with it a petition under oath using the form prescribed for the
purpose, together with copies of the tax declarations and such affidavit or
documents submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. — The
Local Board of Assessment Appeals shall decide the appeal within one
hundred and twenty days from the date of receipt of such appeal. The
decision rendered must be based on substantial evidence presented at
the hearing or at least contained in the record and disclosed to the
parties or such relevant evidence as a reasonable mind might accept as
adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the
power to summon witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue subpoena and subpoena duces
tecum. The proceedings of the Board shall be conducted solely for the
58
purpose of ascertaining the truth without-necessarily adhering to
technical rules applicable in judicial proceedings.
The Secretary of the Board shall furnish the property owner and the
Provincial or City Assessor with a copy each of the decision of the Board.
In case the provincial or city assessor concurs in the revision or the
assessment, it shall be his duty to notify the property owner of such fact
using the form prescribed for the purpose. The owner or administrator of
the property or the assessor who is not satisfied with the decision of the
Board of Assessment Appeals, may, within thirty days after receipt of the
decision of the local Board, appeal to the Central Board of Assessment
Appeals by filing his appeal under oath with the Secretary of the proper
provincial or city Board of Assessment Appeals using the prescribed form
stating therein the grounds and the reasons for the appeal, and attaching
thereto any evidence pertinent to the case. A copy of the appeal should
be also furnished the Central Board of Assessment Appeals, through its
Chairman, by the appellant.
Within ten (10) days from receipt of the appeal, the Secretary of the
Board of Assessment Appeals concerned shall forward the same and all
papers related thereto, to the Central Board of Assessment Appeals
through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. — The Central Board of
Assessment Appeals shall have jurisdiction over appealed assessment
cases decided by the Local Board of Assessment Appeals. The said
Board shall decide cases brought on appeal within twelve (12) months
from the date of receipt, which decision shall become final and executory
after the lapse of fifteen (15) days from the date of receipt of a copy of
the decision by the appellant.
In the exercise of its appellate jurisdiction, the Central Board of
Assessment Appeals, or upon express authority, the Hearing
Commissioner, shall have the power to summon witnesses, administer
oaths, take depositions, and issue subpoenas and subpoenas duces
tecum.
The Central Board of assessment Appeals shall adopt and promulgate
rules of procedure relative to the conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of
assessment, any owner who doubts the assessment of his property, may appeal to the
Local Board of Assessment Appeals. In case the, owner or administrator of the property
or the assessor is not satisfied with the decision of the Local Board of Assessment
Appeals, he may, within thirty days from the receipt of the decision, appeal to the Central
Board of Assessment Appeals. The decision of the Central Board of Assessment Appeals
shall become final and executory after the lapse of fifteen days from the date of receipt of
the decision.
Chavez argues further that the unreasonable increase in real property taxes brought
about by Executive Order No. 73 amounts to a confiscation of property repugnant to the
constitutional guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al.
v. Mayor of Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v.
Ancheta, et al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process
requirement called for therein applies to the "power to tax." Executive Order No. 73 does
not impose new taxes nor increase taxes.
Indeed, the government recognized the financial burden to the taxpayers that will result
from an increase in real property taxes. Hence, Executive Order No. 1019 was issued on
April 18, 1985, deferring the implementation of the increase in real property taxes
resulting from the revised real property assessments, from January 1, 1985 to January 1,
1988. Section 5 thereof is quoted herein as follows:
SEC. 5. The increase in real property taxes resulting from the revised
real property assessments as provided for under Section 21 of
Presidential Decree No. 464, as amended by Presidential Decree No.
1621, shall be collected beginning January 1, 1988 instead of January 1,
1985 in order to enable the Ministry of Finance and the Ministry of Local
Government to establish the new systems of tax collection and
assessment provided herein and in order to alleviate the condition of the
people, including real property owners, as a result of temporary
economic difficulties. (emphasis supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore
59
repealed Executive Order No. 1019, also finds ample justification in its "whereas' clauses, Padilla, J., took no part.
as follows:
Griño-Aquino, J., is on leave.
WHEREAS, the collection of real property taxes based on the 1984 real
property values was deferred to take effect on January 1, 1988 instead of
January 1, 1985, thus depriving the local government units of an
additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment

their financial resources to meet the rising cost of rendering effective
services to the people; (emphasis supplied)

xxx xxx xxx

The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not
proper to be resolved in the present petition. As stated at the outset, the issue here is
limited to the constitutionality of Executive Order No. 73. Intervention is not an
independent proceeding, but an ancillary and supplemental one which, in the nature of
things, unless otherwise provided for by legislation (or Rules of Court), must be in
subordination to the main proceeding, and it may be laid down as a general rule that an
intervention is limited to the field of litigation open to the original parties (59 Am. Jur. 950.
Garcia, etc., et al. v. David, et al., 67 Phil. 279).

We agree with the observation of the Office of the Solicitor General that without
Executive Order No. 73, the basis for collection of real property taxes win still be the 1978
revision of property values. Certainly, to continue collecting real property taxes based on
valuations arrived at several years ago, in disregard of the increases in the value of real
properties that have occurred since then, is not in consonance with a sound tax system.
Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that
sources of revenues must be adequate to meet government expenditures and their
variations.

ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano,

Gancayco, Bidin, Sarmiento, Cortes and Regalado, JJ., concur.

60
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims
that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or
EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the
NIRC) at the House of Representatives. Timbol, on the other hand, claims that she
served as Assistant Secretary of the Department of Trade and Industry and consultant of
the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in
view of the consistent opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the idea
and would impose the challenged tax on toll fees beginning August 16, 2010 unless
judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to
include toll fees within the meaning of "sale of services" that are subject to VAT; that a toll
fee is a "user’s tax," not a sale of services; that to impose VAT on toll fees would amount
to a tax on public service; and that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the non-impairment clause of the
constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within
10 days from notice.2 Later, the Court issued another resolution treating the petition as
one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the government’s
comment.4 The government avers that the NIRC imposes VAT on all kinds of services of
franchise grantees, including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars.5
The government also argues that petitioners have no right to invoke the non-impairment
of contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the State’s sovereign taxing power which is generally read
into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula
for computing toll rates cannot exempt tollway operators from VAT. In any event, it
cannot be claimed that the rights of tollway operators to a reasonable rate of return will
be impaired by the VAT since this is imposed on top of the toll rate. Further, the
imposition of VAT on toll fees would have very minimal effect on motorists using the
tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll
rate and putting any excess collection in an escrow account. But this would be illegal
since only the Congress can modify VAT rates and authorize its disbursement. Finally,
BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll
61
companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first
become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this
reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by
including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax
on tax and not a tax on services; b) will impair the tollway operators’ right to a
reasonable return of investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that petitioners Diaz
and Timbol gave their action. The government has sought reconsideration of the Court’s
resolution,7 however, arguing that petitioners’ allegations clearly made out a case for
declaratory relief, an action over which the Court has no original jurisdiction. The
government adds, moreover, that the petition does not meet the requirements of Rule 65
for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or
ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law
against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition
if the case has far-reaching implications and raises questions that need to be resolved for
the public good.8 The Court has also held that a petition for prohibition is a proper remedy
to prohibit or nullify acts of executive officials that amount to usurpation of legislative
authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday,
but more so on the government’s effort to raise revenue for funding various projects and
for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is
not only the right, but the duty of the Court to take cognizance of and resolve the issues
that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court
has ample power to waive such technical requirements when the legal questions to be
resolved are of great importance to the public. The same may be said of the requirement
of locus standi which is a mere procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is
levied, assessed, and collected, according to Section 108, on the gross receipts derived
from the sale or exchange of services as well as from the use or lease of properties. The
third paragraph of Section 108 defines "sale or exchange of services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
62
proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative
to their transport of goods or cargoes; common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar
services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive.11 By qualifying "services" with the words "all kinds," Congress
has given the term "services" an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the VAT’s reach rather than
establish concrete limits to its application. Thus, every activity that can be imagined as a
form of "service" rendered for a fee should be deemed included unless some provision of
law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or
the Toll Operation Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators’ expense. Tollways serve as
alternatives to regular public highways that meander through populated areas and branch
out to local roads. Traffic in the regular public highways is for this reason slow-moving. In
consideration for constructing tollways at their expense, the operators are allowed to
collect government-approved fees from motorists using the tollways until such operators
could fully recover their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys private proprietary rights 12 that
its contract and the law recognize. In this sense, the tollway operator is no different from
the following service providers under Section 108 who allow others to use their properties
or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties." This means that "services" to be
subject to VAT need not fall under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they
also come under the specific class described in Section 108 as "all other franchise
grantees" who are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of
less than ₱10 million and gas and water utilities) that Section 11913 spares from the
payment of VAT. The word "franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise
grantees" under Section 108 since they do not hold legislative franchises. But nothing in
Section 108 indicates that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for
making a distinction between franchises granted by Congress and franchises granted by
some other government agency. The latter, properly constituted, may grant franchises.
63
Indeed, franchises conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had been made by
Congress itself.15 The term "franchise" has been broadly construed as referring, not only
to authorizations that Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to grant franchises has
been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special
grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB, pursuant to the exercise of its
delegated powers under P.D. 1112.17 The franchise in this case is evidenced by a "Toll
Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code.
But, again, nothing in Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or
service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in
the course of congressional deliberations of the would-be law. As the Court said in South
African Airways v. Commissioner of Internal Revenue, 20 "statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of
that body and are, consequently, not controlling in the interpretation of law." The
congressional will is ultimately determined by the language of the law that the lawmakers
voted on. Consequently, the meaning and intention of the law must first be sought "in the
words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and
without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals: 22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State,"
are owned by the State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the State. Under Article
420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the
road as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon using the road. The
tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property
whether it is for public dominion or not. Article 420 of the Civil Code defines property of
public dominion as "one intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the road under the same
terms and conditions as the rest of the public. The charging of fees, the limitation on the
kind of vehicles that can use the road, the speed restrictions and other conditions for the
use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an airport
for public use. Such fees are often termed user’s tax. This means taxing those among the
public who actually use a public facility instead of taxing all the public including those who
never use the particular public facility. A user’s tax is more equitable – a principle of
taxation mandated in the 1987 Constitution."23(Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "user’s
tax" must also pertain to tollway fees. But the main issue in the MIAA case was whether
or not Parañaque City could sell airport lands and buildings under MIAA administration at
public auction to satisfy unpaid real estate taxes. Since local governments have no power
to tax the national government, the Court held that the City could not proceed with the
auction sale. MIAA forms part of the national government although not integrated in the
department framework."24 Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1)25 of the Civil Code and could
not be sold at public auction.
64
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made,
not to establish a rule that tollway fees are user’s tax, but to make the point that airport
lands and buildings are properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway fees are not taxes.
Indeed, they are not assessed and collected by the BIR and do not go to the general
coffers of the government.
It would of course be another matter if Congress enacts a law imposing a user’s tax,
collectible from motorists, for the construction and maintenance of certain roadways. The
tax in such a case goes directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the government seeks to tax
here are fees collected from tollways that are constructed, maintained, and operated by
private tollway operators at their own expense under the build, operate, and transfer
scheme that the government has adopted for expressways.26 Except for a fraction given
to the government, the toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes
in any sense. A tax is imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures. 27 Toll fees, on the other
hand, are collected by private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and operation of the tollways, as well
as to assure them a reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions that can be properly
treated as a tax. Taxes may be imposed only by the government under its sovereign
authority, toll fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the
liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to the buyer. In such
a case, what is transferred is not the seller’s liability but merely the burden of the VAT. 29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person
who, in the course of trade or business, sells or renders services for a fee. In other words,
the seller of services, who in this case is the tollway operator, is the person liable for VAT.
The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts
and not necessarily on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted
VAT burden simply becomes part of the toll fees that one has to pay in order to use the
tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract
clause on behalf of private investors in the tollway projects. She will neither be prejudiced
by nor be affected by the alleged diminution in return of investments that may result from
the VAT imposition. She has no interest at all in the profits to be earned under the TOAs.
The interest in and right to recover investments solely belongs to the private tollway
investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely
affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on
matters that are manifestly conjectural. Neither can it prohibit the State from exercising its
sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input
VAT make the VAT on tollway operations impractical and incapable of implementation.
They cite the fact that, in order to claim input VAT, the name, address and tax
identification number of the tollway user must be indicated in the VAT receipt or invoice.
The manner by which the BIR intends to implement the VAT – by rounding off the toll rate
and putting any excess collection in an escrow account – is also illegal, while the
alternative of giving "change" to thousands of motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according to them, the VAT on tollway operations
is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that
the tax system should be capable of being effectively administered and enforced with the
least inconvenience to the taxpayer. Non-observance of the canon, however, will not
render a tax imposition invalid "except to the extent that specific constitutional or statutory
limitations are impaired."34 Thus, even if the imposition of VAT on tollway operations may
65
seem burdensome to implement, it is not necessarily invalid unless some aspect of it is
shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the transcript of the August 12,
2010 Senate hearing provides some clue as to how the BIR intends to go about it, 35 the
facts pertaining to the matter are not sufficiently established for the Court to pass
judgment on. Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of implementing tax laws
primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the
matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010
which directs toll companies to record an accumulated input VAT of zero balance in their
books as of August 16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A)36 of the Code which grants first
time VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no longer be collected. The
tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional
input VAT belongs to the tollway operators who have not questioned the circular’s
validity. They are thus the ones who have a right to challenge the circular in a direct and
proper action brought for the purpose.
must be justified by clear statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for tollway operators.
The Court is thus duty-bound to simply apply the law as it is found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Court’s role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the tax statute. Thus, any
unwarranted burden that may be perceived to result from enforcing such policy must be
properly referred to Congress. The Court has no discretion on the matter but simply
applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A.
7716 or the Expanded Value-Added Tax law was passed. It is only now, however, that
the executive has earnestly pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more properly suited to deal with
the immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner
of Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution,
DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of
merit, and SETS ASIDE the Court’s temporary restraining order dated August 13, 2010.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or
expand the VAT law’s coverage when she sought to impose VAT on tollway operations.
Section 108(A) of the Code clearly states that services of all other franchise grantees are
subject to VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactions under Section
109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for the law to clearly say so. Tax exemptions
66
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of
Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for
appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of
Rizal, dismissing the above entitled case and dissolving the writ of preliminary injunction
therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with injunction, upon the ground that Republic
Act No. 920, entitled "An Act Appropriating Funds for Public Works", approved on June
20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the
construction, reconstruction, repair, extension and improvement" of Pasig feeder road
terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen.
Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time of the passage
and approval of said Act, the aforementioned feeder roads were "nothing but projected
and planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . .
. situated at . . . Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from the intersection between the
latter and Highway 54), which projected feeder roads "do not connect any government
property or any important premises to the main highway"; that the aforementioned
Antonio Subdivision (as well as the lands on which said feeder roads were to be
construed) were private properties of respondent Jose C. Zulueta, who, at the time of the
passage and approval of said Act, was a member of the Senate of the Philippines; that
on May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig,
Rizal, offering to donate said projected feeder roads to the municipality of Pasig, Rizal;
that, on June 13, 1953, the offer was accepted by the council, subject to the condition
"that the donor would submit a plan of the said roads and agree to change the names of
two of them"; that no deed of donation in favor of the municipality of Pasig was, however,
executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council,
calling attention to the approval of Republic Act. No. 920, and the sum of P85,000.00
appropriated therein for the construction of the projected feeder roads in question; that
the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that
inasmuch as the projected feeder roads in question were private property at the time of
the passage and approval of Republic Act No. 920, the appropriation of P85,000.00
therein made, for the construction, reconstruction, repair, extension and improvement of
said projected feeder roads, was illegal and, therefore, void ab initio"; that said
appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private
streets of a private subdivision"'; that, "in order to give a semblance of legality, when
there is absolutely none, to the aforementioned appropriation", respondents Zulueta
executed on December 12, 1953, while he was a member of the Senate of the
Philippines, an alleged deed of donation — copy of which is annexed to the petition — of
the four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of donation was,
on the same date, accepted by the then Executive Secretary; that being subject to an
onerous condition, said donation partook of the nature of a contract; that, such, said
donation violated the provision of our fundamental law prohibiting members of Congress
from being directly or indirectly financially interested in any contract with the Government,
and, hence, is unconstitutional, as well as null and void ab initio, for the construction of
the projected feeder roads in question with public funds would greatly enhance or
increase the value of the aforementioned subdivision of respondent Zulueta, "aside from
relieving him from the burden of constructing his subdivision streets or roads at his own
expense"; that the construction of said projected feeder roads was then being undertaken
by the Bureau of Public Highways; and that, unless restrained by the court, the
respondents would continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared
null and void; that the alleged deed of donation of the feeder roads in question be
"declared unconstitutional and, therefor, illegal"; that a writ of injunction be issued
enjoining the Secretary of Public Works and Communications, the Director of the Bureau
of Public Works and Highways and Jose C. Zulueta from ordering or allowing the
67
continuance of the above-mentioned feeder roads project, and from making and securing
any new and further releases on the aforementioned item of Republic Act No. 920, and
the disbursing officers of the Department of Public Works and Highways from making any
further payments out of said funds provided for in Republic Act No. 920; and that pending
final hearing on the merits, a writ of preliminary injunction be issued enjoining the
aforementioned parties respondent from making and securing any new and further
releases on the aforesaid item of Republic Act No. 920 and from making any further
payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of action". In support to this
motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal, pursuant to section 1683 of the Revised
Administrative Code; that said respondent is " not aware of any law which makes illegal
the appropriation of public funds for the improvements of . . . private property"; and that,
the constitutional provision invoked by petitioner is inapplicable to the donation in
question, the same being a pure act of liberality, not a contract. The other respondents, in
turn, maintained that petitioner could not assail the appropriation in question because
"there is no actual bona fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a personal and
substantial interest" in said Act "and that its enforcement has caused or will cause him a
direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned
decision, dated October 29, 1953, holding that, since public interest is involved in this
case, the Provincial Governor of Rizal and the provincial fiscal thereof who represents
him therein, "have the requisite personalities" to question the constitutionality of the
disputed item of Republic Act No. 920; that "the legislature is without power appropriate
public revenues for anything but a public purpose", that the instructions and improvement
of the feeder roads in question, if such roads where private property, would not be a
public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of
the Republic of the Philippines will use the parcels of land hereby donated for
street purposes only and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of the Philippines violate
the condition hereby imposed upon it, the title to the land hereby donated shall,
upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA.
(Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of
the Civil Code of the Philippines, declares in existence and void from the very beginning
contracts "whose cause, objector purpose is contrary to law, morals . . . or public policy";
that the legality of said donation may not be contested, however, by petitioner herein,
because his "interest are not directly affected" thereby; and that, accordingly, the
appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein. According to
said petition, respondent Zulueta is the owner of several parcels of residential land
situated in Pasig, Rizal, and known as the Antonio Subdivision, certain portions of which
had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating
P85,000.00 for the "construction, reconstruction, repair, extension and improvement" of
said roads, was passed by Congress, as well as when it was approved by the President
on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect
of relieving respondent Zulueta of the burden of constructing his subdivision streets or
roads at his own expenses, 1and would "greatly enhance or increase the value of the
subdivision" of said respondent. The lower court held that under these circumstances, the
appropriation in question was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-
evident. 2However, respondent Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal
because Congress is the source of all laws . . . Aside from the fact that movant is
not aware of any law which makes illegal the appropriation of public funds for the
improvement of what we, in the meantime, may assume as private property . . .
(Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the
nature of the Government established under the Constitution of the Republic of the
Philippines and the system of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating legislative enactments
deemed violative of the Constitution or organic laws. 3
68
As regards the legal feasibility of appropriating public funds for a public purpose, the
principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public
revenue for anything but a public purpose. . . . It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interest to be affected nor the degree to which
the general advantage of the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental to the public or to the state,
which results from the promotion of private interest and the prosperity of private
enterprises or business, does not justify their aid by the use public money. (25
R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public
purposes only, discussed suprasec. 14, money raised by taxation can be
expended only for public purposes and not for the advantage of private
individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public
funds may be used only for public purpose. The right of the legislature to
appropriate funds is correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and prohibiting the
collection of a tax for one purpose and the devotion thereof to another
purpose, no appropriation of state funds can be made for other than for a public
purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interest, as opposed to the
furtherance of the advantage of individuals, although each advantage to
individuals might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from
being patently sound, are a necessary corollary to our democratic system of government,
which, as such, exists primarily for the promotion of the general welfare. Besides,
reflecting as they do, the established jurisprudence in the United States, after whose
constitutional system ours has been patterned, said views and jurisprudence are,
likewise, part and parcel of our own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in
question, upon the ground that petitioner may not contest the legality of the donation
above referred to because the same does not affect him directly. This conclusion is,
presumably, based upon the following premises, namely: (1) that, if valid, said donation
cured the constitutional infirmity of the aforementioned appropriation; (2) that the latter
may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and
admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage
or approval, not upon events occurring, or acts performed, subsequently thereto, unless
the latter consists of an amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute. Referring to the
P85,000.00 appropriation for the projected feeder roads in question, the legality thereof
depended upon whether said roads were public or private property when the bill, which,
latter on, became Republic Act 920, was passed by Congress, or, when said bill was
approved by the President and the disbursement of said sum became effective, or on
June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the projected
feeder roads were to be constructed belonged then to respondent Zulueta, the result is
that said appropriation sought a private purpose, and hence, was null and void. 4 The
donation to the Government, over five (5) months after the approval and effectivity of said
Act, made, according to the petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including therefore, his right to
the annulment of said contract, even though such creditors are not affected by the same,
except indirectly, in the manner indicated in said legal provision.
69
Again, it is well-stated that the validity of a statute may be contested only by one who will
sustain a direct injury in consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the disbursement of public
funds, 5upon the theory that "the expenditure of public funds by an officer of the State for
the purpose of administering an unconstitutional act constitutes a misapplication of such
funds," which may be enjoined at the request of a taxpayer. 6Although there are some
decisions to the contrary, 7the prevailing view in the United States is stated in the
American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite
standing to attack the constitutionality of a statute, the general rule is that not
only persons individually affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by taxation and may
therefore question the constitutionality of statutes requiring expenditure of public
moneys. (11 Am. Jur. 761; emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs.
Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is different from that of a
taxpayer of a municipal corporation to its government. Indeed, under
the composite system of government existing in the U.S., the states of the Union are
integral part of the Federation from an international viewpoint, but, each state enjoys
internally a substantial measure of sovereignty, subject to the limitations imposed by the
Federal Constitution. In fact, the same was made by representatives of each state of the
Union, not of the people of the U.S., except insofar as the former represented the people
of the respective States, and the people of each State has, independently of that of the
others, ratified said Constitution. In other words, the Federal Constitution and the Federal
statutes have become binding upon the people of the U.S. in consequence of an act of,
and, in this sense, through the respective states of the Union of which they are citizens.
The peculiar nature of the relation between said people and the Federal Government of
the U.S. is reflected in the election of its President, who is chosen directly, not by the
people of the U.S., but by electors chosen by each State, in such manner as the
legislature thereof may direct (Article II, section 2, of the Federal Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand,
and the Republic of the Philippines, on the other, is not identical to that obtaining
between the people and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people and taxpayers of each
state and the government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that of the states of
the Union, insofar as the simple and unitary type of our national government is not
subject to limitations analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state public funds — which has
been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) —
has greater application in the Philippines than that adopted with respect to acts of
Congress of the United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation
of a land by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene
for the purpose of contesting the price being paid to the owner thereof, as unduly
exorbitant. It is true that in Custodio vs. President of the Senate (42 Off. Gaz., 1243), a
taxpayer and employee of the Government was not permitted to question the
constitutionality of an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and Barredo vs.Commission on Elections (84
Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers impugning the
validity of certain appropriations of public funds, and invalidated the same. Moreover, the
reason that impelled this Court to take such position in said two (2) cases — the
importance of the issues therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a
taxpayer. The Province of Rizal, which he represents officially as its Provincial Governor,
is our most populated political subdivision, 8and, the taxpayers therein bear a substantial
portion of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case
sufficiently justify petitioners action in contesting the appropriation and donation in
question; that this action should not have been dismissed by the lower court; and that the
writ of preliminary injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are
remanded to the lower court for further proceedings not inconsistent with this decision,
with the costs of this instance against respondent Jose C. Zulueta. It is so ordered.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera,
Gutierrez David, Paredes, and Dizon, JJ., concur.
70
 On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie
Producers, Importers and Distributors Association of the Philippines, and Philippine
Motion Pictures Producers Association, hereinafter collectively referred to as the
Intervenors, were permitted by the Court to intervene in the case, over petitioner's
opposition, upon the allegations that intervention was necessary for the complete
protection of their rights and that their "survival and very existence is threatened by the
unregulated proliferation of film piracy." The Intervenors were thereafter allowed to file
their Comment in Intervention.

EN BANC The rationale behind the enactment of the DECREE, is set out in its preambular clauses
as follows:
June 18, 1987
1. WHEREAS, the proliferation and unregulated circulation of videograms
G.R. No. L-75697 including, among others, videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly prejudiced the operations of
moviehouses and theaters, and have caused a sharp decline in theatrical
VALENTIN TIO doing business under the name and style of OMI
attendance by at least forty percent (40%) and a tremendous drop in the
ENTERPRISES, petitioner,
collection of sales, contractor's specific, amusement and other taxes, thereby
vs.
resulting in substantial losses estimated at P450 Million annually in government
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA
revenues;
COMMISSION, CITY MAYOR and CITY TREASURER OF MANILA, respondents.

2. WHEREAS, videogram(s) establishments collectively earn around P600 Million

MELENCIO-HERRERA, J.:
per annum from rentals, sales and disposition of videograms, and such earnings
have not been subjected to tax, thereby depriving the Government of
This petition was filed on September 1, 1986 by petitioner on his own behalf and approximately P180 Million in taxes each year;
purportedly on behalf of other videogram operators adversely affected. It assails the
constitutionality of Presidential Decree No. 1987 entitled "An Act Creating the Videogram
3. WHEREAS, the unregulated activities of videogram establishments have also
Regulatory Board" with broad powers to regulate and supervise the videogram industry
affected the viability of the movie industry, particularly the more than 1,200 movie
(hereinafter briefly referred to as the BOARD). The Decree was promulgated on October
houses and theaters throughout the country, and occasioned industry-wide
5, 1985 and took effect on April 10, 1986, fifteen (15) days after completion of its
displacement and unemployment due to the shutdown of numerous moviehouses
publication in the Official Gazette.
and theaters;
On November 5, 1985, a month after the promulgation of the abovementioned decree,
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for
Presidential Decree No. 1994 amended the National Internal Revenue Code
the Government to create an environment conducive to growth and development
providing, inter alia:
of all business industries, including the movie industry which has an accumulated
investment of about P3 Billion;
SEC. 134. Video Tapes. — There shall be collected on each processed video-
tape cassette, ready for playback, regardless of length, an annual tax of five
5. WHEREAS, proper taxation of the activities of videogram establishments will
pesos; Provided, That locally manufactured or imported blank video tapes shall
not only alleviate the dire financial condition of the movie industry upon which
be subject to sales tax.
more than 75,000 families and 500,000 workers depend for their livelihood, but
71
 also provide an additional source of revenue for the Government, and at the
same time rationalize the heretofore uncontrolled distribution of videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram
features constitutes a clear and present danger to the moral and spiritual well-
being of the youth, and impairs the mandate of the Constitution for the State to
support the rearing of the youth for civic efficiency and the development of moral
character and promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial
measures to curb these blatant malpractices which have flaunted our censorship
and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values
of the people and betraying the national economic recovery program, bold
emergency measures must be adopted with dispatch; ... (Numbering of
paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable
to the local government is a RIDER and the same is not germane to the subject
matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint
of trade in violation of the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast
powers conferred upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it
is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which
shall be expressed in the title thereof" 1 is sufficiently complied with if the title be
comprehensive enough to include the general purpose which a statute seeks to achieve.
It is not necessary that the title express each and every end that the statute wishes to
accomplish. The requirement is satisfied if all the parts of the statute are related, and are
germane to the subject matter expressed in the title, or as long as they are not
inconsistent with or foreign to the general subject and title. 2An act having a single
general subject, indicated in the title, may contain any number of provisions, no matter
how diverse they may be, so long as they are not inconsistent with or foreign to the
general subject, and may be considered in furtherance of such subject by providing for
the method and means of carrying out the general object." 3 The rule also is that the
constitutional requirement as to the title of a bill should not be so narrowly construed as
to cripple or impede the power of legislation. 4 It should be given practical rather than
technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the
DECREE is a rider is without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding
any provision of law to the contrary, the province shall collect a tax of thirty
percent (30%) of the purchase price or rental rate, as the case may be, for every
sale, lease or disposition of a videogram containing a reproduction of any motion
picture or audiovisual program. Fifty percent (50%) of the proceeds of the tax
collected shall accrue to the province, and the other fifty percent (50%) shall
acrrue to the municipality where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally by the City/Municipality and
the Metropolitan Manila Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the
video industry through the Videogram Regulatory Board as expressed in its title. The tax
provision is not inconsistent with, nor foreign to that general subject and title. As a tool for
regulation 6 it is simply one of the regulatory and control mechanisms scattered
throughout the DECREE. The express purpose of the DECREE to include taxation of the
video industry in order to regulate and rationalize the heretofore uncontrolled distribution
of videograms is evident from Preambles 2 and 5, supra. Those preambles explain the
motives of the lawmaker in presenting the measure. The title of the DECREE, which is
the creation of the Videogram Regulatory Board, is comprehensive enough to include the
72
purposes expressed in its Preamble and reasonably covers all its provisions. It is
unnecessary to express all those objectives in the title or that the latter be an index to the
body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and
oppressive, confiscatory, and in restraint of trade. However, it is beyond serious question
that a tax does not cease to be valid merely because it regulates, discourages, or even
definitely deters the activities taxed. 8 The power to impose taxes is one so unlimited in
force and so searching in extent, that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in the discretion of the authority
which exercises it. 9 In imposing a tax, the legislature acts upon its constituents. This is,
in general, a sufficient security against erroneous and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure
prompted by the realization that earnings of videogram establishments of around P600
million per annum have not been subjected to tax, thereby depriving the Government of
an additional source of revenue. It is an end-user tax, imposed on retailers for every
videogram they make available for public viewing. It is similar to the 30% amusement tax
imposed or borne by the movie industry which the theater-owners pay to the government,
but which is passed on to the entire cost of the admission ticket, thus shifting the tax
burden on the buying or the viewing public. It is a tax that is imposed uniformly on all
videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the
need for regulating the video industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation of pornographic video
tapes. And while it was also an objective of the DECREE to protect the movie industry,
the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled
the legislature to impose the tax was to favor one industry over another. 11
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 "inequities which result from a
singling out of one particular class for taxation or exemption infringe no
constitutional limitation". 12 Taxation has been made the implement of the state's
police power.13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the
DECREE by the former President under Amendment No. 6 of the 1973 Constitution
providing that "whenever in the judgment of the President ... , there exists a grave
emergency or a threat or imminence thereof, or whenever the interim Batasang
Pambansa or the regular National Assembly fails or is unable to act adequately on any
matter for any reason that in his judgment requires immediate action, he may, in order to
meet the exigency, issue the necessary decrees, orders, or letters of instructions, which
shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th
"whereas" clause sufficiently summarizes the justification in that grave emergencies
corroding the moral values of the people and betraying the national economic recovery
program necessitated bold emergency measures to be adopted with dispatch. Whatever
the reasons "in the judgment" of the then President, considering that the issue of the
validity of the exercise of legislative power under the said Amendment still pends
resolution in several other cases, we reserve resolution of the question raised at the
proper time.
4. Neither can it be successfully argued that the DECREE contains an undue delegation
of legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to
"solicit the direct assistance of other agencies and units of the government and deputize,
for a fixed and limited period, the heads or personnel of such agencies and units to
perform enforcement functions for the Board" is not a delegation of the power to legislate
but merely a conferment of authority or discretion as to its execution, enforcement, and
implementation. "The true distinction is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring authority or
discretion as to its execution to be exercised under and in pursuance of the law. The first
cannot be done; to the latter, no valid objection can be made." 14 Besides, in the very
language of the decree, the authority of the BOARD to solicit such assistance is for a
"fixed and limited period" with the deputized agencies concerned being "subject to the
direction and control of the BOARD." That the grant of such authority might be the source
of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the
eventuality occur, the aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is,
among other categories, one which "alters the legal rules of evidence, and authorizes
conviction upon less or different testimony than the law required at the time of the
commission of the offense." It is petitioner's position that Section 15 of the DECREE in
providing that:
73
 All videogram establishments in the Philippines are hereby given a period of
forty-five (45) days after the effectivity of this Decree within which to register with
and secure a permit from the BOARD to engage in the videogram business and
to register with the BOARD all their inventories of videograms, including
videotapes, discs, cassettes or other technical improvements or variations
thereof, before they could be sold, leased, or otherwise disposed of. Thereafter
any videogram found in the possession of any person engaged in the videogram
business without the required proof of registration by the BOARD, shall be prima
facie evidence of violation of the Decree, whether the possession of such
videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required
proof of registration of any videogram cannot be presented and thus partakes of the
nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of
Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the passage of
a law providing that the presumption of innocence may be overcome by a
contrary presumption founded upon the experience of human conduct, and
enacting what evidence shall be sufficient to overcome such presumption of
innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY,
A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the
"legislature may enact that when certain facts have been proved that they shall
be prima facie evidence of the existence of the guilt of the accused and shift the
burden of proof provided there be a rational connection between the facts proved
and the ultimate facts presumed so that the inference of the one from proof of the
others is not unreasonable and arbitrary because of lack of connection between
the two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational
connection between the fact proved, which is non-registration, and the ultimate fact
presumed which is violation of the DECREE, besides the fact that the prima
facie presumption of violation of the DECREE attaches only after a forty-five-day period
counted from its effectivity and is, therefore, neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being over-regulated and
being eased out of existence as if it were a nuisance. Being a relatively new industry, the
need for its regulation was apparent. While the underlying objective of the DECREE is to
protect the moribund movie industry, there is no question that public welfare is at bottom
of its enactment, considering "the unfair competition posed by rampant film piracy; the
erosion of the moral fiber of the viewing public brought about by the availability of
unclassified and unreviewed video tapes containing pornographic films and films with
brutally violent sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities of video establishments
are virtually untaxed since mere payment of Mayor's permit and municipal license fees
are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of
the video industry. On the contrary, video establishments are seen to have proliferated in
many places notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and
expediency of the DECREE. These considerations, however, are primarily and
exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action taken,
may be the basis for declaring a statute invalid. This is as it ought to be. The
principle of separation of powers has in the main wisely allocated the respective
authority of each department and confined its jurisdiction to such a sphere. There
would then be intrusion not allowable under the Constitution if on a matter left to
the discretion of a coordinate branch, the judiciary would substitute its own. If
there be adherence to the rule of law, as there ought to be, the last offender
should be courts of justice, to which rightly litigants submit their controversy
precisely to maintain unimpaired the supremacy of legal norms and prescriptions.
The attack on the validity of the challenged provision likewise insofar as there
may be objections, even if valid and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a
challenged statute. We find no clear violation of the Constitution which would justify us in
pronouncing Presidential Decree No. 1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
Republic of the Philippines
SUPREME COURT
Manila
74
 EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for
appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case
No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as
involving only pure questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June
19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2 of Republic Act No.
2264.1 otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of
1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are practically the same, and
second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tai of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28,
1962, levies and collects "on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft drinks shall submit
to the Municipal Treasurer a monthly report of the total number of gallons produced or
manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing
the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264]
declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay
the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary
Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging
as a matter of right to every independent government, without being expressly conferred
75
by the people. 6 It is a power that is purely legislative and which the central legislative
body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does not apply. Legislative
powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to
tax. 9 Under the New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided by law." Withal,
it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the
State has not deemed wise to tax for more general purposes. 10 This is not to say though
that the constitutional injunction against deprivation of property without due process of
law may be passed over under the guise of the taxing power, except when the taking of
the property is in the lawful exercise of the taxing power, as when (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a
particular taxpayer, although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax and the manner in which it shall be
apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may
not be exercised. 13 The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the
Union.14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and the other by the
city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and
still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances
clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council
of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-
appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only
Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of
Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
76
almost "everything, accepting those which are mentioned therein." As long as the text
levied under the authority of a city or municipal ordinance is not within the exceptions and
limitations in the law, the same comes within the ambit of the general rule, pursuant to
the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The
limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline, under the provisions of
the National Internal Revenue Code." For purposes of this particular limitation, a
municipal ordinance which prescribes a set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax and is null and void for being outside
the power of the municipality to enact. 20 But, the imposition of "a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is levied on
the produce (whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of determining the
tax rate on the products, but there is not set ratio between the volume of sales and the
amount of the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco
other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on
all softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would
not support the claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of imposable taxes.
25 This is in line with the constutional policy of according the widest possible autonomy to
local governments in matters of local taxation, an aspect that is given expression in the
Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to
be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if
the purpose of the law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters
under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of
1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of
Ordinance No. 27. Municipalities are empowered to impose, not only municipal license
taxes upon persons engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes
within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal
Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino
and Concepcion, Jr., JJ., concur.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows adherence to tried and tested concepts of
the law of municipal taxation, I am only in agreement. If I limit myself to concurrence in
the result, it is primarily because with the article on Local Autonomy found in the present
Constitution, I feel a sense of reluctance in restating doctrines that arose from a different
basic premise as to the scope of such power in accordance with the 1935 Charter.
Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully what for
me are the nuances and implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny question of double
taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon.1
1. The present Constitution is quite explicit as to the power of taxation vested in local and
municipal corporations. It is therein specifically provided: "Each local government unit
shall have the power to create its own sources of revenue and to levy taxes subject to
such limitations as may be provided by law. 2 That was not the case under the 1935
Charter. The only limitation then on the authority, plenary in character of the national
government, was that while the President of the Philippines was vested with the power of
control over all executive departments, bureaus, or offices, he could only . It exercise
77
general supervision over all local governments as may be provided by law ... 3As far as
legislative power over local government was concerned, no restriction whatsoever was
placed on the Congress of the Philippines. It would appear therefore that the extent of the
taxing power was solely for the legislative body to decide. It is true that in 1939, there
was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in 1959
such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as
late as December of 1964, five years after its enactment of the Local Autonomy Act, this
Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6 reaffirmed the traditional concept in these words: "The rule is well-settled that
municipal corporations, unlike sovereign states, after clothed with no power of taxation;
that its charter or a statute must clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and that any such power granted
must be construed strictly, any doubt or ambiguity arising from the terms of the grant to
be resolved against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of
Pagbilao,8 "is an attribute of sovereignty which municipal corporations do not
enjoy." 9 That case left no doubt either as to weakness of a claim "based merely by
inferences, implications and deductions, [as they have no place in the interpretation of
the power to tax of a municipal corporation." 10 As the conclusion reached by the Court
finds support in such grant of the municipal taxing power, I concur in the result. 2. As to
any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As to why
double taxation is not violative of due process, Justice Holmes made clear in this
language: 'The objection to the taxation as double may be laid down on one side. ... The
14th Amendment [the due process clause) no more forbids double taxation than it does
doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on
other grouse With that decision rendered at a time when American sovereignty in the
Philippines was recognized, it possesses more than just a persuasive effect. To some, it
delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us,
its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision,
however, we quoted with approval this excerpt from a leading American decision: 'Where,
as here, Congress has clearly expressed its intention, the statute must be sustained even
though double taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows adherence to tried and tested concepts of
the law of municipal taxation, I am only in agreement. If I limit myself to concurrence in
the result, it is primarily because with the article on Local Autonomy found in the present
Constitution, I feel a sense of reluctance in restating doctrines that arose from a different
basic premise as to the scope of such power in accordance with the 1935 Charter.
Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully what for
me are the nuances and implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny question of double
taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon.1
1. The present Constitution is quite explicit as to the power of taxation vested in local and
municipal corporations. It is therein specifically provided: "Each local government unit
shall have the power to create its own sources of revenue and to levy taxes subject to
such limitations as may be provided by law. 2 That was not the case under the 1935
Charter. The only limitation then on the authority, plenary in character of the national
government, was that while the President of the Philippines was vested with the power of
control over all executive departments, bureaus, or offices, he could only . It exercise
general supervision over all local governments as may be provided by law ... 3As far as
legislative power over local government was concerned, no restriction whatsoever was
placed on the Congress of the Philippines. It would appear therefore that the extent of the
taxing power was solely for the legislative body to decide. It is true that in 1939, there
was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in 1959
such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as
late as December of 1964, five years after its enactment of the Local Autonomy Act, this
Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6 reaffirmed the traditional concept in these words: "The rule is well-settled that
municipal corporations, unlike sovereign states, after clothed with no power of taxation;
that its charter or a statute must clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and that any such power granted
must be construed strictly, any doubt or ambiguity arising from the terms of the grant to
be resolved against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of
Pagbilao,8 "is an attribute of sovereignty which municipal corporations do not
enjoy." 9 That case left no doubt either as to weakness of a claim "based merely by
inferences, implications and deductions, [as they have no place in the interpretation of
the power to tax of a municipal corporation." 10 As the conclusion reached by the Court
78
finds support in such grant of the municipal taxing power, I concur in the result. 2. As to
any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As to why
double taxation is not violative of due process, Justice Holmes made clear in this
language: 'The objection to the taxation as double may be laid down on one side. ... The
14th Amendment [the due process clause) no more forbids double taxation than it does
doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on
other grouse With that decision rendered at a time when American sovereignty in the
Philippines was recognized, it possesses more than just a persuasive effect. To some, it
delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us,
its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision,
however, we quoted with approval this excerpt from a leading American decision: 'Where,
as here, Congress has clearly expressed its intention, the statute must be sustained even
though double taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.
(c) Taxes on the business of any newspaper engaged in the printing and publication of
any newspaper, magazine, review or bulletin appearing at regular interval and having
fixed prices for subscription and sale, and which is not published primarily for the
purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except
electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof;

Footnotes (i) Customs duties registration, wharfage on wharves owned by the national
government, tonnage and all other kinds of customs fees, charges and dues;
1 "Sec. 2. Taxation. — Any provision of law to the contrary notwithstanding, all
chartered cities, municipalities and municipal districts shall have authority to impose (j) Taxes of any kind on banks, insurance companies, and persons paying franchise
municipal license taxes or fees upon persons engaged in any occupation or business, tax:
or exercising private in chartered cities, municipalities and municipal districts by
requiring them to secure licenses at rates fixed by the municipal board or city council of (k) Taxes on premiums paid by owners of property who obtain insurance directly with
the city, the municipal council of the municipality, or the municipal district council of the foreign insurance companies; and
municipal district to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable for services (i) Taxes, fees or levies, of any kind, which in effect impose a burden on exports of
rendered in connection with any business, profession occupation being conducted Philippine finished, manufactured or processed products and products of Philippine
within the city, municipality or municipal district and otherwise to levy for public cottage industries.
purposes, just and uniform taxes, licenses or fees: Provided, That municipalities and
municipal districts shall, in no case, impose any percentage tax on sales or other taxes
in any form based thereon nor impose taxes on articles subject to specific tax, except
gasoline, under the provisions of the National Internal Revenue Code: Provided,
however, That no city, municipality or municipal district may levy or impose any of the
following:

(a) Residence tax;

(b) Documentary stamp tax;

79
 disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued
Opinion No. 061. The OGCC opined that the Local Government Code of 1991
withdrew the exemption from real estate tax granted to MIAA under Section 21 of the
MIAA Charter. Thus, MIAA negotiated with respondent City of Parañaque to pay the
real estate tax imposed by the City. MIAA then paid some of the real estate tax
already due.
EN BANC
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from
G.R. No. 155650 July 20, 2006 the City of Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax
delinquency is broken down as follows:
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
TAX
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE, TAXABL
DECLARATIO TAX DUE PENALTY TOTAL
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF E YEAR
N
PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE, respondents.
E-016-01370 1992- 19,558,160.00 11,201,083.20 30,789,243.20
DECISION 2001
E-016-01374 1992- 111,689,424.90 68,149,479.59 179,838,904.49
CARPIO, J.: 2001
E-016-01375 1992- 20,276,058.00 12,371,832.00 32,647,890.00
The Antecedents 2001
E-016-01376 1992- 58,144,028.00 35,477,712.00 93,621,740.00
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino 2001
International Airport (NAIA) Complex in Parañaque City under Executive Order No. E-016-01377 1992- 18,134,614.65 11,065,188.59 29,199,803.24
903, otherwise known as the Revised Charter of the Manila International Airport 2001
Authority ("MIAA Charter"). Executive Order No. 903 was issued on 21 July 1983 by E-016-01378 1992- 111,107,950.40 67,794,681.59 178,902,631.99
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 9091 and 2001
2982 amended the MIAA Charter.
E-016-01379 1992- 4,322,340.00 2,637,360.00 6,959,700.00
2001
As operator of the international airport, MIAA administers the land, improvements
and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA E-016-01380 1992- 7,776,436.00 4,744,944.00 12,521,380.00
approximately 600 hectares of land,3 including the runways and buildings ("Airport 2001
Lands and Buildings") then under the Bureau of Air Transportation.4 The MIAA *E-016-013-85 1998- 6,444,810.00 2,900,164.50 9,344,974.50
Charter further provides that no portion of the land transferred to MIAA shall be 2001

80
 *E-016-01387 1998- 34,876,800.00 5,694,560.00 50,571,360.00 Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at
2001 the Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in
*E-016-01396 1998- 75,240.00 33,858.00 109,098.00 the public market of Barangay La Huerta; and in the main lobby of the Parañaque
2001 City Hall. The City of Parañaque published the notices in the 3 and 10 January 2003
issues of the Philippine Daily Inquirer, a newspaper of general circulation in the
GRAND P392,435,861.9 P232,070,863.4 P 624,506,725.4 Philippines. The notices announced the public auction sale of the Airport Lands and
TOTAL 5 7 2 Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative
Session Hall Building of Parañaque City.
1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for
P4,207,028.75 A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed
before this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a
#9476101 for P28,676,480.00 Temporary Restraining Order. The motion sought to restrain respondents — the City
of Parañaque, City Mayor of Parañaque, Sangguniang Panglungsod ng Parañaque,
#9476103 for P49,115.006 City Treasurer of Parañaque, and the City Assessor of Parañaque ("respondents") —
from auctioning the Airport Lands and Buildings.
On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of
levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
of Parañaque threatened to sell at public auction the Airport Lands and Buildings immediately. The Court ordered respondents to cease and desist from selling at
should MIAA fail to pay the real estate tax delinquency. MIAA thus sought a public auction the Airport Lands and Buildings. Respondents received the TRO on
clarification of OGCC Opinion No. 061. the same day that the Court issued it. However, respondents received the TRO only
at 1:25 p.m. or three hours after the conclusion of the public auction.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No.
061. The OGCC pointed out that Section 206 of the Local Government Code On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the
requires persons exempt from real estate tax to show proof of exemption. The OGCC TRO.
opined that Section 21 of the MIAA Charter is the proof that MIAA is exempt from real
estate tax. On 29 March 2005, the Court heard the parties in oral arguments. In compliance with
the directive issued during the hearing, MIAA, respondent City of Parañaque, and the
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for Solicitor General subsequently submitted their respective Memoranda.
prohibition and injunction, with prayer for preliminary injunction or temporary
restraining order. The petition sought to restrain the City of Parañaque from imposing MIAA admits that the MIAA Charter has placed the title to the Airport Lands and
real estate tax on, levying against, and auctioning for public sale the Airport Lands Buildings in the name of MIAA. However, MIAA points out that it cannot claim
and Buildings. The petition was docketed as CA-G.R. SP No. 66878. ownership over these properties since the real owner of the Airport Lands and
Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed devote the Airport Lands and Buildings for the benefit of the general public. Since the
it beyond the 60-day reglementary period. The Court of Appeals also denied on 27 Airport Lands and Buildings are devoted to public use and public service, the
September 2002 MIAA's motion for reconsideration and supplemental motion for ownership of these properties remains with the State. The Airport Lands and
reconsideration. Hence, MIAA filed on 5 December 2002 the present petition for Buildings are thus inalienable and are not subject to real estate tax by local
review.7 governments.

81
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA
from the payment of real estate tax. MIAA insists that it is also exempt from real
estate tax under Section 234 of the Local Government Code because the Airport
Lands and Buildings are owned by the Republic. To justify the exemption, MIAA
invokes the principle that the government cannot tax itself. MIAA points out that the
reason for tax exemption of public property is that its taxation would not inure to any
public advantage, since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly
withdrew the tax exemption privileges of "government-owned and-controlled
corporations" upon the effectivity of the Local Government Code. Respondents also
argue that a basic rule of statutory construction is that the express mention of one
person, thing, or act excludes all others. An international airport is not among the
exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are
exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcos8 where we held that the Local Government Code has withdrawn the
exemption from real estate tax granted to international airports. Respondents further
argue that since MIAA has already paid some of the real estate tax assessments, it is
now estopped from claiming that the Airport Lands and Buildings are exempt from
real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of
MIAA are exempt from real estate tax under existing laws. If so exempt, then the real
estate tax assessments issued by the City of Parañaque, and all proceedings taken
pursuant to such assessments, are void. In such event, the other issues raised in this
petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax
imposed by local governments.
First, MIAA is not a government-owned or controlled corporation but
an instrumentality of the National Government and thus exempt from local
taxation. Second, the real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation,
is not exempt from real estate tax. Respondents claim that the deletion of the phrase
"any government-owned or controlled so exempt by its charter" in Section 234(e) of
the Local Government Code withdrew the real estate tax exemption of government-
owned or controlled corporations. The deleted phrase appeared in Section 40(a) of
the 1974 Real Property Tax Code enumerating the entities exempt from real estate
tax.
There is no dispute that a government-owned or controlled corporation is not exempt
from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code
of 1987 defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. – x x x x
(13) Government-owned or controlled corporation refers to any
agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or proprietary in
nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the
extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis
supplied)
A government-owned or controlled corporation must be "organized as a stock or
non-stock corporation." MIAA is not organized as a stock or non-stock corporation.
MIAA is not a stock corporation because it has no capital stock divided into
shares. MIAA has no stockholders or voting shares. Section 10 of the MIAA
Charter9 provides:
SECTION 10. Capital. — The capital of the Authority to be contributed by the
National Government shall be increased from Two and One-half Billion
82
 (P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to
consist of:
(a) The value of fixed assets including airport facilities, runways and
equipment and such other properties, movable and immovable[,] which may
be contributed by the National Government or transferred by it from any of its
agencies, the valuation of which shall be determined jointly with the
Department of Budget and Management and the Commission on Audit on the
date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other
liabilities of the Authority at the time of the takeover of the assets and other
properties;
(b) That the amount of P605 million as of December 31, 1986 representing
about seventy percentum (70%) of the unremitted share of the National
Government from 1983 to 1986 to be remitted to the National Treasury as
provided for in Section 11 of E. O. No. 903 as amended, shall be converted
into the equity of the National Government in the Authority. Thereafter, the
Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into
shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose
"capital stock is divided into shares and x x x authorized to distribute to the
holders of such shares dividends x x x." MIAA has capital but it is not divided into
shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a
stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of
the Corporation Code defines a non-stock corporation as "one where no part of its
income is distributable as dividends to its members, trustees or officers." A non-stock
corporation must have members. Even if we assume that the Government is
considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual
gross operating income to the National Treasury.11 This prevents MIAA from
qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are
"organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade,
industry, agriculture and like chambers." MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and
domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as
a government-owned or controlled corporation. What then is the legal status of MIAA
within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform
efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate powers.
Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually
through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises
"all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order."15
83
Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government
machinery although not integrated with the department framework. The MIAA Charter
expressly states that transforming MIAA into a "separate and autonomous
body"16 will make its operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an
agency or instrumentality is deemed a government-owned or controlled corporation.
Examples are the Mactan International Airport Authority, the Philippine Ports
Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized
as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are
sometimes loosely called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense as understood under
the Administrative Code, which is the governing law defining the legal relationship
and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units. – Unless otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalitiesand local government units.(Emphasis and
underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers
of local governments, local governments may only exercise such power "subject to
such guidelines and limitations as the Congress may provide."18
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments. The
rule is that a tax is never presumed and there must be clear language in the law
imposing the tax. Any doubt whether a person, article or activity is taxable is resolved
against taxation. This rule applies with greater force when local governments seek to
tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming
the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally
in favor of the national government instrumentality. As this Court declared in Maceda
v. Macaraig, Jr.:
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.19
There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one
government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for
sound and compelling policy considerations. There must be express language in
the law empowering local governments to tax national government instrumentalities.
Any doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise
provided" in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and
Gaming Corporation:
84
 The states have no power by taxation or otherwise, to retard, impede,
burden or in any manner control the operation of constitutional laws
enacted by Congress to carry into execution the powers vested in the
federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed.
579)
This doctrine emanates from the "supremacy" of the National Government
over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to
the entire absence of power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state
or political subdivision can regulate a federal instrumentality in such a
way as to prevent it from consummating its federal responsibilities, or
even to seriously burden it in the accomplishment of them." (Antieau,
Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as "a tool for regulation" (U.S. v.
Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to
destroy" (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and
therefore owned by the State or the Republic of the Philippines. The Civil Code
provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character
stated in the preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for
public use or for public service, shall form part of the patrimonial property of
the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed by
the State," are owned by the State. The term "ports" includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by
the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings
are properties of public dominion and thus owned by the State or the Republic of the
Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by
the public for international and domestic travel and transportation. The fact that
the MIAA collects terminal fees and other charges from the public does not remove
the character of the Airport Lands and Buildings as properties for public use. The
operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon using the road.
The tollway system is even a more efficient and equitable manner of taxing the public
for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property
whether it is of public dominion or not. Article 420 of the Civil Code defines property
85
of public dominion as one "intended for public use." Even if the government collects
toll fees, the road is still "intended for public use" if anyone can use the road under
the same terms and conditions as the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an
airport for public use. Such fees are often termed user's tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user's tax is more
equitable — a principle of taxation mandated in the 1987 Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport
of the Philippines for both international and domestic air traffic,"22 are properties of
public dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the
Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are
properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are outside the commerce of man. The Court has ruled
repeatedly that properties of public dominion are outside the commerce of man. As
early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in
provinces and in towns comprises the provincial and town roads, the
squares, streets, fountains, and public waters, the promenades, and public
works of general service supported by said towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal
council of Cavite could not in 1907 withdraw or exclude from public use a
portion thereof in order to lease it for the sole benefit of the defendant Hilaria
Rojas. In leasing a portion of said plaza or public place to the defendant for
private use the plaintiff municipality exceeded its authority in the exercise of
its powers by executing a contract over a thing of which it could not dispose,
nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside
the commerce of man may be the object of a contract, and plazas and streets
are outside of this commerce, as was decided by the supreme court of
Spain in its decision of February 12, 1895, which says: "Communal things
that cannot be sold because they are by their very nature outside of
commerce are those for public use, such as the plazas, streets,
common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public
dominion are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public
use and to be made available to the public in general. They are outside the
commerce of man and cannot be disposed of or even leased by the
municipality to private parties. While in case of war or during an emergency,
town plazas may be occupied temporarily by private individuals, as was done
and as was tolerated by the Municipality of Pozorrubio, when the emergency
has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the
public and free from encumbrances or illegal private
constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the
commerce of man, cannot be the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary
to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale. This will happen if the City
of Parañaque can foreclose and compel the auction sale of the 600-hectare runway
of the MIAA for non-payment of real estate tax.
86
Before MIAA can encumber26 the Airport Lands and Buildings, the President must lands of the public domain, the use of which is not otherwise directed
first withdraw from public usethe Airport Lands and Buildings. Sections 83 and 88 by law. The reserved land shall thereafter remain subject to the specific
of the Public Land Law or Commonwealth Act No. 141, which "remains to this day public purpose indicated until otherwise provided by law or
the existing general law governing the classification and disposition of lands of the proclamation;
public domain other than timber and mineral lands,"27 provide:
x x x x. (Emphasis supplied)
SECTION 83. Upon the recommendation of the Secretary of Agriculture and
Natural Resources, the President may designate by proclamation any tract or There is no question, therefore, that unless the Airport Lands and Buildings are
tracts of land of the public domain as reservations for the use of the Republic withdrawn by law or presidential proclamation from public use, they are properties of
of the Philippines or of any of its branches, or of the inhabitants thereof, in public dominion, owned by the Republic and outside the commerce of man.
accordance with regulations prescribed for this purposes, or for quasi-public
uses or purposes when the public interest requires it, including reservations c. MIAA is a Mere Trustee of the Republic
for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public
MIAA is merely holding title to the Airport Lands and Buildings in trust for the
quarries, public fishponds, working men's village and other improvements for
Republic. Section 48, Chapter 12, Book I of the Administrative Code allows
the public benefit.
instrumentalities like MIAA to hold title to real properties owned by the
Republic, thus:
SECTION 88. The tract or tracts of land reserved under the provisions of
Section eighty-three shall be non-alienable and shall not be subject to
SEC. 48. Official Authorized to Convey Real Property. — Whenever real
occupation, entry, sale, lease, or other disposition until again declared
property of the Government is authorized by law to be conveyed, the deed of
alienable under the provisions of this Act or by proclamation of the
conveyance shall be executed in behalf of the government by the following:
President. (Emphasis and underscoring supplied)
(1) For property belonging to and titled in the name of the Republic of the
Thus, unless the President issues a proclamation withdrawing the Airport Lands and
Philippines, by the President, unless the authority therefor is expressly vested
Buildings from public use, these properties remain properties of public dominion and
by law in another officer.
are inalienable. Since the Airport Lands and Buildings are inalienable in their
present status as properties of public dominion, they are not subject to levy on
execution or foreclosure sale. As long as the Airport Lands and Buildings are (2) For property belonging to the Republic of the Philippines but titled in
reserved for public use, their ownership remains with the State or the Republic of the the name of any political subdivision or of any corporate agency or
Philippines. instrumentality, by the executive head of the agency or instrumentality.
(Emphasis supplied)
The authority of the President to reserve lands of the public domain for public use,
and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is
III of the Administrative Code of 1987, which states: clearer because even its executive head cannot sign the deed of conveyance on
behalf of the Republic. Only the President of the Republic can sign such deed of
conveyance.28
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government. — (1) The President shall have the power to reserve for
settlement or public use, and for specific public purposes, any of the d. Transfer to MIAA was Meant to Implement a Reorganization

87
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands
and Buildings from the Bureau of Air Transportation of the Department of
Transportation and Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. — x x x x
The land where the Airport is presently located as well as the
surrounding land area of approximately six hundred hectares, are
hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. The
Bureau of Lands and other appropriate government agencies shall undertake
an actual survey of the area transferred within one year from the
promulgation of this Executive Order and the corresponding title to be issued
in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved
by the President of the Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All
existing public airport facilities, runways, lands, buildings and other
property, movable or immovable, belonging to the Airport, and all assets,
powers, rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue
facilities, are hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the
Bureau of Air Transportation and Transitory Provisions. — The Manila
International Airport including the Manila Domestic Airport as a division under
the Bureau of Air Transportation is hereby abolished.
x x x x.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the
Philippines for both international and domestic air traffic, is required to
provide standards of airport accommodation and service comparable with the
best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other
facilities, have to be upgraded to meet the current and future air traffic and
other demands of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the
objectives of providing high standards of accommodation and service
within the context of a financially viable operation, will best be achieved
by a separate and autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by
Presidential Decree No. 1772, the President of the Philippines is given
continuing authority to reorganize the National Government, which
authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation
to MIAA was not meant to transfer beneficial ownership of these assets from the
Republic to MIAA. The purpose was merely to reorganize a division in the Bureau
of Air Transportation into a separate and autonomous body. The Republic
remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is owned
solely by the Republic. No party claims any ownership rights over MIAA's assets
adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not
be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines." This only means that the Republic
retained the beneficial ownership of the Airport Lands and Buildings because under
Article 428 of the Civil Code, only the "owner has the right to x x x dispose of a thing."
Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not own
the Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands
and Buildings without the Republic paying MIAA any consideration. Under Section 3
88
of the MIAA Charter, the President is the only one who can authorize the sale or
disposition of the Airport Lands and Buildings. This only confirms that the Airport
Lands and Buildings belong to the Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any
"[r]eal property owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. — The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code,
which prohibits local governments from imposing "[t]axes, fees or charges of any kind
on the National Government, its agencies and instrumentalitiesx x x." The real
properties owned by the Republic are titled either in the name of the Republic itself or
in the name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real estate
tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the
tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person."
MIAA, as a government instrumentality, is not a taxable person under Section 133(o)
of the Local Government Code. Thus, even if we assume that the Republic has
granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does
not make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such
a case, MIAA has granted the beneficial use of such land area for a consideration to
a taxable person and therefore such land area is subject to real estate tax. In Lung
Center of the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes.29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because
Section 193 of the Local Government Code of 1991 withdrew the tax exemption of
"all persons, whether natural or juridical" upon the effectivity of the Code. Section
193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise
provided in this Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions are hereby withdrawn upon
effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues
that since the Local Government Code withdrew the tax exemption of all juridical
persons, then MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code
that the withdrawn exemptions from realty tax cover not just GOCCs,
but all persons. To repeat, the provisions lay down the explicit proposition
89
 that the withdrawal of realty tax exemption applies to all persons. The
reference to or the inclusion of GOCCs is only clarificatory or illustrative of
the explicit provision.
The term "All persons" encompasses the two classes of persons
recognized under our laws, natural and juridical persons. Obviously,
MIAA is not a natural person. Thus, the determinative test is not just
whether MIAA is a GOCC, but whether MIAA is a juridical person at all.
(Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local
taxation is its status — whether MIAA is a juridical person or not. The minority also
insists that "Sections 193 and 234 may be examined in isolation from Section 133(o)
to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government
Code expressly withdrew the tax exemption of all juridical persons "[u]nless
otherwise provided in this Code." Now, Section 133(o) of the Local Government
Code expressly provides otherwise, specifically prohibiting local governments
from imposing any kind of tax on national government instrumentalities. Section
133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units. – Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the levy
of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its
agencies and instrumentalities, and local government units. (Emphasis and
underscoring supplied)
By express mandate of the Local Government Code, local governments cannot
impose any kind of tax on national government instrumentalities like the MIAA. Local
governments are devoid of power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend to the
national government, its agencies and instrumentalities, "[u]nless otherwise provided
in this Code" as stated in the saving clause of Section 133. The saving clause refers
to Section 234(a) on the exception to the exemption from real estate tax of real
property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all
juridical persons are subject to tax by local governments. The minority insists that the
juridical persons exempt from local taxation are limited to the three classes of entities
specifically enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts;
(b) cooperatives duly registered under Republic Act No. 6938; and (c) non-
stock and non-profit hospitals and educational institutions. It would be
belaboring the obvious why the MIAA does not fall within any of the exempt
entities under Section 193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of
the Local Government Code. This theory will result in gross absurdities. It will make
the national government, which itself is a juridical person, subject to tax by local
governments since the national government is not included in the enumeration of
exempt entities in Section 193. Under this theory, local governments can impose any
kind of local tax, and not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax.
Some of the national government instrumentalities vested by law with juridical
personalities are: Bangko Sentral ng Pilipinas,30 Philippine Rice Research
Institute,31Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion
Development Authority,34Philippine Ports Authority,35 Cagayan de Oro Port
Authority,36 San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine
National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which
expressly prohibits local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) does not distinguish between national
government instrumentalities with or without juridical personalities. Where the law
does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all
90
national government instrumentalities, with or without juridical personalities. The
determinative test whether MIAA is exempt from local taxation is not whether MIAA is
a juridical person, but whether it is a national government instrumentality under
Section 133(o) of the Local Government Code. Section 133(o) is the specific
provision of law prohibiting local governments from imposing any kind of tax on the
national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless
otherwise provided in this Code." This means that unless the Local Government
Code grants an express authorization, local governments have no power to tax the
national government, its agencies and instrumentalities. Clearly, the rule is local
governments have no power to tax the national government, its agencies and
instrumentalities. As an exception to this rule, local governments may tax the national
government, its agencies and instrumentalities only if the Local Government Code
expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section
234(a) of the Code, which makes the national government subject to real estate tax
when it gives the beneficial use of its real properties to a taxable entity. Section
234(a) of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax – The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real
estate tax. The exception to this exemption is when the government gives the
beneficial use of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the
national government, its agencies and instrumentalities are subject to any kind of tax
by local governments. The exception to the exemption applies only to real estate tax
and not to any other tax. The justification for the exception to the exemption is that
the real property, although owned by the Republic, is not devoted to public use or
public service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the
Local Government Code, the later provisions prevail over Section 133. Thus, the
minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234.
Following an accepted rule of construction, in case of conflict the subsequent
provisions should prevail. Therefore, MIAA, as a juridical person, is subject to
real property taxes, the general exemptions attaching to instrumentalities
under Section 133(o) of the Local Government Code being qualified by
Sections 193 and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on
one hand, and Sections 193 and 234 on the other. No one has urged that there is
such a conflict, much less has any one presenteda persuasive argument that there is
such a conflict. The minority's assumption of an irreconcilable conflict in the statutory
provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section
193 expressly admits its subordination to other provisions of the Code when Section
193 states "[u]nless otherwise provided in this Code." By its own words, Section 193
admits the superiority of other provisions of the Local Government Code that limit the
exercise of the taxing power in Section 193. When a provision of law grants a power
but withholds such power on certain matters, there is no conflict between the grant of
power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to
tax, and not merely the exercise of a delegated power to tax. Section 133 states that
the taxing powers of local governments "shall not extend to the levy" of any kind of
tax on the national government, its agencies and instrumentalities. There is no
clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local
91
governments such taxing powers. By their very meaning and purpose, the "common
limitations" on the taxing power prevail over the grant or exercise of the taxing power.
If the taxing power of local governments in Section 193 prevails over the limitations
on such taxing power in Section 133, then local governments can impose any kind of
tax on the national government, its agencies and instrumentalities — a gross
absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code
pursuant to the saving clause in Section 133 stating "[u]nless otherwise provided in
this Code." This exception — which is an exception to the exemption of the Republic
from real estate tax imposed by local governments — refers to Section 234(a) of the
Code. The exception to the exemption in Section 234(a) subjects real property
owned by the Republic, whether titled in the name of the national government, its
agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points
out that Section 2 of the Introductory Provisions of the Administrative Code admits
that its definitions are not controlling when it provides:
SEC. 2. General Terms Defined. — Unless the specific words of the text, or
the context as a whole, or a particular statute, shall require a different
meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is
"flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in
the Administrative Code does not apply to the Local Government Code. Section 2 of
the Administrative Code clearly states that "unless the specific words x x x of a
particular statute shall require a different meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus, unless there is specific language in the Local
Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining
the phrase "government-owned or controlled corporation" differently from the
definition in the Administrative Code. Indeed, there is none. The Local Government
Code is silent on the definition of the phrase "government-owned or controlled
corporation." The Administrative Code, however, expressly defines the phrase
"government-owned or controlled corporation." The inescapable conclusion is that
the Administrative Code definition of the phrase "government-owned or controlled
corporation" applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code
"incorporates in a unified document the major structural, functional and procedural
principles and rules of governance." Thus, the Administrative Code is the governing
law defining the status and relationship of government departments, bureaus, offices,
agencies and instrumentalities. Unless a statute expressly provides for a different
status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled
corporation" should apply only to corporations organized under the Corporation
Code, the general incorporation law, and not to corporations created by special
charters. The minority sees no reason why government corporations with special
charters should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations"
under the Administrative Code refer to those corporations owned by the
government or its instrumentalities which are created not by legislative
enactment, but formed and organized under the Corporation Code through
registration with the Securities and Exchange Commission. In short, these
are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a
capital structure for GOCCs whose full ownership is limited by its charter to
92
 the State or Republic. Such GOCCs are not empowered to declare dividends
or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the
Constitution and existing legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or
controlled corporation" does not distinguish between one incorporated under the
Corporation Code or under a special charter. Where the law does not distinguish,
courts should not distinguish.
Second, Congress has created through special charters several government-owned
corporations organized as stock corporations. Prime examples are the Land Bank of
the Philippines and the Development Bank of the Philippines. The special charter40 of
the Land Bank of the Philippines provides:
SECTION 81. Capital. — The authorized capital stock of the Bank shall be
nine billion pesos, divided into seven hundred and eighty million common
shares with a par value of ten pesos each, which shall be fully subscribed by
the Government, and one hundred and twenty million preferred shares with a
par value of ten pesos each, which shall be issued in accordance with the
provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the
Bank shall be Five Billion Pesos to be divided into Fifty Million common
shares with par value of P100 per share. These shares are available for
subscription by the National Government. Upon the effectivity of this Charter,
the National Government shall subscribe to Twenty-Five Million common
shares of stock worth Two Billion Five Hundred Million which shall be
deemed paid for by the Government with the net asset values of the Bank
remaining after the transfer of assets and liabilities as provided in Section 30
hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their
special charters are the Philippine Crop Insurance Corporation,42 Philippine
International Trading Corporation,43 and the Philippine National Bank44 before it was
reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To rule
that they are not government-owned or controlled corporations because they are not
registered with the Securities and Exchange Commission would remove them from
the reach of Section 234 of the Local Government Code, thus exempting them from
real estate tax.
Third, the government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article XII of
the Constitution. The first condition is that the government-owned or controlled
corporation must be established for the common good. The second condition is that
the government-owned or controlled corporation must meet the test of economic
viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability. (Emphasis and underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned or
controlled corporations" through special charters only if these entities are required to
meet the twin conditions of common good and economic viability. In other words,
Congress has no power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two conditions of common
good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good — meaning for economic development
purposes — these government-owned or controlled corporations with special
charters are usually organized as stock corporations just like ordinary private
corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
93
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential
governmental or public functions. Congress has plenary authority to create
government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services.
However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities — known as "government-
owned or controlled corporations" — must meet the test of economic viability
because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank
of the Philippines and similar government-owned or controlled corporations, which
derive their income to meet operating expenses solely from commercial transactions
in competition with the private sector. The intent of the Constitution is to prevent the
creation of government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to
the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when
the government creates a corporation, there is a sense in which this
corporation becomes exempt from the test of economic performance. We
know what happened in the past. If a government corporation loses, then it
makes its claim upon the taxpayers' money through new equity infusions
from the government and what is always invoked is the common good. That
is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to support a
few government financial institutions. And this is all taxpayers' money which
could have been relocated to agrarian reform, to social services like health
and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with
the "common good," this becomes a restraint on future enthusiasts for state
capitalism to excuse themselves from the responsibility of meeting the market
test so that they become viable. And so, Madam President, I reiterate, for the
committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY
OR THE ECONOMIC TEST," together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines: A
Commentary:
The second sentence was added by the 1986 Constitutional Commission.
The significant addition, however, is the phrase "in the interest of the
common good and subject to the test of economic viability." The addition
includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector
can do better. Moreover, economic viability is more than financial viability but
also includes capability to make profit and generate benefits not quantifiable
in financial terms.46(Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.
However, government-owned or controlled corporations with special charters,
organized essentially for economic or commercial objectives, must meet the test of
economic viability. These are the government-owned or controlled corporations that
are usually organized under their special charters as stock corporations, like the
Land Bank of the Philippines and the Development Bank of the Philippines. These
are the government-owned or controlled corporations, along with government-owned
or controlled corporations organized under the Corporation Code, that fall under the
definition of "government-owned or controlled corporations" in Section 2(10) of the
Administrative Code.
94
The MIAA need not meet the test of economic viability because the legislature did
not create MIAA to compete in the market place. MIAA does not compete in the
market place because there is no competing international airport operated by the
private sector. MIAA performs an essential public service as the primary domestic
and international airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and
departure of passengers, screening out those without visas or travel
documents, or those with hold departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on
prohibited importations;
3. The quarantine office of the Department of Health, to enforce health
measures against the spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of
plant and animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to
prevent the entry of terrorists and the escape of criminals, as well as to
secure the airport premises from terrorist attack or seizure;
6. The Air Traffic Office of the Department of Transportation and
Communications, to authorize aircraft to enter or leave Philippine airspace,
as well as to land on, or take off from, the airport; and
7. The MIAA, to provide the proper premises — such as runway and
buildings — for the government personnel, passengers, and airlines, and to
manage the airport operations.
All these agencies of government perform government functions essential to the
operation of an international airport.
MIAA performs an essential public service that every modern State must provide its
citizens. MIAA derives its revenues principally from the mandatory fees and charges
MIAA imposes on passengers and airlines. The terminal fees that MIAA charges
every passenger are regulatory or administrative fees47 and not income from
commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of
the Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. – x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually
through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital
structure, MIAA remains a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code. More importantly, as long as
MIAA renders essential public services, it need not comply with the test of economic
viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase
"government-owned or controlled corporation" as merely "clarificatory or illustrative."
This is fatal. The 1987 Constitution prescribes explicit conditions for the creation of
"government-owned or controlled corporations." The Administrative Code defines
what constitutes a "government-owned or controlled corporation." To belittle this
phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under
Section 2(13) of the Introductory Provisions of the Administrative Code because it is
not organized as a stock or non-stock corporation. Neither is MIAA a government-
owned or controlled corporation under Section 16, Article XII of the 1987 Constitution
because MIAA is not required to meet the test of economic viability. MIAA is a
government instrumentality vested with corporate powers and performing essential
public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any
kind of tax by local governments under Section 133(o) of the Local Government
95
Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is
given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use
and thus are properties of public dominion. Properties of public dominion are owned
by the State or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth. (Emphasis supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very least
intended for public service. Whether intended for public use or public service, the
Airport Lands and Buildings are properties of public dominion. As properties of public
dominion, the Airport Lands and Buildings are owned by the Republic and thus
exempt from real estate tax under Section 234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative
Code, which governs the legal relation and status of government units, agencies and
offices within the entire government machinery, MIAA is a government instrumentality
and not a government-owned or controlled corporation. Under Section 133(o) of the
Local Government Code, MIAA as a government instrumentality is not a taxable
person because it is not subject to "[t]axes, fees or charges of any kind" by local
governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case
the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private
parties are subject to real estate tax by the City of Parañaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the State
or the Republic of the Philippines. Article 420 specifically mentions "ports x x x
constructed by the State," which includes public airports and seaports, as properties
of public dominion and owned by the Republic. As properties of public dominion
owned by the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public
dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of
the Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No.
66878. We DECLARE the Airport Lands and Buildings of the Manila International
Airport Authority EXEMPT from the real estate tax imposed by the City of Parañaque.
We declare VOID all the real estate tax assessments, including the final notices of
real estate tax delinquencies, issued by the City of Parañaque on the Airport Lands
and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also
declare VOID the assailed auction sale, and all its effects, of the Airport Lands and
Buildings of the Manila International Airport Authority.
No costs.
SO ORDERED.
*With dissenting opinion.
96
 Republic of the Philippines To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from
SUPREME COURT several foreign banks,8 i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank
Manila of Japan, Limited, and Societe General (original lenders), acting through an Inter-Creditor
Agent, Dai-ichi Kangyo Bank, a Japanesebank that subsequently merged with the
FIRST DIVISION Industrial Bank of Japan, Limited (Industrial Bank of Japan) and the Fuji Bank, Limited
(Fuji Bank), with the mergedentity being named as Mizuho Corporate Bank (Mizuho
G.R. Nos. 193383-84 January 14, 2015 Bank). One of the merged banks, Fuji Bank, had a branch in the Philippines, which
became a branch of Mizuho Bank as a result of the merger. The Industrial Bank of Japan
and Mizuho Bank are residents of Japan for purposes of income taxation, and recognized
CBK POWER COMPANY LIMITED, Petitioner, as such under the relevant provisions of the income tax treaties between the Philippines
vs. and Japan.9
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Certain portions of the loan were subsequently assigned by the original lenders to various
x-----------------------x other banks, including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen
Zentral Bank Osterreich AG (Raiffesen Bank). Fortis-Netherlands, in turn, assigned its
G.R. Nos. 193407-08 portion of the loan to Fortis Bank S.A./N.V. (Fortis-Belgium), a resident of Belgium. Fortis
Netherlands and Raiffesen Bank, on the other hand, are residents of Netherlands and
COMMISSIONER OF INTERNAL REVENUE, Petitioner, Austria, respectively.10
vs.
CBK POWER COMPANY LIMITED, Respondent. In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-
Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it remitted
DECISION interest payments from May 2001 to May 2003.11 It allegedly withheld final taxes from
said payments based on the following rates, and paid the same to the Revenue District
PERLAS-BERNABE, J.: Office No. 55 of the Bureau of Internal Revenue (BIR): (a) fifteen percent (15%) for Fortis-
Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for
Industrial Bank of Japan and Mizuho Bank.12
Assailed in these consolidated petitions for review on certiorari 1 are the Decision2 dated
March 29, 2010 and the Resolution3 dated August 16, 2010 of the Court ofTax Appeals
(CTA) En Bancin C.T.A. E.B. Nos. 469 and 494, which affirmed the Decision4 dated However, according to CBK Power, under the relevant tax treaties between the
August 28, 2008, the Amended Decision5 dated February 12, 2009, and the Philippines and the respective countries in which each of the banks is a resident, the
Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos. 6699, interest income derived by the aforementioned banks are subject only to a preferential
6884,and 7166 granting CBK Power Company Limited (CBK Power) a refund of its tax rate of 10%, viz.:13
excess final withholding tax for the taxable years 2001 to 2003.
1âwphi1
The Facts COUNTRY PREFERENTIAL RATE
BANK OF UNDER THE RELEVANT TAX
CBK Power is a limited partnership duly organized and existing under the laws of the RESIDENCE TREATY
Philippines, and primarily engaged in the development and operation of the Caliraya,
Botocan, and Kalayaan hydro electric power generating plants in Laguna (CBK Project). Fortis Bank S.A./N.V. Belgium 10% (Article 11[1], RP-Belgium
It is registered with the Board of Investments (BOI) as engaged in a preferred pioneer Tax Treaty)
area of investment under the Omnibus Investment Code of 1987.7
97
 Industrial Bank of Japan 10% (Article 11[3], RP-Japan Tax CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently,
Japan Treaty) however, all three cases – CTA Case Nos. 6699, 6884, and 7166 – were consolidated in
a Resolution dated August 3, 2005.16
Raiffesen Zentral Austria 10% (Article 11[3], RP-Austria Tax
Bank Treaty) The CTA First Division Rulings
Osterreich AG

Mizuho Corporate Japan 10% (Article 11[3], RP-Japan Tax
Bank Treaty)
Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final
withholding taxes allegedly erroneously withheld and collected for the years 2001 and
2002 with the BIR Revenue Region No. 9. The claim for refund of excess final
withholding taxes in 2003 was subsequently filed on March 4, 2005. 14
The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims
prompted CBK Power to file petitions for review before the CTA, viz.:15
(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the
refund of excess final withholding tax in the total amount of ₱6,393,267.20
covering the year 2001 with respect to interest income derived by [Fortis-
Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An Answer was filed by
the Commissioner on July 25, 2003.
(2) CTA Case No. 6884was filed by CBK Power on March 5, 2004 seeking for the
refund of the amount of 8,136,174.31 covering [the] year 2002 with respect to
interest income derived by [Fortis- Belgium], Industrial Bank of Japan, [Mizuho
Bank], and [Raiffesen Bank]. The Commissioner filed his Answer on May 7,
2004.
xxxx
(3) CTA Case No. 7166was filed by CBK [Power] on March 9, 2005 seeking for
the refund of [the amount of] ₱1,143,517.21covering [the] year 2003 with respect
to interest income derived by [Fortis Belgium], and [Raiffesen Bank]. The
Commissioner filed his Answer on May 9, 2005. (Emphases supplied)
In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and
ordered the refund of the amount of 15,672,958.42 upon a finding that the relevant tax
treaties were applicable to the case.18 It cited DA-ITAD Ruling No. 099-0319 dated July
16, 2003, issued by the BIR, confirming CBK Power’s claim that the interest payments it
made to Industrial Bank of Japan and Raiffesen Bank were subject to a final withholding
tax rate of only 10%of the gross amount of interest, pursuant to Article 11 of the Republic
of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling
No. 126-0320 dated August 18, 2003, also issued by the BIR, interest payments to Fortis-
Belgium were likewise subjected to the same rate pursuant to the Protocol Amending the
RP-Belgium Tax Treaty, the provisions of which apply on income derived or which
accrued beginning January 1, 2000. With respect to interest payments made to Fortis-
Netherlands before it assigned its portion of the loan to Fortis-Belgium, the CTA First
Division likewise granted the preferential rate.21
The CTA First Division categorically declared in the August 28, 2008 Decision that the
required International Tax Affairs Division (ITAD) ruling was not a condition sine qua non
for the entitlement of the tax relief sought by CBK Power,22 however, upon motion for
reconsideration23 filed by the Commissioner, the CTA First Division amendedits earlier
decision by reducing the amount of the refund from ₱15,672,958.42 to ₱14,835,720.39
on the ground that CBK Power failed to obtain an ITAD ruling with respect to its
transactions with Fortis-Netherlands.24 In its Amended Decision25 dated February 12,
2009, the CTA First Division adopted26 the ruling in the case of Mirant (Philippines)
Operations Corporation (formerly: Southern Energy Asia-Pacific Operations [Phils.], Inc.)
v. Commissioner of Internal Revenue (Mirant),27 cited by the Commissioner in his motion
for reconsideration, where the Court categorically pronounced in its Resolution dated
February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax
rate.
CBK Power moved for the reconsideration28 of the Amended Decision dated February 12,
2009, arguing in the main that the Mirantcase, which was resolved in a minute resolution,
did not establish a legal precedent. The motion was denied, however, in a
Resolution29 dated May 7, 2009 for lack of merit.

98
Undaunted, CBK Power elevated the matter to the CTA En Bancon petition for
review,30 docketed as C.T.A E.B. No. 494. The Commissioner likewise filed his own
petition for review,31 which was docketed as C.T.A. E.B. No. 469. Said petitions were
subsequently consolidated.32
CBK Power raised the lone issue of whether or not an ITAD ruling is required before it
can avail of the preferential tax rate. On the other hand, the Commissioner claimed that
CBK Power failed to exhaust administrative remedies when it filed its petitions before the
CTA First Division, and that said petitions were not filed within the two-year prescriptive
period for initiating judicial claims for refund.33
The CTA En Banc Ruling
In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA
First Division that a prior application with the ITAD is indeed required by Revenue
Memorandum Order (RMO) 1-2000,35 which administrative issuance has the force and
effect of law and is just as binding as a tax treaty. The CTA En Banc declared the Mirant
case as without any binding effect on CBK Power, having been resolved by this Court
merely through minute resolutions, and relied instead on the mandatory wording of RMO
1-2000, as follows:36
III. Policies:
xxxx
2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR
Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days
before the transaction i.e. payment of dividends, royalties, etc., accompanied by
supporting documents justifying the relief. x x x.
The CTA En Banc further held that CBK Power’s petitions for review were filed within the
two-year prescriptive period provided under Section 22937 of the National Internal
Revenue Code of 199738 (NIRC), and that it was proper for CBK Power to have filed said
petitions without awaiting the final resolution of its administrative claims for refund before
the BIR; otherwise, it would have completely lost its right to seek judicial recourse if the
two-year prescriptive period lapsed with no judicial claim filed.
CBK Power’s motion for partial reconsideration and the Commissioner’s motion for
reconsideration of the foregoing Decision were both deniedin a Resolution39 dated
August 16, 2010 for lack of merit; hence, the present consolidated petitions.
The Issues Before the Court
In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may
add a requirement– prior application for an ITAD ruling – that is not found in the income
tax treaties signed by the Philippines before a taxpayer can avail of preferential tax rates
under said treaties.40
On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK
Power is not entitled to a refund in the amount of ₱1,143,517.21 for the period covering
taxable year 2003 as it allegedly failed to exhaust administrative remedies before seeking
judicial redress.41
The Court’s Ruling
The Court resolves the foregoing in seriatim.
A. G.R. Nos. 193383-84
The Philippine Constitution provides for adherence to the general principles of
international law as part of the law of the land. The time honored international principle of
pacta sunt servanda demands the performance in good faith of treaty obligations on the
part of the states that enter into the agreement. In this jurisdiction, treaties have the force
and effect of law.42 The issue of whether the failure to strictly comply with RMO No. 1-
2000 will deprive persons or corporations of the benefit of a tax treaty was squarely
addressed in the recent case of Deutsche Bank AG Manila Branch v. Commissioner of
Internal Revenue43 (Deutsche Bank), where the Court emphasized that the obligation to
comply with a tax treaty must take precedence over the objective of RMO No. 1-2000,
viz.:
We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the
CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed
period is not in harmony with the objectives of the contracting state to ensure that the
benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.
99
Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divestentitlement to
the reliefas it would constitute a violation of the duty required by good faith in complying
with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance would impair the
value of the tax treaty. At most, the application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to
the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.44 (Emphases and underscoring supplied)
The objective of RMO No. 1-2000 inrequiring the application for treaty relief with the ITAD
before a party’s availment of the preferential rate under a tax treaty is to avert the
consequences of any erroneous interpretation and/or application of treaty provisions,
such as claims for refund/credit for overpayment of taxes, or deficiency tax liabilities for
underpayment.45 However, as pointed out in Deutsche Bank, the underlying principle of
prior application with the BIR becomes moot in refund cases– as in the present case –
where the very basis of the claim is erroneous or there is excessive payment arising from
the non-availment of a tax treaty relief at the first instance.Just as Deutsche Bank was
not faulted by the Court for not complying with RMO No. 1-2000 prior to the
transaction,46 so should CBK Power. In parallel, CBK Power could not have applied for a
tax treaty relief 15 days prior to its payment of the final withholding tax on the interest
paid to its lenders precisely because it erroneously paid said tax on the basis of the
regular rate as prescribed by the NIRC, and not on the preferential tax rate provided
under the different treaties. As stressed by the Court, the prior application requirement
under RMO No. 1-2000 then becomes illogical.47
Not only is the requirement illogical, butit is also an imposition that is not found at all in
the applicable tax treaties. In Deutsche Bank, the Court categorically held that the BIR
should not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements, especially since said tax treaties do not
provide for any prerequisite at all for the availment of the benefits under said
agreements.48
It bears reiterating that the application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief.49 Since CBK Power had
requested for confirmation from the ITAD on June 8, 2001 and October 28, 2002 50 before
it filed on April 14, 2003 its administrative claim for refund of its excess final withholding
taxes, the same should be deemed substantial compliance with RMO No. 1-2000, as in
Deutsche Bank. To rule otherwise would defeat the purpose of Section 229 of the NIRC
in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure
to make prior application for tax treaty relief.51 As the Court exhorted in Republic v. GST
Philippines, Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes,
the government has a corollary duty to implement tax laws in good faith; to discharge its
duty to collect what is due to it; and to justly return what has been erroneously and
excessively given to it.53
In view of the foregoing, the Court holds that the CTA En Banc committed reversible error
in affirming the reduction of the amount of refund to CBK Power from 15,672,958.42 to
₱14,835,720.39 to exclude its transactions with Fortis-Netherlands for which no ITAD
ruling was obtained.54 CBK Power’s petition in G.R. Nos. 193383-84 is therefore granted.
The opposite conclusion is, however, reached with respect to the Commissioner’s petition
in G.R. Nos. 193407-08.
B. G.R. Nos. 193407-08
The Commissioner laments55 that he was deprived of the opportunity to act on the
administrative claim for refund of excess final withholding taxes covering taxable year
2003 which CBK Power filed on March 4, 2005, a Friday, then the following Wednesday,
March 9, 2005, the latter hastily elevated the case on petition for review before the CTA.
He argues56 that the failure on the part of CBK Power to give him a reasonable timeto act
on said claim is violative of the doctrines of exhaustion of administrative remedies and of
primary jurisdiction.
For its part, CBK Power maintains57 that it would be prejudicial to wait for the
Commissioner’s ruling beforeit files its judicial claim since it only has 2 years from the
payment of the tax within which to file both its administrative and judicial claims.
The Court rules for CBK Power.
Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally
collected taxes. Section 204 applies to administrative claims for refund, while Section 229
to judicial claims for refund. In both instances, the taxpayer’s claim must be filed within
100
two (2) years from the date of payment of the tax or penalty. However, Section 229 of the WHEN WHEN LAST DAY OF WHEN WHEN
NIRC further states the condition that a judicial claim for refund may not be maintained FINAL REMITTANCE THE 2-YEAR ADMINISTRATIVE PETITION
until a claim for refund or credit has been duly filed with the Commissioner. These INCOME RETURN PRESCRIPTIVE CLAIM WAS FOR
provisions respectively read: TAXES FILED PERIOD FILED REVIEW
WERE WAS
SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit WITHHELD FILED
Taxes. – The Commissioner may -
February 03/10/03 03/10/05 March 4, 2005 03/09/05
2003
xxxx
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good With respect to the remittance filed on March 10, 2003, the Court agrees with the
condition by the purchaser, and, in his discretion, redeem or change unused stamps that ratiocination of the CTA En Banc in debunking the alleged failure to exhaust
have been rendered unfit for use and refund their value upon proof of destruction. No administrative remedies. Had CBK Power awaited the action of the Commissioner on its
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing claim for refund prior to taking court action knowing fully well that the prescriptive period
with the Commissioner a claim for credit or refund within two (2) years after the payment was about to end, it would have lost not only its right to seek judicial recourse but its right
of the tax or penalty: Provided, however, That a return filed showing an overpayment to recover the final withholding taxes it erroneously paid to the government thereby
shall be considered as a written claim for credit or refund. suffering irreparable damage.59

xxxx
SEC. 229. 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, of any sum alleged to have
been excessively or in any manner wrongfully collected without authority, or of any sum
alleged to have been excessively orin 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 filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: x x x. (Emphases and underscoring supplied)
Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final
withholding taxes covering taxable year 2003 were filed within the two-year prescriptive
period, as shown by the table below:58
Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to
prescribe on June 10,2005, CBK Power could have waited for, at the most, three (3)
months from the filing of the administrative claim on March 4, 2005 until the last day of
the two-year prescriptive period ending June 10, 2005, that is, if only togive the BIR at the
administrative level an opportunity to act on said claim, the Court cannot, on that basis
alone, deny a legitimate claim that was, for all intents and purposes, timely filed in
accordance with Section 229 of the NIRC. There was no violation of Section 229 since
the law, as worded, only requires that an administrative claim be priorly filed.
In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener
Co., Ltd. v. David60 (Kiener), wherein it was held that in no wise does the law, i.e.,
Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector
of Internal Revenue first act upon the taxpayer’s claim, and that the taxpayer shall not go
to court before he is notified of the Collector’s action. In Kiener, the Court went on to say
that the claim with the Collector of Internal Revenue was intended primarily as a notice of
warning that unless the tax or penalty alleged to have been collected erroneously or
illegally is refunded, court action will follow, viz.: The controversy centers on the
construction of the aforementioned section of the Tax Code which reads:
SEC. 306. 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
101
hereafter alleged to have been erroneously or illegally assessed or collected, or of any SO ORDERED.
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 ESTELA M. PERLAS-BERNABE
has been duly filed with the Collector of Internal Revenue; but such suit or proceeding Associate Justice
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. The preceding provisions seem
at first blush conflicting. It will be noticed that, whereas the first sentence requires a claim
to be filed with the Collector of Internal Revenue before any suit is commenced, the last
makes imperative the bringing of such suit within two years from the date of collection.
But the conflict is only apparent and the two provisions easily yield to reconciliation,
which it is the office of statutory construction to effectuate, where possible, to give effect
to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the
language it used and to have acted with full idea of what it wanted to accomplish, it is fair
and reasonable to say without doing violence to the context or either of the two
provisions, that by the first is meant simply that the Collector of Internal Revenue shall be
given an opportunity to consider his mistake, if mistake has been committed, before he is
sued, but not, as the appellant contends that pending consideration of the claim, the
period of two years provided in the last clause shall be deemed interrupted. Nowhere and
in no wise does the law imply that the Collector of Internal Revenue must act upon the
claim, or that the taxpayer shall not go to court before he is notified of the Collector’s
action. x x x. We understand the filing of the claim with the Collector of Internal Revenue
to be intended primarily as a notice of warning that unless the tax or penalty alleged to
have been collected erroneously or illegally is refunded, court action will follow. x x
x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and,
the petition of the Commissioner in G.R. Nos. 193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated
March 29, 2010 and the Resolution dated August 16, 2010 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. E.B. Nos. 469 and 494 are hereby REVERSED and SET ASIDE
and a new one entered REINSTATING the Decision of the CTA First Division dated
August 28, 2008 ordering the refund in favor of CBK Power Company Limited the amount
of PlS,672,958.42 representing its excess final withholding taxes for the taxable years
2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack
of merit.

102
 municipality of Isabel, province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage
complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for

deficiency income, branch profit remittance, contractor's and commercial broker's taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986
FIRST DIVISION from petitioner assessing respondent several deficiency taxes. The assessed deficiency
internal revenue taxes, inclusive of surcharge and interest, were as follows:
G.R. No. 137377 December 18, 2001
I. DEFICIENCY INCOME TAX
COMMISSIONER OF INTERNAL REVENUE, petitioner, FY ended March 31, 1985
vs.
MARUBENI CORPORATION, respondent. Undeclared gross income
(Philphos and NDC construction
projects) P967,269,811.14
PUNO, J.:
Less: Cost and expenses (50%) 483,634,905.57
In this petition for review, the Commissioner of Internal Revenue assails the decision Net undeclared income 483,634,905.57
dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed Income tax due thereon 169,272,217.00
the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The
Add: 50% surcharge 84,636,108.50
tax court ordered the Commissioner of Internal Revenue to desist from collecting the
1985 deficiency income, branch profit remittance and contractor's taxes from Marubeni 20% int. p.a.fr. 7-15-85 to
Corporation after finding the latter to have properly availed of the tax amnesty under 8-15-86 36,675,646.90
Executive Orders Nos. 41 and 64, as amended. TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE
Respondent Marubeni Corporation is a foreign corporation organized and existing under TAX
the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines FY ended March 31, 1985
and maintains a branch office in Manila. Undeclared gross income from
Philphos and NDC construction
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a projects P483,634,905.57
letter of authority to examine the books of accounts of the Manila branch office of Less: Income tax thereon 169,272,217.00
respondent corporation for the fiscal year ending March 1985. In the course of the Amount subject to Tax 314,362,688.57
examination, petitioner found respondent to have undeclared income from two (2)
contracts in the Philippines, both of which were completed in 1984. One of the contracts Tax due thereon 47,154,403.00
was with the National Development Company (NDC) in connection with the construction Add: 50% surcharge 23,577,201.50
and installation of a wharf/port complex at the Leyte Industrial Development Estate in the

103
 20% int. p.a.fr. 4-26-85 to
8-15-86
TOTAL AMOUNT DUE
III. DEFICIENCY CONTRACTOR'S TAX
FY ended March 31, 1985
Undeclared gross receipts/gross
income from Philphos and NDC
construction projects P967,269,811.14
Contractor's tax due thereon
(4%)
50% surcharge for non-
Add: declaration
20% surcharge for late
payment
Sub-total
20% int. p.a.fr. 4-21-85 to
Add: 8-15-86
TOTAL AMOUNT DUE
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
FY ended March 31, 1985
Undeclared share from
commission income
(denominated as "subsidy from
Home Office")
Tax due thereon
50% surcharge for non-
Add: declaration
20% surcharge for late
payment
Sub-total
20% int. p.a.fr. 4-21-85 to
Add: 8-15-86
TOTAL AMOUNT DUE
The 50% surcharge was imposed for your client's failure to report for tax purposes the
12,305,360.66 aforesaid taxable revenues while the 25% surcharge was imposed because of your
client's failure to pay on time the above deficiency percentage taxes.
P83,036,965.16
xxx xxx xxx"1
Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis
and that the gross income from the two projects amounted to P967,269,811.14. Each
contract was for a piece of work and since the projects called for the construction and
installation of facilities in the Philippines, the entire income therefrom constituted income
38,690,792.00 from Philippine sources, hence, subject to internal revenue taxes. The assessment letter
further stated that the same was petitioner's final decision and that if respondent
disagreed with it, respondent may file an appeal with the Court of Tax Appeals within
19,345,396.00 thirty (30) days from receipt of the assessment.
9,672,698.00 On September 26, 1986, respondent filed two (2) petitions for review with the Court of
67,708,886.00 Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income,
branch profit remittance and contractor's tax assessments in petitioner's assessment
17,854,739.46 letter. The second, CTA Case No. 4110, questioned the deficiency commercial broker's
assessment in the same letter.
P85,563,625.46
Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file
a certified true copy of his statement declaring his net worth as of December 31, 1980 on
P24,683,114.50 record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and (c) file a return and pay
1,628,569.00 a tax equivalent to ten per cent (10%) of the increase in net worth from December 31,
1980 to December 31, 1985.
814,284.50
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return
407,142.25 dated October 30, 1986 and attached thereto its sworn statement of assets and liabilities
2,849,995.75 and net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the
BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent
to ten percent (10%) of its net worth increase between 1981 and 1986.
751,539.98
P3,600,535.68 The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
104
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by
Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No.
41 for the years 1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under
Title III and the tax on business under Chapter II, Title V of the National Internal Revenue
Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the
immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities,
and the period within which the taxpayer could avail of the amnesty was extended to
December 15, 1986. Those taxpayers who already filed their amnesty return under E.O.
No. 41, as amended, could avail themselves of the benefits, immunities and privileges
under the new E.O. by filing an amended return and paying an additional 5% on the
increase in net worth to cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No.
95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent
to five percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the
deficiency taxes subject of said case as deemed cancelled and withdrawn. The Court of
Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby
ORDERED to DESIST from collecting the 1985 deficiency taxes it had assessed
against petitioner and the same are deemed considered [sic] CANCELLED and
WITHDRAWN by reason of the proper availment by petitioner of the amnesty
under Executive Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with
the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the
decision of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the
Court of Tax Appeals which ruled that herein respondent's deficiency tax
liabilities were extinguished upon respondent's availment of tax amnesty under
Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit
remittance, and contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the
amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved
herein — income tax, branch profit remittance tax and contractor's tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however,
that respondent is disqualified from availing of the said amnesties because the latter falls
under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty
granted thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the
amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already
filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue
Code, as amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue
as of the effectivity hereof as a result of information furnished under Section 316
of the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth
before the Sandiganbayan;
105
 g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of
the Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending; before the Court of
Tax Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No.
41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax
cases already filed in court as of the effectivity hereof." The point of reference is the date
of effectivity of E.O. No. 41. The filing of income tax cases in court must have been made
before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed
for income tax amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractor's tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in
court. Respondent corporation did not fall under the said exception in Section 4 (b),
hence, respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
Chapter III of the National Internal Revenue Code.6 In the tax code, this tax falls under
Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the
exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O.
No. 41 by including estate and donor's taxes and tax on business. Estate and donor's
taxes fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V
of the same. The contractor's tax is provided in Section 205, Chapter II, Title V of the Tax
Code; it is defined and imposed under the title on business taxes, and is therefore a tax
on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of
E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not
contrary to or inconsistent with this amendatory Executive Order shall remain in
full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of
E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a
taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As
to what Executive Order the exception refers to, respondent argues that because of the
words "income" and "hereof," they refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed
to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory
act operates prospectively.9 While an amendment is generally construed as becoming a
part of the original act as if it had always been contained therein, 10 it may not be given a
retroactive effect unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired. 11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O.
No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is
a substantive amendment of E.O. No. 41. It does not merely change provisions in E.O.
No. 41. It supplements the original act by adding other taxes not covered in the first. 12 It
has been held that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax
past transactions not subject to tax under the original act.13 In an amendatory act, every
case of doubt must be resolved against its retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law. 15 It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to start with a clean slate.16 A tax
amnesty, much like a tax exemption, is never favored nor presumed in law. 17 If granted,
the terms of the amnesty, like that of a tax exemption, must be construed strictly against
106
the taxpayer and liberally in favor of the taxing authority. 18 For the right of taxation is
inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should
be read as to refer to estate and donor's taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November 17,
1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of
effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took
effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in
court. By the time respondent filed its supplementary tax amnesty return on December
15, 1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41
and 64 and was disqualified from availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty
under the two Executive Orders, it is still not liable for the deficiency contractor's tax
because the income from the projects came from the "Offshore Portion" of the contracts.
The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Portion. All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of
the two contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to
engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign
markets.20 The Philphos plant complex which was envisioned to be the largest
phosphatic fertilizer operation in Asia, and among the largest in the world, covered an
area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development
Estate. The wharf/port complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to be specifically
adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products,
liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),21 and other industrial plants within the Estate. The bidding
was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered
into an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port
Development Project Between National Development Company and Marubeni
Corporation."22 The Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems, fuel oil depot, utilities
systems, storage and service buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting, mobile equipment, spare parts
and other related facilities.23 The scope of the works under the contract covered turn-key
supply, which included grants of licenses and the transfer of technology and know-
how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the
whole of the Wharf/Port Complex through the Owner, with the design and
construction of other facilities around the site. The scope of works shall also
include any activity, work and supply necessary for, incidental to or appropriate
under present international industrial port practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to
in the abovementioned Annex I."25
The contract price for the wharf/port complex was ¥12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken down into
two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos Portion. The
Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan
provided by the Overseas Economic Cooperation Fund (OECF); and (b) by supplier's
credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese government as
assistance to foreign governments to promote economic development.26 The OECF
107
extended to the Philippine Government a loan of ¥7,560,000,000.00 for the Leyte
Industrial Estate Port Development Project and authorized the NDC to implement the
same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-
contractors.28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine
Pesos Portion were further broken down and subdivided according to the materials,
equipment and services rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained in a list attached as
Annex III to the contract.29
A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC
contract, it was Marubeni Head Office in Japan that participated in and won the bidding.
Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement
entitled "Turn-Key Contract for Ammonia Storage Complex Between Philippine
Phosphate Fertilizer Corporation and Marubeni Corporation."30 The object of the contract
was to establish and place in operating condition a modern, reliable, efficient and
integrated ammonia storage complex adapted to the site for the receipt and storage of
liquid anhydrous ammonia31 and for the delivery of ammonia to an integrated fertilizer
plant adjacent to the storage complex and to vessels at the dock.32 The storage complex
was to consist of ammonia storage tanks, refrigeration system, ship unloading system,
transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts,
and other related facilities.33 The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and transfer
of technology and know-how,34 and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the
whole of the Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of works shall
also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial practice, for the timely and
successful implementation of the object of this Contract, whether or not expressly
referred to in the abovementioned Annex I."35
The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency
was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the
price in Philippine currency was classified as the Philippine Pesos Portion. Both
Japanese Yen Portions I and II were financed by supplier's credit from the Export-Import
Bank of Japan. The price stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the project and their
individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the contracts
were classified — the Foreign Offshore Portion and the Philippine Onshore Portion. In
both contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore
Portion.37 Japanese Yen Portion II and the Philippine Pesos Portion correspond to the
Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractor's tax on the income from the two projects. In fact respondent claims, which
petitioner has not denied, that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon already paid to the
Philippine government.39 It is with regard to the gross receipts from the Foreign Offshore
Portion of the two contracts that the liabilities involved in the assessments subject of this
case arose. Petitioner argues that since the two agreements are turn-key,40 they call for
the supply of both materials and services to the client, they are contracts for a piece of
work and are indivisible. The situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and completed within the
territorial jurisdiction of the Philippines.41Accordingly, respondent's entire receipts from
the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be
subjected to contractor's tax in accordance with the ruling in Commissioner of Internal
Revenue v. Engineering Equipment & Supply Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A
contractor's tax of four percent of the gross receipts is hereby imposed on
proprietors or operators of the following business establishments and/or persons
engaged in the business of selling or rendering the following services for a fee or
compensation:
108
 (a) General engineering, general building and specialty contractors, as
defined in Republic Act No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent contractors"
includes persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of
such contractors or their employees. It does not include regional or area
headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries
or branches in the Asia-Pacific Region.
xxx xxx xxx43
Under the afore-quoted provision, an independent contractor is a person whose activity
consists essentially of the sale of all kinds of services for a fee, regardless of whether or
not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word "contractor" refers to a person
who, in the pursuit of independent business, undertakes to do a specific job or piece of
work for other persons, using his own means and methods without submitting himself to
control as to the petty details.44
A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is
generally in the nature of an excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products;46 and is directly collectible from the person
exercising the privilege.47 Being an excise tax, it can be levied by the taxing authority only
when the acts, privileges or business are done or performed within the jurisdiction of said
authority.48 Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.49
In the case at bar, it is undisputed that respondent was an independent contractor under
the terms of the two subject contracts. Respondent, however, argues that the work
therein were not all performed in the Philippines because some of them were completed
in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment
to be made and the works and services to be performed by respondent are indeed
classified into two. The first part, entitled "Breakdown of Japanese Yen Portion I"
provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to
discrete portions of materials and equipment which will be shipped to Leyte as
units and lots. This subdivision of price is to be used by owner to verify invoice for
Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision
of Japanese Yen Portion I is as follows:
xxx xxx xxx50
The subdivision of Japanese Yen Portion I covers materials and equipment while
Japanese Yen Portion II and the Philippine Pesos Portion enumerate other materials and
equipment and the construction and installation work on the project. In other words, the
supplies for the project are listed under Portion I while labor and other supplies are listed
under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General
Manager of the Industrial Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two projects, testified that
all the machines and equipment listed under Japanese Yen Portion I in Annex III were
manufactured in Japan.51 The machines and equipment were designed, engineered and
fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors
in the technical appendices to each contract.52 Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof;53 Yashima & Co. Ltd. which manufactured the
mobile equipment; Bridgestone which provided the rubber fenders of the mobile
equipment;54 and B.S. Japan for the supply of radio equipment.55 The engineering and
design works made by Kawasaki Steel Corporation included the lay-out of the plant
facility and calculation of the design in accordance with the specifications given by
respondent.56 All sub-contractors and manufacturers are Japanese corporations and are
based in Japan and all engineering and design works were performed in that country. 57
The materials and equipment under Portion I of the NDC Port Project is primarily
composed of two (2) sets of ship unloader and loader; several boats and mobile
equipment.58 The ship unloader unloads bags or bulk products from the ship to the port
while the ship loader loads products from the port to the ship. The unloader and loader
are big steel structures on top of each is a large crane and a compartment for operation
of the crane. Two sets of these equipment were completely manufactured in Japan
according to the specifications of the project. After manufacture, they were rolled on to a
109
barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader
were rolled off the barge and pulled to the pier to the spot where they were
installed.60 Their installation simply consisted of bolting them onto the pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile
equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on
wheels and self-propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in
Annex III to the NDC contract. These other items consist of supplies and materials for five
(5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration
building and a security building. Most of the materials consist of steel sheets, steel pipes,
channels and beams and other steel structures, navigational and communication as well
as electrical equipment.63
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units.64 The steel plates for
the tank were manufactured and cut in Japan according to drawings and specifications
and then shipped to Isabel. Once there, respondent's employees put the steel plates
together to form the storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply installed
there. 65 Annex III to the Philphos contract lists down under the Japanese Yen Portion I
the materials for the ammonia storage tank, incidental equipment, piping facilities,
electrical and instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested
in Japan prior to shipment in accordance with the terms of the contracts.66 The inspection
was made by representatives of respondent corporation, of NDC and Philphos. NDC, in
fact, contracted the services of a private consultancy firm to verify the correctness of the
tests on the machines and equipment67 while Philphos sent a representative to Japan to
inspect the storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were
all paid by respondent in Japan. In his deposition upon oral examination, Kenjiro
Yamakawa, formerly the Assistant General Manager and Manager of the Steel Plant
Marketing Department, Engineering & Construction Division, Kawasaki Steel Corporation,
testified that the equipment and supplies for the two projects provided by Kawasaki under
Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments
were duly issued by Kawasaki in Japanese and English.69 Yashima & Co. Ltd. and B.S.
Japan were likewise paid by Marubeni in Japan.70
Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos
also in Japan. The NDC, through the Philippine National Bank, established letters of
credit in favor of respondent through the Bank of Tokyo. The letters of credit were
financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank
of Tokyo, upon respondent's submission of pertinent documents, released the amount in
the letters of credit in favor of respondent and credited the amount therein to
respondent's account within the same bank.71
Clearly, the service of "design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing and commissioning,
coordination. . . "72 of the two projects involved two taxing jurisdictions. These acts
occurred in two countries — Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the evidence is clear that some
pieces of equipment and supplies were completely designed and engineered in Japan.
The two sets of ship unloader and loader, the boats and mobile equipment for the NDC
project and the ammonia storage tanks and refrigeration units were made and completed
in Japan. They were already finished products when shipped to the Philippines. The other
construction supplies listed under the Offshore Portion such as the steel sheets, pipes
and structures, electrical and instrumental apparatus, these were not finished products
when shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered outside the
taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co73 is not in point. In that case, the Court found that
Engineering Equipment, although an independent contractor, was not engaged in the
manufacture of air conditioning units in the Philippines. Engineering Equipment designed,
supplied and installed centralized air-conditioning systems for clients who contracted its
services. Engineering, however, did not manufacture all the materials for the air-
conditioning system. It imported some items for the system it designed and
installed.74 The issues in that case dealt with services performed within the local taxing
110
jurisdiction. There was no foreign element involved in the supply of materials and
services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.

SO ORDERED.

Davide, Jr., C .J ., Kapunan, Pardo, and Ynares-Santiago, JJ ., concur.

111
 SUPREME COURT
Manila
EN BANC
G.R. No. 127410 January 20, 1999
CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M.
JUNGCO, petitioners,
vs.
COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION
AND DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY,
BUREAU OF INTERNAL REVENUE, CITY TREASURER OF OLONGAPO and
MUNICIPAL TREASURER OF SUBIC, ZAMBALES, respondents.
PANGANIBAN, J.:
The constituttional rights to equal protection of the law is not violated by an executive
order, issued pursuant to law, granting tax and duty incentives only to the bussiness and
residents within the "secured area" of the Subic Special Econimic Zone and denying them
to those who live within the Zone but outside such "fenced-in" territory. The Constitution
does not require absolute equality among residents. It is enough that all persons under
like circumstances or conditions are given the same privileges and required to follow the
same obligations. In short, a classification based on valid and reasonable standards does
not violate the equal protection clause.
The Case
Before us is a petition for review under Rule 45 of the Rules of Court, seeking the
reversal of the Court of Appeals' Decision1 promulgated on August 29, 1996, and
Resolution2 dated November 13, 1996, in CA-GR SP No. 37788. 3The challenged
Decision upheld the constitutionality and validity of Executive Order No. 97-A (EO 97-A),
according to which the grant and enjoyment of the tax and duty incentives authorized
under Republic Act No. 7227 (RA 7227) were limited to the business enterprises and
residents within the fenced-in area of the Subic Special Economic Zone (SSEZ).
The assailed Resolution denied the petitioners' motion for reconsideration.
On March 13, 1992, Congress, with the approval of the President, passed into law RA
7227 entitled "An Act Accelerating the Conversion of Military Reservations Into Other
Productive Uses, Creating the Bases Conversion and Development Authority for this
Purpose, Providing Funds Therefor and for Other Purposes." Section 12 thereof created
the Subic Special Economic Zone and granted there to special privileges, as follows:
Sec. 12. Subic Special Economic Zone. — Subject to the concurrence by
resolution of the sangguniang panlungsod of the City of Olongapo and
the sangguniang bayan of the Municipalities of Subic, Morong and
Hermosa, there is hereby created a Special Economic and Free-port
Zone consisting of the City of Olongapo and the Municipality of Subic,
Province of Zambales, the lands occupied by the Subic Naval Base and
its contiguous extensions as embraced, covered, and defined by the
1947 Military Bases Agreement between the Philippines and the United
States of America as amended, and within the territorial jurisdiction of the
Municipalities of Morong and Hermosa, Province of Bataan, hereinafter
referred to as the Subic Special Economic Zone whose metes and
bounds shall be delineated in a proclamation to be issued by the
President of the Philippines. Within thirty (30) days after the approval of
this Act, each local government unit shall submit its resolution of
concurrence to join the Subic Special Economic Zone to the Office of the
President. Thereafter, the President of the Philippines shall issue a
proclamation defining the metes and bounds of the zone as provided
herein.
The abovementioned zone shall be subject to the following policies:
(a) Within the framework and subject to the mandate and limitations of
the Constitution and the pertinent provisions of the Local Government
Code, the Subic Special Economic Zone shall be developed into a self-
sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract
and promote productive foreign investments;
112
(b) The Subic Special Economic Zone shall be operated and managed
as a separate customs territory ensuring free flow or movement of goods
and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes, three percent (3%)
of the gross income earned by all businesses and enterprises within the
Subic Special Economic Zone shall be remitted to the National
Government, one percent (1%) each to the local government units
affected by the declaration of the zone in proportion to their population
area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all
businesses and enterprises within the Subic Special Economic Zone to
be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities
contiguous to the base areas.
In case of conflict between national and local laws with respect to tax
exemption privileges in the Subic Special Economic Zone, the same shall
be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for
foreign exchange, gold, securities and future shall be allowed and
maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and
regulate the operations of banks and other financial institutions within the
Subic Special Economic Zone;
(f) Banking and finance shall be liberalized with the establishment of
foreign currency depository units of local commercial banks and offshore
banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose
continuing investment shall not be less than two hundred fifty thousand
dollars ($250,000), his/her spouse and dependent children under twenty-
one (21) years of age, shall be granted permanent resident status within
the Subic Special Economic Zone. They shall have the freedom of
ingress and egress to and from the Subic Special Economic Zone
without any need of special authorization form the Bureau of Immigration
and Deportation. The Subic Bay Metropolitan Authority referred to in
Section 13 of this Act may also issue working visas renewable every two
(2) years to foreign executives and other aliens possessing highly
technical skills which no Filipino within the Subic Special Economic Zone
possesses, as certified by the Department of Labor and Employment.
The names of aliens granted permanent residence status and working
visas by the Subic Bay Metropolitan Authority shall be reported to the
Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;
(h) The defense of the zone and the security of its perimeters shall be the
responsibility of the National Government in coordination with the Subic
Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall
provide and establish its own security and fire-fighting forces; and
(i) Except as herein provided, the local government units comprising the
Subic Special Economic Zone shall retain their basic autonomy and
identity. The cities shall be governed by their respective charters and the
municipalities shall operate and function in accordance with Republic Act
No. 7160, otherwise known as the Local Government Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO
97), clarifying the application of the tax and duty incentives thus:
Sec. 1. On Import Taxes and Duties. — Tax and duty-free importations
shall apply only to raw materials, capital goods and equipment brought in
by business enterprises into the SSEZ. Except for these items,
importations of other goods into the SSEZ, whether by business
enterprises or resident individuals, are subject to taxes and duties under
relevant Philippine laws.
113
 The exportation or removal of tax and duty-free goods from the territory
of the SSEZ to other parts of the Philippine territory shall be subject to
duties and taxes under relevant Philippine laws.
Sec. 2. On All Other Taxes. — In lieu of all local and national taxes
(except import taxes and duties), all business enterprises in the SSEZ
shall be required to pay the tax specified in Section 12(c) of R.A. No.
7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO
97-A), specifying the area within which the tax-and-duty-free privilege was operative, viz.:
Sec. 1.1. The Secured Area consisting of the presently fenced-in former
Subic Naval Base shall be the only completely tax and duty-free area in
the SSEFPZ [Subic Special Economic and Free Port Zone]. Business
enterprises and individuals (Filipinos and foreigners) residing within the
Secured Area are free to import raw materials, capital goods, equipment,
and consumer items tax and duty-free. Consumption items, however,
must be consumed within the Secured Area. Removal of raw materials,
capital goods, equipment and consumer items out of the Secured Area
for sale to non-SSEFPZ registered enterprises shall be subject to the
usual taxes and duties, except as may be provided herein.
On October 26, 1994, the petitioners challenged before this Court the constitutionality of
EO 97-A for allegedly being violative of their right to equal protection of the laws. In a
Resolution dated June 27, 1995, this Court referred the matter to the Court of Appeals,
pursuant to Revised Administrative Circular No. 1-95.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos.
It delineated the exact metes and bounds of the Subic Special Economic and Free Port
Zone, pursuant to Section 12 of RA 7227.
Ruling of the Court of Appeals
Respondent Court held that "there is no substantial difference between the provisions of
EO 97-A and Section 12 of RA 7227. In both, the 'Secured Area' is precise and well-
defined as '. . . the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered and defined by the 1947 Military Bases Agreement
between the Philippines and the United States of America, as amended . . .'" The
appellate court concluded that such being the case, petitioners could not claim that EO
97-A is unconstitutional, while at the same time maintaining the validity of RA 7227.
The court a quo also explained that the intention of Congress was to confine the
coverage of the SSEZ to the "secured area" and not to include the "entire Olongapo City
and other areas mentioned in Section 12 of the law." It relied on the following
deliberarions in the Senate:
Senator Paterno. Thank you, Mr. President. My first question is the
extent of the economic zone. Since this will be a free port, in effect, I
believe that it is important to delineate or make sure that the delineation
will be quite precise[. M]y question is: Is it the intention that the entire of
Olongapo City, the Municipality of Subic and the Municipality of
Dinalupihan will be covered by the special economic zone or only
portions thereof?
Senator Shahani. Only portions, Mr. President. In other words, where the
actual operations of the free port will take place.
Senator Paterno. I see. So, we should say, "COVERING THE
DESIGNATED PORTIONS OR CERTAIN PORTIONS OF OLONGAPO
CITY, SUBIC AND DINALUPIHAN" to make it clear that it is not
supposed to cover the entire area of all of these territories.
Senator Shahani. So, the Gentleman is proposing that the words
"CERTAIN AREAS". . .
The President. The Chair would want to invite the attention of the
Sponsor and Senator Paterno to letter "C," which says: "THE
PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO
PROCLAIM, DELINEATE AND SPECIFY THE METES AND BOUNDS
OF OTHER SPECIAL ECONOMIC ZONES WHICH MAY BE CREATED
IN THE CLARK MILITARY RESERVATIONS AND ITS EXTENSIONS."
Probably, this provision can be expanded since, apparently, the intention
is that what is referred to in Olongapo as Metro Olongapo is not by
itself ipso jure already a special economic zone.
Senator Paterno. That is correct.
114
 The President. Someone, some authority must declare which portions of
the same shall be the economic zone. Is it the intention of the author that
it is the President of the Philippines who will make such delineation?
Senator Shahani. Yes Mr. President.
The Court of Appeals further justified the limited application of the tax incentives as being
within the prerogative of the legislature, pursuant to its "avowed purpose [of serving]
some public benefit or interest." It ruled that "EO 97-A merely implements the legislative
purpose of [RA 7227]."
Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals
Decision and Resolution.
The Issue
Petitioners submit the following issue for the resolution of the Court:
[W]hether or not Executive Order No. 97-A violates the equal protection
clause of the Constitution. Specifically the issue is whether the provisions
of Executive Order No. 97-A confining the application of R.A. 7227 within
the secured area and excluding the residents of the zone outside of the
secured area is discriminatory or not.4
The Court's Ruling
The petition 5 is bereft of merit.
Main Issue:
The Constitionality of EO 37-A
Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the
City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly
occupied by the Subic Naval Base. However, EO 97-A, according to them, narrowed
down the area within which the special privileges granted to the entire zone would apply
to the present "fenced-in former Subic Naval Base" only. It has thereby excluded the
residents of the first two components of the zone from enjoying the benefits granted by
the law. It has effectively discriminated against them without reasonable or valid
standards, in contravention of the equal protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents, the validity of
EO 97-A, arguing that Section 12 of RA 7227 clearly vests in the President the authority
to delineate the metes and bounds of the SSEZ. He adds that the issuance fully complies
with the requiretnents of a valid classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not
violative of the equal protection clause; neither is it discriminatory. Rather, than we find
real and substantive distinctions between the circumstances obtain;ng inside and those
outside the Subic Naval Base, thereby justifying a valid and reasonable classification.
The fundamental right of equal protection of the laws is not absolute, but is subject to
reasonable classification. If the groupings are characterized by substantial distinctions
that make real differences, one class may be treated and regulated differently from
another. 6 The classification must also be germane to the purpose of the law and must
apply to all those belonging to the same class. Explaining the nature of the equal
protection guarantee, the Court in Ichong v. Hernandez 8 said:
The equal protection of the law clause is against undue favor and
individual or class privilege, as well as hostile discrimination or the
oppression of inequality. It is not intended to prohibit legislation which is
limited either [by] the object to which it is directed or by [the] territory
within which it is to operate. It does not demand absolute equality among
residents; it merely requires that all persons shall be treated alike, under
like circumstances and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not infringed by
legislation which applies only to those persons falling within a specified
class, if it applies alike to all persons within such class, and reasonable.
grounds exist for making a distinction between those who fall within such
class and those who do not.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the
purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to
all members of the same class. 9
We first determine the purpose of the law. From the very title itself, it is clear that RA
7227 aims primarily to accelerate the conversion of military reservations into productive
115
uses. Obviously, the "lands covered under the 1947 Military Bases Agreement" are its
object. Thus, the law avows this policy:
Sec. 2. Declaration of Policies. — It is hereby declared the policy of the
Government to accelerate the sound and balanced conversion into
alternative productive uses of the Clark and Subic military reservations
and their extensions (John Hay Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications Station and
Capas Relay Station), to raise funds by the sale of portions of Metro
Manila military camps, and to apply said funds as provided herein for the
development and conversion to productive civilian use of the lands
covered under the 1947 Military Bases Agreement between the
Philippines and the United States of America, as amended.
To undertake the above objectives, the same law created the Bases Conversion and
Development Authority, some of whose relevant defined purposes are:
(b) To adopt, prepare and implement a comprehensive and detailed
development plan embodying a list of projects including but not limited to
those provided in the Legislative-Executive Bases Council (LEBC)
framework plan for the sound and balanced conversion of the Clark and
Subic military reservations and their extensions consistent with
ecological and environmental standards, into other productive uses to
promote the economic and social development of Central Luzon in
particular and the country in general;
(c). To encourage the active participation of the private sector in
transforming the Clark and Subic military reservations and their
extensions into other productive uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone into a "self-
sustaining, industrial, commercial, financial and investment center."10
From the above provisions of the law, it can easily be deduced that the real concern of
RA 7227 is to convert the lands formerly occupied by the US military bases into economic
or industrial areas. In furtherance of such objective, Congress deemed it necessary to
extend economic incentives to attract and encourage investors, both local and foreign.
Among such enticements are:11 (1) a separate customs territory within the zone, (2) tax-
and-duty-free importation's, (3) restructured income tax rates on business enterprises
within the zone, (4) no foreign exchange control, (5) liberalized regulations on banking
and finance, and (6) the grant of resident status to certain investors and of working visas
to certain foreign executives and workers .
We believe it was reasonable for the President to have delimited the application of some
incentives to the confines of the former Subic military base. It is this specific area which
the government intends to transform and develop from its status quo ante as an
abandoned naval facility into a self-sustaining industrial and commercial zone, particularly
for big foreign and local investors to use as operational bases for their businesses and
industries. Why the seeming bias for the big investors? Undeniably, they are the ones
who can pour huge investments to spur economic growth in the country and to generate
employment opportunities for the Filipinos, the ultimate goals of the government for such
conversion. The classification is, therefore, germane to the purposes of the law. And as
the legal maxim goes, "The intent of a statute is the law."12
Certainly, there are substantial differences between the big investors who are being lured
to establish and operate their industries in the so-called "secured area" and the present
business operators outside the area. On the one hand, we are talking of billion-peso
investments and thousands of new, jobs. On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the second, only local.
Even more important, at this time the business activities outside the "secured area" are
not likely to have any impact in achieving the purpose of the law, which is to turn the
former military base to productive use for the benefit of the Philippine economy. There is,
then, hardly any reasonable basis to extend to them the benefits and incentives accorded
in RA 7227. Additionally, as the Court of Appeals pointed out, it will be easier to manage
and monitor the activities within the "secured area," which is already fenced off, to
prevent "fraudulent importation of merchandise" or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity
of laws.13 As long as there are actual and material differences between territories, there is
no violation of the constitutional clause. And of course, anyone, including the petitioners,
possessing the requisite investment capital can always avail of the same benefits by
channeling his or her resources or business operations into the fenced-off free port zone.
We believe that the classification set forth by the executive issuance does not apply
merely to existing conditions. As laid down in RA 7227, the objective is to establish a
"self-sustaining, industrial, commercial, financial and investment center" in the area.
There will, therefore, be a long-term difference between such investment center and the
areas outside it.
116
Lastly, the classification applies equally to all the resident individuals and businesses
within the "secured area." The residents, being in like circumstances or contributing
directly to the achievement of the end purpose of the law, are not categorized further.
Instead, they are all similarly treated, both in privileges granted and in obligations
required.

All told, the Court holds that no undue favor or privilege was extended. The classification
occasioned by EO 97-A was not unreasonable, capricious or unfounded. To repeat, it
was based, rather, on fair and substantive considerations that were germane to the
legislative purpose.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and
Resolution are hereby AFFIRMED. Costs against petitioners.1âwphi1.nêt

SO ORDERED.

Davide, Jr., C.J., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Martinez,
Quisumbing, Purisima, Pardo, Buena and Gozaga-Reyes, JJ., concur.

117
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23771 August 4, 1988
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
APPEALS, respondents.
Angel Sanchez for Lingayen Electric Power Co., Inc.
SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity)
dated September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointly heard
upon agreement of the parties, absolving the respondent taxpayer from liability for the
deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in
the sums of P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961,
respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric
power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the
province of Pangasinan, pursuant to the municipal franchise granted it by their respective
municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946,
respectively. Section 10 of these franchises provide that:
...The said grantee in consideration of the franchise hereby granted, shall pay quarterly
into the Provincial Treasury of Pangasinan, one per centum of the gross earnings
obtained thru this privilege during the first twenty years and two per centum during the
remaining fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved the franchises granted
to the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and
demanded from the private respondent the total amount of P19,293.41 representing
deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as
prescribed in Section 259 of the National Internal Revenue Code, instead of the lower
rates as provided in the municipal franchises. On September 29, 1956, the private
respondent requested for a reinvestigation of the case on the ground that instead of
incurring a deficiency liability, it made an overpayment of the franchise tax. On April 30,
1957, the BIR through its regional director, denied the private respondent's request for
reinvestigation and reiterated the demand for payment of the same. In its letters dated
July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent
protested the said assessment and requested for a conference with a view to settling the
liability amicably. In his letters dated July 25 and August 28, 1958, the Commissioner
denied the request of the private respondent. Thus, the appeal to the respondent Court of
Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.
In a letter dated August 21, 1962, the Commissioner demanded from the private
respondent the payment of P3,616.86 representing deficiency franchise tax and
surcharges for the years 1959 to 1961 again applying the franchise tax rate of 5% on
gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a
letter dated October 5, 1962, the private respondent protested the assessment and
requested reconsideration thereof The same was denied on November 9, 1962. Thus,
the appeal to the respondent Court of Appeals on November 29, 1962, docketed as
C.T.A. No. 1302.
Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June
22, 1 963, granting to the private respondent a legislative franchise for the operation of
the electric light, heat, and power system in the same municipalities of Pangasinan.
Section 4 thereof provides that:
In consideration of the franchise and rights hereby granted, the grantee shall pay into the
Internal Revenue office of each Municipality in which it is supplying electric current to the
public under this franchise, a tax equal to two per centum of the gross receipts from
electric current sold or supplied under this franchise. Said tax shall be due and payable
quarterly and shall be in lieu of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority whatsoever, municipal,
provincial or national, now or in the future, on its poles, wires, insulator ... and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or
licenses, the grantee is hereby expressly exempted and effective further upon the date
the original franchise was granted, no other tax and/or licenses other than the franchise
118
tax of two per centum on the gross receipts as provided for in the original franchise shall
be collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843
should apply and accordingly dismissed the claim of the Commissioner of Internal
Revenue. The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal
Revenue Code assessed against the private respondent on its gross receipts realized
before the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the
"uniformity and equality of taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be
given retroactive effect so as to render uncollectible the taxes in question which were
assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency
percentage taxes in the amount of P3,025.96 for the period from January 1, 1946 to
February 29, 1948, the period before the approval of its municipal franchises.
The first issue raised by the petitioner before us is whether or not the five percent (5%)
franchise tax prescribed in Section 259 of the National Internal Revenue Code
(Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the private
respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is
collectible. It is the contention of the petitioner Commissioner of Internal Revenue that the
private respondent should have been held liable for the 5% franchise tax on gross
receipts prescribed in Section 259 of the Tax Code, instead of the lower franchise tax
rates provided in the municipal franchises (1% of gross earnings for the first twenty years
and 2% for the remaining fifteen years of the life of the franchises) because Section 259
of the Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing and
future franchises. The franchises of the private respondent were already in existence at
the time of the adoption of the said amendment, since the franchises were accepted on
March 1, 1948 after approval by the President of the Philippines on February 24, 1948.
The private respondent's original franchises did not contain the proviso that the tax
provided therein "shall be in lieu of all taxes;" moreover, the franchises contained a
reservation clause that they shag be subject to amendment, alteration, or repeal, but
even in the absence of such cause, the power of the Legislature to alter, amend, or
repeal any franchise is always deemed reserved. The franchise of the private respondent
have been modified or amended by Section 259 of the Tax Code, the petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent
a legislative franchise in June, 1963, amending, altering, or even repealing the original
municipal franchises, and providing that the private respondent should pay only a 2%
franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any
kind, nature or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national, now or in the future ... and effective further upon
the date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision
of law to the contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the private
respondent was liable to pay only the 2% franchise tax, effective from the date the
original municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for
being violative of the "uniformity and equality of taxation" clause of the Constitution, and,
if adjudged valid, whether or not it should be given retroactive effect, the petitioner
submits that the said law is unconstitutional insofar as it provides for the payment by the
private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers
similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax
Code, thereby discriminatory and violative of the rule on uniformity and equality of
taxation.
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall
be taxed alike The Legislature has the inherent power not only to select the subjects of
taxation but to grant exemptions. Tax exemptions have never been deemed violative of
the equal protection clause. 1 It is true that the private respondents municipal franchises
were obtained under Act No. 667 2 of the Philippine Commission, but these original
franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843. As
correctly held by the respondent court, the latter was granted subject to the terms and
conditions established in Act No. 3636, 3 as amended by C.A. No. 132. These conditions
Identify the private respondent's power plant as falling within that class of power plants
created by Act No. 3636, as amended. The benefits of the tax reduction provided by law
(Act No. 3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's
power plant and others circumscribed within this class. R.A-No. 3843 merely transferred
the petitioner's power plant from that class provided for in Act No. 667, as amended, to
which it belonged until the approval of R.A- No. 3843, and placed it within the class falling
119
under Act No. 3636, as amended. Thus, it only effected the transfer of a taxable property to December 31, 1961, the private respondent paid the amount of P34,184.36, which was
from one class to another. very much more than the amount rightfully due from it. Hence, the private respondent
should no longer be made to pay for the deficiency tax in the amount of P3,025.98 for the
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% period from January 1, 1946 to February 29, 1948.
franchise tax rate provided in Section 259 of the Tax Code was never intended to have a
universal application. 4 We note that the said Section 259 of the Tax Code expressly WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby
allows the payment of taxes at rates lower than 5% when the charter granting the AFFIRMED. No pronouncement as to costs. SO ORDERED.
franchise of a grantee, like the one granted to the private respondent under Section 4 of
R.A. No. 3843, precludes the imposition of a higher tax. R.A. No. 3843 did not only fix Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano,
and specify a franchise tax of 2% on its gross receipts, but made it "in lieu of any and all Gancayco, Padilla, Bidin, Cortes, Griño-Aquino and Medialdea, JJ., concur.
taxes, all laws to the contrary notwithstanding," thus, leaving no room for doubt regarding
the legislative intent. "Charters or special laws granted and enacted by the Legislature
are in the nature of private contracts. They do not constitute a part of the machinery of
the general government. They are usually adopted after careful consideration of the
private rights in relation with resultant benefits to the State ... in passing a special charter
the attention of the Legislature is directed to the facts and circumstances which the act or
charter is intended to meet. The Legislature consider (sic) and make (sic) provision for all
the circumstances of a particular case." 5 In view of the foregoing, we find no reason to
disturb the respondent court's ruling upholding the constitutionality of the law in question.

Given its validity, should the said law be applied retroactively so as to render uncollectible
the taxes in question which were assessed before its enactment? The question of
whether a statute operates retrospectively or only prospectively depends on the
legislative intent. In the instant case, Act No. 3843 provides that "effective ... upon the
date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision
to the contrary notwithstanding." Republic Act No. 3843 therefore specifically provided for
the retroactive effect of the law.

The last issue to be resolved is whether or not the private respondent is liable for the
fixed and deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from
January 1, 1946 to February 29, 1948) before the approval of its municipal franchises. As
aforestated, the franchises were approved by the President only on February 24, 1948.
Therefore, before the said date, the private respondent was liable for the payment of
percentage and fixed taxes as seller of light, heat, and power — which as the petitioner
claims, amounted to P3,025.96. The legislative franchise (R.A. No. 3843) exempted the
grantee from all kinds of taxes other than the 2% tax from the date the original franchise
was granted. The exemption, therefore, did not cover the period before the franchise was
granted, i.e. before February 24, 1948. However, as pointed out by the respondent court
in its findings, during the period covered by the instant case, that is from January 1, 1946

120
 Republic of the Philippines under protest the said permit and license fees in the aforementioned amount, giving at
SUPREME COURT the same time notice to the City Treasurer that suit would be taken in court to question
Manila the legality of the ordinances under which, the said fees were being collected (Annex C),
which was done on the same date by filing the complaint that gave rise to this action. In
EN BANC its complaint plaintiff prays that judgment be rendered declaring the said Municipal
Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and
G.R. No. L-9637 April 30, 1957 unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of
P5,891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff
further praying for such other relief and remedy as the court may deem just equitable.
AMERICAN BIBLE SOCIETY, plaintiff-appellant,
vs.
CITY OF MANILA, defendant-appellee. Defendant answered the complaint, maintaining in turn that said ordinances were
enacted by the Municipal Board of the City of Manila by virtue of the power granted to it
by section 2444, subsection (m-2) of the Revised Administrative Code, superseded on
City Fiscal Eugenio Angeles and Juan Nabong for appellant. June 18, 1949, by section 18, subsection (1) of Republic Act No. 409, known as the
Assistant City Fiscal Arsenio Nañawa for appellee. Revised Charter of the City of Manila, and praying that the complaint be dismissed, with
costs against plaintiff. This answer was replied by the plaintiff reiterating the
FELIX, J.: unconstitutionality of the often-repeated ordinances.

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly Before trial the parties submitted the following stipulation of facts:
registered and doing business in the Philippines through its Philippine agency established
in Manila in November, 1898, with its principal office at 636 Isaac Peral in said City. The COME NOW the parties in the above-entitled case, thru their undersigned
defendant appellee is a municipal corporation with powers that are to be exercised in attorneys and respectfully submit the following stipulation of facts:
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of
the City of Manila.
1. That the plaintiff sold for the use of the purchasers at its principal office at 636
Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling concordance in English and other foreign languages imported by it from the
bibles and/or gospel portions thereof (except during the Japanese occupation) throughout United States as well as Bibles, New Testaments and bible portions in the local
the Philippines and translating the same into several Philippine dialects. On May 29 dialects imported and/or purchased locally; that from the fourth quarter of 1945 to
1953, the acting City Treasurer of the City of Manila informed plaintiff that it was the first quarter of 1953 inclusive the sales made by the plaintiff were as follows:
conducting the business of general merchandise since November, 1945, without
providing itself with the necessary Mayor's permit and municipal license, in violation of
Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and Quarter Amount of
required plaintiff to secure, within three days, the corresponding permit and license fees, Sales
together with compromise covering the period from the 4th quarter of 1945 to the 2nd
quarter of 1953, in the total sum of P5,821.45 (Annex A). 4th quarter 1945 P1,244.21
1st quarter 1946 2,206.85
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff
deposit and pay under protest the sum of P5,891.45, if suit was to be taken in court 2nd quarter 1946 1,950.38
regarding the same (Annex B). To avoid the closing of its business as well as further
fines and penalties in the premises on October 24, 1953, plaintiff paid to the defendant 3rd quarter 1946 2,235.99

121
4th quarter 1946 3,256.04 4th quarter 1952 24,180.72
1st quarter 1947 13,241.07 1st quarter 1953 29,516.21

2nd quarter 1947 15,774.55

2. That the parties hereby reserve the right to present evidence of other facts not
3rd quarter 1947 14,654.13 herein stipulated.
4th quarter 1947 12,590.94
WHEREFORE, it is respectfully prayed that this case be set for hearing so that
1st quarter 1948 11,143.90 the parties may present further evidence on their behalf. (Record on Appeal, pp.
15-16).
2nd quarter 1948 14,715.26

3rd quarter 1948 38,333.83 When the case was set for hearing, plaintiff proved, among other things, that it has been
in existence in the Philippines since 1899, and that its parent society is in New York,
4th quarter 1948 16,179.90 United States of America; that its, contiguous real properties located at Isaac Peral are
exempt from real estate taxes; and that it was never required to pay any municipal
1st quarter 1949 23,975.10 license fee or tax before the war, nor does the American Bible Society in the United
States pay any license fee or sales tax for the sale of bible therein. Plaintiff further tried to
2nd quarter 1949 17,802.08
establish that it never made any profit from the sale of its bibles, which are disposed of
3rd quarter 1949 16,640.79 for as low as one third of the cost, and that in order to maintain its operating cost it
obtains substantial remittances from its New York office and voluntary contributions and
4th quarter 1949 15,961.38 gifts from certain churches, both in the United States and in the Philippines, which are
interested in its missionary work. Regarding plaintiff's contention of lack of profit in the
1st quarter 1950 18,562.46 sale of bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness
who testified on cross-examination that bibles bearing the price of 70 cents each from
2nd quarter 1950 21,816.32
plaintiff-appellant's New York office are sold here by plaintiff-appellant at P1.30 each;
3rd quarter 1950 25,004.55 those bearing the price of $4.50 each are sold here at P10 each; those bearing the price
of $7 each are sold here at P15 each; and those bearing the price of $11 each are sold
4th quarter 1950 45,287.92 here at P22 each, clearly show that plaintiff's contention that it never makes any profit
from the sale of its bible, is evidently untenable.
1st quarter 1951 37,841.21

2nd quarter 1951 29,103.98 After hearing the Court rendered judgment, the last part of which is as follows:

3rd quarter 1951 20,181.10 As may be seen from the repealed section (m-2) of the Revised Administrative
4th quarter 1951 22,968.91 Code and the repealing portions (o) of section 18 of Republic Act No. 409,
although they seemingly differ in the way the legislative intent is expressed, yet
1st quarter 1952 23,002.65 their meaning is practically the same for the purpose of taxing the merchandise
mentioned in said legal provisions, and that the taxes to be levied by said
2nd quarter 1952 17,626.96 ordinances is in the nature of percentage graduated taxes (Sec. 3 of Ordinance
No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as
3rd quarter 1952 17,921.01 amended by Ordinance No. 3364).
122
 IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion
and so holds that this case should be dismissed, as it is hereby dismissed, for
lack of merits, with costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which
certified the case to Us for the reason that the errors assigned to the lower Court involved
only questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are
not unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the Revised Administrative
Code under which Ordinances Nos. 2592 and 3000 were promulgated, was not
repealed by Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based on gross sales or
receipts, in order to be valid under the new Charter of the City of Manila, must
first be approved by the President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-appellant have assumed
commercial proportions, it cannot escape from the operation of said municipal
ordinances under the cloak of religious privilege.
The issues. — As may be seen from the proceeding statement of the case, the issues
involved in the present controversy may be reduced to the following: (1) whether or not
the ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364,
are constitutional and valid; and (2) whether the provisions of said ordinances are
applicable or not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the
Philippines, provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting
the free exercise thereof, and the free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be
allowed. No religion test shall be required for the exercise of civil or political
rights.
Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances
Nos. 2529 and 3000, as respectively amended, are unconstitutional and illegal in so far
as its society is concerned, because they provide for religious censorship and restrain the
free exercise and enjoyment of its religious profession, to wit: the distribution and sale of
bibles and other religious literature to the people of the Philippines.
Before entering into a discussion of the constitutional aspect of the case, We shall first
consider the provisions of the questioned ordinances in relation to their application to the
sale of bibles, etc. by appellant. The records, show that by letter of May 29, 1953 (Annex
A), the City Treasurer required plaintiff to secure a Mayor's permit in connection with the
society's alleged business of distributing and selling bibles, etc. and to pay permit dues in
the sum of P35 for the period covered in this litigation, plus the sum of P35 for
compromise on account of plaintiff's failure to secure the permit required by Ordinance
No. 3000 of the City of Manila, as amended. This Ordinance is of general application and
not particularly directed against institutions like the plaintiff, and it does not contain any
provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. — It shall be unlawful for any person or entity
to conduct or engage in any of the businesses, trades, or
occupations enumerated in Section 3 of this Ordinance or other businesses,
trades, or occupations for which a permit is required for the proper supervision
and enforcement of existing laws and ordinances governing the sanitation,
security, and welfare of the public and the health of the employees engaged in
the business specified in said section 3 hereof, WITHOUT FIRST HAVING
OBTAINED A PERMIT THEREFOR FROM THE MAYOR AND THE
NECESSARY LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this case is not particularly
mentioned in Section 3 of the Ordinance, and the record does not show that a permit is
required therefor under existing laws and ordinances for the proper supervision and
enforcement of their provisions governing the sanitation, security and welfare of the
public and the health of the employees engaged in the business of the plaintiff. However,
sections 3 of Ordinance 3000 contains item No. 79, which reads as follows:
79. All other businesses, trades or occupations not
mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00
123
Therefore, the necessity of the permit is made to depend upon the power of the City to
license or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay
from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including
the sum of P50 as compromise, Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. — Subject to the provisions of section 578 of the Revised
Ordinances of the City of Manila, as amended, there shall be paid to the City
Treasurer for engaging in any of the businesses or occupations below
enumerated, quarterly, license fees based on gross sales or receipts realized
during the preceding quarter in accordance with the rates herein prescribed:
PROVIDED, HOWEVER, That a person engaged in any businesses or
occupation for the first time shall pay the initial license fee based on the probable
gross sales or receipts for the first quarter beginning from the date of the opening
of the business as indicated herein for the corresponding business or occupation.
xxx xxx xxx
GROUP 2. — Retail dealers in new (not yet used) merchandise, which dealers
are not yet subject to the payment of any municipal tax, such as (1) retail dealers
in general merchandise; (2) retail dealers exclusively engaged in the sale of . . .
books, including stationery.
xxx xxx xxx
As may be seen, the license fees required to be paid quarterly in Section 1 of said
Ordinance No. 2529, as amended, are not imposed directly upon any religious institution
but upon those engaged in any of the business or occupations therein enumerated, such
as retail "dealers in general merchandise" which, it is alleged, cover the business or
occupation of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection
(m-2) of said legal body, as amended by Act No. 3659, approved on December 8, 1929,
empowers the Municipal Board of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new automobiles or
accessories or both, and (b) retail dealers in new (not yet used) merchandise,
which dealers are not yet subject to the payment of any municipal tax.
For the purpose of taxation, these retail dealers shall be classified as (1) retail
dealers in general merchandise, and (2) retail dealers exclusively engaged in the
sale of (a) textiles . . . (e) books, including stationery, paper and office supplies, .
. .: PROVIDED, HOWEVER, That the combined total tax of any debtor or
manufacturer, or both, enumerated under these subsections (m-1) and (m-2),
whether dealing in one or all of the articles mentioned herein, SHALL NOT BE IN
EXCESS OF FIVE HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as
amended, were enacted in virtue of the power that said Act No. 3669 conferred upon the
City of Manila. Appellant, however, contends that said ordinances are longer in force and
effect as the law under which they were promulgated has been expressly repealed by
Section 102 of Republic Act No. 409 passed on June 18, 1949, known as the Revised
Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No. 409
expressly repealed the provisions of Chapter 60 of the Revised Administrative Code but
in the opinion of the trial Judge, although Section 2444 (m-2) of the former Manila Charter
and section 18 (o) of the new seemingly differ in the way the legislative intent was
expressed, yet their meaning is practically the same for the purpose of taxing the
merchandise mentioned in both legal provisions and, consequently, Ordinances Nos.
2529 and 3000, as amended, are to be considered as still in full force and effect
uninterruptedly up to the present.
Often the legislature, instead of simply amending the pre-existing statute, will
repeal the old statute in its entirety and by the same enactment re-enact all or
certain portions of the preexisting law. Of course, the problem created by this sort
of legislative action involves mainly the effect of the repeal upon rights and
liabilities which accrued under the original statute. Are those rights and liabilities
destroyed or preserved? The authorities are divided as to the effect of
simultaneous repeals and re-enactments. Some adhere to the view that the rights
and liabilities accrued under the repealed act are destroyed, since the statutes
from which they sprang are actually terminated, even though for only a very short
period of time. Others, and they seem to be in the majority, refuse to accept this
view of the situation, and consequently maintain that all rights an liabilities which
have accrued under the original statute are preserved and may be enforced,
124
 since the re-enactment neutralizes the repeal, therefore, continuing the law in
force without interruption. (Crawford-Statutory Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new
and wider concept of taxation and is different from the provisions of Section 2444(m-2)
that the former cannot be considered as a substantial re-enactment of the provisions of
the latter. We have quoted above the provisions of section 2444(m-2) of the Revised
Administrative Code and We shall now copy hereunder the provisions of Section 18,
subdivision (o) of Republic Act No. 409, which reads as follows:
(o) To tax and fix the license fee on dealers in general merchandise, including
importers and indentors, except those dealers who may be expressly subject to
the payment of some other municipal tax under the provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and
(b) retail dealers. For purposes of the tax on retail dealers, general merchandise
shall be classified into four main classes: namely (1) luxury articles, (2) semi-
luxury articles, (3) essential commodities, and (4) miscellaneous articles. A
separate license shall be prescribed for each class but where commodities of
different classes are sold in the same establishment, it shall not be compulsory
for the owner to secure more than one license if he pays the higher or highest
rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax
as such, as may be provided by ordinance.
For purposes of this section, the term "General merchandise" shall include
poultry and livestock, agricultural products, fish and other allied products.
The only essential difference that We find between these two provisions that may have
any bearing on the case at bar, is that, while subsection (m-2) prescribes that the
combined total tax of any dealer or manufacturer, or both, enumerated under subsections
(m-1) and (m-2), whether dealing in one or all of the articles mentioned therein, shall not
be in excess of P500 per annum, the corresponding section 18, subsection (o) of
Republic Act No. 409, does not contain any limitation as to the amount of tax or license
fee that the retail dealer has to pay per annum. Hence, and in accordance with the weight
of the authorities above referred to that maintain that "all rights and liabilities which have
accrued under the original statute are preserved and may be enforced, since the
reenactment neutralizes the repeal, therefore continuing the law in force without
interruption", We hold that the questioned ordinances of the City of Manila are still in
force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be
approved by the President of the Philippines as per section 18, subsection (ii) of Republic
Act No. 409, which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being
conducted within the City of Manila, not otherwise enumerated in the preceding
subsections, including percentage taxes based on gross sales or receipts,
subject to the approval of the PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained in section 2444 of the
former Charter of the City of Manila under which Ordinance No. 2529 was promulgated.
Anyway, as stated by appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No.
409; hence, an ordinance prescribing a municipal tax on said business does not have to
be approved by the President to be effective, as it is not among those referred to in said
subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it
by law.
The question that now remains to be determined is whether said ordinances are
inapplicable, invalid or unconstitutional if applied to the alleged business of distribution
and sale of bibles to the people of the Philippines by a religious corporation like the
American Bible Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and
3028, appellant contends that it is unconstitutional and illegal because it restrains the free
exercise and enjoyment of the religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been spoken
of as a profession of faith to an active power that binds and elevates man to its Creator"
(Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his relations to His
Creator and to the obligations they impose of reverence to His being and character, and
obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of
the free exercise and enjoyment of religious profession and worship carries with it the
right to disseminate religious information. Any restraints of such right can only be justified
like other restraints of freedom of expression on the grounds that there is a clear and
present danger of any substantive evil which the State has the right to prevent". (Tañada
and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case
125
at bar the license fee herein involved is imposed upon appellant for its distribution and
sale of bibles and other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring
that a license be obtained before a person could canvass or solicit orders for
goods, paintings, pictures, wares or merchandise cannot be made to apply to
members of Jehovah's Witnesses who went about from door to door distributing
literature and soliciting people to "purchase" certain religious books and
pamphlets, all published by the Watch Tower Bible & Tract Society. The "price" of
the books was twenty-five cents each, the "price" of the pamphlets five cents
each. It was shown that in making the solicitations there was a request for
additional "contribution" of twenty-five cents each for the books and five cents
each for the pamphlets. Lesser sum were accepted, however, and books were
even donated in case interested persons were without funds.
On the above facts the Supreme Court held that it could not be said that
petitioners were engaged in commercial rather than a religious venture. Their
activities could not be described as embraced in the occupation of selling books
and pamphlets. Then the Court continued:
"We do not mean to say that religious groups and the press are free from all
financial burdens of government. See Grosjean vs. American Press Co., 297
U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite
different, for example, from a tax on the income of one who engages in religious
activities or a tax on property used or employed in connection with activities. It is
one thing to impose a tax on the income or property of a preacher. It is quite
another to exact a tax from him for the privilege of delivering a sermon. The tax
imposed by the City of Jeannette is a flat license tax, payment of which is a
condition of the exercise of these constitutional privileges. The power to tax the
exercise of a privilege is the power to control or suppress its enjoyment. . . .
Those who can tax the exercise of this religious practice can make its exercise so
costly as to deprive it of the resources necessary for its maintenance. Those who
can tax the privilege of engaging in this form of missionary evangelism can close
all its doors to all those who do not have a full purse. Spreading religious beliefs
in this ancient and honorable manner would thus be denied the needy. . . .
It is contended however that the fact that the license tax can suppress or control
this activity is unimportant if it does not do so. But that is to disregard the nature
of this tax. It is a license tax — a flat tax imposed on the exercise of a privilege
granted by the Bill of Rights . . . The power to impose a license tax on the
exercise of these freedom is indeed as potent as the power of censorship which
this Court has repeatedly struck down. . . . It is not a nominal fee imposed as a
regulatory measure to defray the expenses of policing the activities in question. It
is in no way apportioned. It is flat license tax levied and collected as a condition
to the pursuit of activities whose enjoyment is guaranteed by the constitutional
liberties of press and religion and inevitably tends to suppress their exercise.
That is almost uniformly recognized as the inherent vice and evil of this flat
license tax."
Nor could dissemination of religious information be conditioned upon the
approval of an official or manager even if the town were owned by a corporation
as held in the case of Marsh vs. State of Alabama (326 U.S. 501), or by the
United States itself as held in the case of Tucker vs. Texas (326 U.S. 517). In the
former case the Supreme Court expressed the opinion that the right to enjoy
freedom of the press and religion occupies a preferred position as against the
constitutional right of property owners.
"When we balance the constitutional rights of owners of property against those of
the people to enjoy freedom of press and religion, as we must here, we remain
mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such
restraint by the application of a State statute." (Tañada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. — The following
organizations shall not be taxed under this Title in respect to income received by
them as such —
(e) Corporations or associations organized and operated exclusively for religious,
charitable, . . . or educational purposes, . . .: Provided, however, That the income
of whatever kind and character from any of its properties, real or personal, or
from any activity conducted for profit, regardless of the disposition made of such
income, shall be liable to the tax imposed under this Code;
126
Appellant's counsel claims that the Collector of Internal Revenue has exempted the Wherefore, and on the strength of the foregoing considerations, We hereby reverse the
plaintiff from this tax and says that such exemption clearly indicates that the act of decision appealed from, sentencing defendant return to plaintiff the sum of P5,891.45
distributing and selling bibles, etc. is purely religious and does not fall under the above unduly collected from it. Without pronouncement as to costs. It is so ordered.
legal provisions.
Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia,
It may be true that in the case at bar the price asked for the bibles and other religious JJ., concur.
pamphlets was in some instances a little bit higher than the actual cost of the same but
this cannot mean that appellant was engaged in the business or occupation of selling
said "merchandise" for profit. For this reason We believe that the provisions of City of
Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so
it would impair its free exercise and enjoyment of its religious profession and worship as
well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the
Mayor's permit before any person can engage in any of the businesses, trades or
occupations enumerated therein, We do not find that it imposes any charge upon the
enjoyment of a right granted by the Constitution, nor tax the exercise of religious
practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this point was
elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing either
by hand or otherwise, circulars, handbooks, advertising, or literature of any kind,
whether said articles are being delivered free, or whether same are being sold
within the city limits of the City of Griffin, without first obtaining written permission
from the city manager of the City of Griffin, shall be deemed a nuisance and
punishable as an offense against the City of Griffin, does not deprive defendant
of his constitutional right of the free exercise and enjoyment of religious
profession and worship, even though it prohibits him from introducing and
carrying out a scheme or purpose which he sees fit to claim as a part of his
religious system.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional,
even if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as
amended, is not applicable to plaintiff-appellant and defendant-appellee is powerless to
license or tax the business of plaintiff Society involved herein for, as stated before, it
would impair plaintiff's right to the free exercise and enjoyment of its religious profession
and worship, as well as its rights of dissemination of religious beliefs, We find that
Ordinance No. 3000, as amended is also inapplicable to said business, trade or
occupation of the plaintiff.

127
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-60126 September 25, 1985
CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
Quasha, De Guzman Makalintal & Barot for petitioner.
AQUINO, J.:
This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income
tax amounting to P75,149.73 for the more than seven-month period of the year 1969 in
addition to franchise tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which
its payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of
all taxes and assessments of whatever authority upon privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes
and assessments the grantee is hereby expressly exempted" (Sec. 3).
On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by
making liable for income tax all corporate taxpayers not specifically exempt under
paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the
"provisions of existing special or general laws to the contrary". Thus, franchise companies
were subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020,
effective August 4, 1969, by authorizing the petitioner to furnish electricity to the
municipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro
City and the municipalities of Tagoloan and Opol. The amendment reenacted the tax
exemption in its original charter or neutralized the modification made by Republic Act No.
5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal
Revenue in a demand letter dated February 15, 1973 required the petitioner to pay
deficiency income taxes for 1968-to 1971. The petitioner contested the assessments. The
Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for
1968 and 1969.
The petitioner filed a petition for review with the Tax Court, which on February 26, 1982
held the petitioner liable only for the income tax for the period from January 1 to August
3, 1969 or before the passage of Republic Act No. 6020 which reiterated its tax
exemption. The petitioner appealed to this Court.
It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the
petitioner is a commutative tax which already includes the income tax; (2) in holding that
Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3) in
holding that petitioner's franchise is a contract which can be impaired by an implied
repeal and (4) in not holding that section 24(d) of the Tax Code should be construed
strictly against the Government.
We hold that Congress could impair petitioner's legislative franchise by making it liable for
income tax from which heretofore it was exempted by virtue of the exemption provided for
in section 3 of its franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal
by the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution;
Sec. 5, Art. XIV, 1973 Constitution),
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the
provisions of the Constitution and to the terms and conditions established in Act No. 3636
whose section 12 provides that the franchise is subject to amendment, alteration or
repeal by Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income
tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code,
had the effect of withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the
subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the
said tax exemption. Hence, the petitioner is liable only for the income tax for the period
from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act
No. 5431.
128
It is relevant to note that franchise companies, like the Philippine Long Distance
Telephone Company, have been paying income tax in addition to the franchise tax.

However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to petitioner's income
tax liability. It had reason not to pay income tax because of the tax exemption in its
franchise.

For this reason, it should be liable only for tax proper and should not be held liable for the
surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of Internal
Revenue and Court of Tax Appeals, G. R. No. 59758, December 26, 1984,133 SCRA
765; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C.M.
Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71
SCRA 511.)

WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the
petitioner is liable only for the tax proper and that it should not pay the delinquency
penalties. No costs.

SO ORDERED.

Concepcion, Jr., Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

129
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 168584 October 15, 2007
REPUBLIC OF THE PHILIPPINES, represented by THE HONORABLE
SECRETARY OF FINANCE, THE HONORABLE COMMISSIONER OF BUREAU
OF INTERNAL REVENUE, THE HONORABLE COMMISSIONER OF CUSTOMS,
and THE COLLECTOR OF CUSTOMS OF THE PORT OF SUBIC, petitioners,
vs.
HON. RAMON S. CAGUIOA, Presiding Judge, Branch 74, RTC, Third Judicial
Region, Olongapo City, INDIGO DISTRIBUTION CORP., herein represented by
ARIEL G. CONSOLACION, W STAR TRADING AND WAREHOUSING CORP.,
herein represented by HIERYN R. ECLARINAL, FREEDOM BRANDS PHILS.,
CORP., herein represented by ANA LISA RAMAT, BRANDED WAREHOUSE,
INC., herein represented by MARY AILEEN S. GOZUN, ALTASIA INC., herein
represented by ALAN HARROW, TAINAN TRADE (TAIWAN), INC., herein
represented by ELENA RANULLO, SUBIC PARK N’ SHOP, herein represented
by NORMA MANGALINO DIZON, TRADING GATEWAYS INTERNATIONAL
PHILS., herein represented by MA. CHARINA FE C. RODOLFO, DUTY FREE
SUPERSTORE (DFS), herein represented by RAJESH R. SADHWANI, CHJIMES
TRADING INC., herein represented by ANGELO MARK M. PICARDAL, PREMIER
FREEPORT, INC., herein represented by ROMMEL P. GABALDON, FUTURE
TRADE SUBIC FREEPORT, INC., herein represented by WILLIE S. VERIDIANO,
GRAND COMTRADE INTERNATIONAL CORP., herein represented by JULIUS
MOLINDA, and FIRST PLATINUM INTERNATIONAL, INC., herein represented by
ISIDRO M. MUÑOZ,respondents.
DECISION
CARPIO MORALES, J.:
Petitioners seek via petition for certiorari and prohibition to annul (1) the May 4, 2005
Order1 issued by public respondent Judge Ramon S. Caguioa of the Regional Trial
Court (RTC), Branch 74, Olongapo City, granting private respondents’ application for
the issuance of a writ of preliminary injunction and (2) the Writ of Preliminary
Injunction2that was issued pursuant to such Order, which stayed the implementation
of Republic Act (R.A.) No. 9334, AN ACT INCREASING THE EXCISE TAX RATES
IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS, AMENDING FOR THE
PURPOSE SECTIONS 131, 141, 142, 143, 144, 145 AND 288 OF THE NATIONAL
INTERNAL REVENUE CODE OF 1997, AS AMENDED.
Petitioners likewise seek to enjoin, restrain and inhibit public respondent from
enforcing the impugned issuances and from further proceeding with the trial of Civil
Case No. 102-0-05.
The relevant facts are as follows:
In 1992, Congress enacted Republic Act (R.A) No. 72273 or the Bases Conversion
and Development Act of 1992 which, among other things, created the Subic Special
Economic and Freeport Zone (SBF4) and the Subic Bay Metropolitan Authority
(SBMA).
R.A. No. 7227 envisioned the SBF to be developed into a "self-sustaining, industrial,
commercial, financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments."5 In
line with this vision, Section 12 of the law provided:
(b) The Subic Special Economic Zone shall be operated and managed
as a separate customs territory ensuring free flow or movement of
goods and capital within, into and exported out of the Subic Special
Economic Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be
subject to customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within
the Subic Special Economic Zone. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and enterprises within the
Subic Special Economic Zone shall be remitted to the National Government,
130
one percent (1%) each to the local government units affected by the
declaration of the zone in proportion to their population area, and other
factors. In addition, there is hereby established a development fund of one
percent (1%) of the gross income earned by all businesses and enterprises
within the Subic Special Economic Zone to be utilized for the development of
municipalities outside the City of Olongapo and the Municipality of Subic, and
other municipalities contiguous to be base areas.
In case of conflict between national and local laws with respect to tax
exemption privileges in the Subic Special Economic Zone, the same shall be
resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and future shall be allowed and maintained in the
Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and
regulate the operations of banks and other financial institutions within the
Subic Special Economic Zone;
(f) Banking and finance shall be liberalized with the establishment of foreign
currency depository units of local commercial banks and offshore banking
units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than Two hundred fifty thousand dollars
($250,000), his/her spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status within the Subic
Special Economic Zone. They shall have freedom of ingress and egress to
and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay
Metropolitan Authority referred to in Section 13 of this Act may also issue
working visas renewal every two (2) years to foreign executives and other
aliens possessing highly-technical skills which no Filipino within the Subic
Special Economic Zone possesses, as certified by the Department of Labor
and Employment. The names of aliens granted permanent residence status
and working visas by the Subic Bay Metropolitan Authority shall be reported
to the Bureau of Immigration and Deportation within thirty (30) days after
issuance thereof;
x x x x. (Emphasis supplied)
Pursuant to the law, private respondents Indigo Distribution Corporation, W Star
Trading and Warehousing Corporation, Freedom Brands Philippines Corporation,
Branded Warehouse, Inc., Altasia, Inc., Tainan Trade (Taiwan) Inc., Subic Park ‘N
Shop, Incorporated, Trading Gateways International Philipines, Inc., Duty Free
Superstore (DFS) Inc., Chijmes Trading, Inc., Premier Freeport, Inc., Future Trade
Subic Freeport, Inc., Grand Comtrade Int’l., Corp., and First Platinum International,
Inc., which are all domestic corporations doing business at the SBF, applied for and
were granted Certificates of Registration and Tax Exemption6 by the SBMA.
These certificates allowed them to engage in the business either of trading, retailing
or wholesaling, import and export, warehousing, distribution and/or transshipment of
general merchandise, including alcohol and tobacco products, and uniformly granted
them tax exemptions for such importations as contained in the following provision of
their respective Certificates:
ARTICLE IV. The Company shall be entitled to tax and duty-free
importation of raw materials, capital equipment, and household and
personal items for use solely within the Subic Bay Freeport
Zonepursuant to Sections 12(b) and 12(c) of the Act and Sections 43, 45, 46
and 49 of the Implementing Rules. All importations by the Company are
exempt from inspection by the Societe Generale de Surveillance if such
importations are delivered immediately to and for use solely within the Subic
Bay Freeport Zone. (Emphasis supplied)
Congress subsequently passed R.A. No. 9334, however, effective on January 1,
2005,7 Section 6 of which provides:
Sec. 6. Section 131 of the National Internal Revenue Code of 1977, as
amended, is hereby amended to read as follows:
Sec. 131. Payment of Excise Taxes on Imported Articles. –
131
 (A) Persons Liable. – Excise taxes on imported articles shall be paid by the
owner or importer to the Customs Officers, conformably with the regulations
of the Department of Finance and before the release of such articles from the
customshouse or by the person who is found in possession of articles which
are exempt from excise taxes other than those legally entitled to exemption.
In the case of tax-free articles brought or imported into the Philippines by
persons, entities or agencies exempt from tax which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be considered the importers
thereof, and shall be liable for the duty and internal revenue tax due on such
importation.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes, distilled
spirits, fermented liquors and wines into the Philippines, even if
destined for tax and duty free shops, shall be subject to all applicable
taxes, duties, charges, including excise taxes due thereon. This shall
apply to cigars and cigarettes, distilled spirits, fermented liquors and
wines brought directly into the duly chartered or legislated freeports of
the Subic Economic Freeport Zone, created under Republic Act No.
7227; x x x and such other freeports as may hereafter be established or
created by law: Provided, further, That importations of cigars and cigarettes,
distilled spirits, fermented liquors and wines made directly by a government-
owned and operated duty-free shop, like the Duty Free Philippines (DFP),
shall be exempted from all applicable duties only: x x x Provided, finally, That
the removal and transfer of tax and duty-free goods, products, machinery,
equipment and other similar articles other than cigars and cigarettes, distilled
spirits, fermented liquors and wines, from one Freeport to another Freeport,
shall not be deemed an introduction into the Philippine customs territory. x x
x. (Emphasis and underscoring supplied)
On the basis of Section 6 of R.A. No. 9334, SBMA issued on January 10, 2005 a
Memorandum8 declaring that effective January 1, 2005, all importations of cigars,
cigarettes, distilled spirits, fermented liquors and wines into the SBF, including those
intended to be transshipped to other free ports in the Philippines, shall be treated as
ordinary importations subject to all applicable taxes, duties and charges, including
excise taxes.
Meanwhile, on February 3, 2005, former Bureau of Internal Revenue (BIR)
Commissioner Guillermo L. Parayno, Jr. requested then Customs Commissioner
George M. Jereos to immediately collect the excise tax due on imported alcohol and
tobacco products brought to the Duty Free Philippines (DFP) and Freeport zones.9
Accordingly, the Collector of Customs of the port of Subic directed the SBMA
Administrator to require payment of all appropriate duties and taxes on all
importations of cigars and cigarettes, distilled spirits, fermented liquors and wines;
and for all transactions involving the said items to be covered from then on by a
consumption entry and no longer by a warehousing entry.10
On February 7, 2005, SBMA issued a Memorandum11 directing the departments
concerned to require locators/importers in the SBF to pay the corresponding duties
and taxes on their importations of cigars, cigarettes, liquors and wines before said
items are cleared and released from the freeport. However, certain SBF locators
which were "exclusively engaged in the transshipment of cigarette products for
foreign destinations" were allowed by the SBMA to process their import documents
subject to their submission of an Undertaking with the Bureau of Customs.12
On February 15, 2005, private respondents wrote the offices of respondent Collector
of Customs and the SBMA Administrator requesting for a reconsideration of the
directives on the imposition of duties and taxes, particularly excise taxes, on their
shipments of cigars, cigarettes, wines and liquors.13 Despite these letters, however,
they were not allowed to file any warehousing entry for their shipments.
Thus, private respondent enterprises, through their representatives, brought before
the RTC of Olongapo City a special civil action for declaratory relief14 to have certain
provisions of R.A. No. 9334 declared as unconstitutional, which case was docketed
as Civil Case No. 102-0-05.
In the main, private respondents submitted that (1) R.A. No. 9334 should not be
interpreted as altering, modifying or amending the provisions of R.A. No. 7227
because repeals by implication are not favored; (2) a general law like R.A. No. 9334
cannot amend R.A. No. 7727, which is a special law; and (3) the assailed law
violates the one bill-one subject rule embodied in Section 26(1), Article VI15 of the
Constitution as well as the constitutional proscription against the impairment of the
obligation of contracts.16
132
Alleging that great and irreparable loss and injury would befall them as a
consequence of the imposition of taxes on alcohol and tobacco products brought into
the SBF, private respondents prayed for the issuance of a writ of preliminary
injunction and/or Temporary Restraining Order (TRO) and preliminary mandatory
injunction to enjoin the directives of herein petitioners.
Petitioners duly opposed the private respondents’ prayer for the issuance of a writ of
preliminary injunction and/or TRO, arguing that (1) tax exemptions are not presumed
and even when granted, are strictly construed against the grantee; (2) an increase in
business expense is not the injury contemplated by law, it being a case of damnum
absque injuria; and (3) the drawback mechanism established in the law clearly
negates the possibility of the feared injury.17
Petitioners moreover pointed out that courts are enjoined from issuing a writ of
injunction and/or TRO on the grounds of an alleged nullity of a law, ordinance or
administrative regulation or circular or in a manner that would effectively dispose of
the main case. Taxes, they stressed, are the lifeblood of the government and their
prompt and certain availability is an imperious need. They maintained that greater
injury would be inflicted on the public should the writ be granted.
On May 4, 2005, the court a quo granted private respondents’ application for the
issuance of a writ of preliminary injunction, after it found that the essential requisites
for the issuance of a preliminary injunction were present.
As investors duly licensed to operate inside the SBF, the trial court declared that
private respondents were entitled to enjoy the benefits of tax incentives under R.A.
No. 7227, particularly the exemption from local and national taxes under Section
12(c); the aforecited provision of R.A. No. 7227, coupled with private respondents’
Certificates of Registration and Tax Exemption from the SBMA, vested in them a
clear and unmistakable right or right in esse that would be violated should R.A. No.
9334 be implemented; and the invasion of such right is substantial and material as
private respondents would be compelled to pay more than what they should by way
of taxes to the national government.
The trial court thereafter ruled that the prima facie presumption of validity of R.A. No.
9334 had been overcome by private respondents, it holding that as a partial
amendment of the National Internal Revenue Code (NIRC) of 1997,18 as amended,
R.A. No. 9334 is a general law that could not prevail over a special statute like R.A.
No. 7227 notwithstanding the fact that the assailed law is of later effectivity.
The trial court went on to hold that the repealing provision of Section 10 of R.A. No.
9334 does not expressly mention the repeal of R. A. No. 7227, hence, its repeal can
only be an implied repeal, which is not favored; and since R.A. No. 9334 imposes
new tax burdens, whatever doubts arising therefrom should be resolved against the
taxing authority and in favor of the taxpayer.
The trial court furthermore held that R.A. No. 9334 violates the terms and conditions
of private respondents’ subsisting contracts with SBMA, which are embodied in their
Certificates of Registration and Exemptions in contravention of the constitutional
guarantee against the impairment of contractual obligations; that greater damage
would be inflicted on private respondents if the writ of injunction is not issued as
compared to the injury that the government and the general public would suffer from
its issuance; and that the damage that private respondents are bound to suffer once
the assailed statute is implemented – including the loss of confidence of their foreign
principals, loss of business opportunity and unrealized income, and the danger of
closing down their businesses due to uncertainty of continued viability – cannot be
measured accurately by any standard.
With regard to the rule that injunction is improper to restrain the collection of taxes
under Section 21819 of the NIRC, the trial court held that what is sought to be
enjoined is not per se the collection of taxes, but the implementation of a statute that
has been found preliminarily to be unconstitutional.
Additionally, the trial court pointed out that private respondents’ taxes have not yet
been assessed, as they have not filed consumption entries on all their imported
tobacco and alcohol products, hence, their duty to pay the corresponding excise
taxes and the concomitant right of the government to collect the same have not yet
materialized.
On May 11, 2005, the trial court issued a Writ of Preliminary Injunction directing
petitioners and the SBMA Administrator as well as all persons assisting or acting for
and in their behalf "1) to allow the operations of [private respondents] in accordance
with R.A. No. 7227; 2) to allow [them] to file warehousing entries instead of
consumption entries as regards their importation of tobacco and alcohol products;
and 3) to cease and desist from implementing the pertinent provisions of R.A. No.
133
9334 by not compelling [private respondents] to immediately pay duties and taxes on
said alcohol and tobacco products as a condition to their removal from the port area
for transfer to the warehouses of [private respondents]."20
The injunction bond was approved at One Million pesos (P1,000,000).21
Without moving for reconsideration, petitioners have come directly to this Court to
question the May 4, 2005 Order and the Writ of Preliminary Injunction which, they
submit, were issued by public respondent with grave abuse of discretion amounting
to lack or excess of jurisdiction.
In particular, petitioners contend that public respondent peremptorily and unjustly
issued the injunctive writ despite the absence of the legal requisites for its issuance,
resulting in heavy government revenue losses.22 They emphatically argue that since
the tax exemption previously enjoyed by private respondents has clearly been
withdrawn by R.A. No. 9334, private respondents do not have any right in esse nor
can they invoke legal injury to stymie the enforcement of R.A. No. 9334.
Furthermore, petitioners maintain that in issuing the injunctive writ, public respondent
showed manifest bias and prejudice and prejudged the merits of the case in utter
disregard of the caveat issued by this Court in Searth Commodities Corporation, et
al. v. Court of Appeals23 and Vera v. Arca.24
Regarding the P1 million injunction bond fixed by public respondent, petitioners
argue that the same is grossly disproportionate to the damages that have been and
continue to be sustained by the Republic.
In their Reply25 to private respondents’ Comment, petitioners additionally plead public
respondent’s bias and partiality in allowing the motions for intervention of a number
of corporations26 without notice to them and in disregard of their present pending
petition for certiorari and prohibition before this Court. The injunction bond filed by
private respondent Indigo Distribution Corporation, they stress, is not even sufficient
to cover all the original private respondents, much less, intervenor-corporations.
The petition is partly meritorious.
At the outset, it bears emphasis that only questions relating to the propriety of the
issuance of the May 4, 2005 Order and the Writ of Preliminary Injunction are properly
within the scope of the present petition and shall be so addressed in order to
determine if public respondent committed grave abuse of discretion. The arguments
raised by private respondents which pertain to the constitutionality of R.A. No. 9334
subject matter of the case pending litigation before the trial court have no bearing in
resolving the present petition.
Section 3 of Rule 58 of the Revised Rules of Court provides:
SEC. 3. Grounds for issuance of preliminary injunction. – A preliminary
injunction may be granted when it is established.
(a) That the applicant is entitled to the relief demanded, and the whole or part
of such relief consists in restraining the commission or continuance of the act
or acts complained of, or in requiring the performance of an act or acts, either
for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the act or acts
complained of during the litigation would probably work injustice to the
applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of the
action or proceeding, and tending to render the judgment ineffectual.
For a writ of preliminary injunction to issue, the plaintiff must be able to establish that
(1) there is a clear and unmistakable right to be protected, (2) the invasion of the right
sought to be protected is material and substantial, and (3) there is an urgent and
paramount necessity for the writ to prevent serious damage.27
Conversely, failure to establish either the existence of a clear and positive right which
should be judicially protected through the writ of injunction, or of the acts or attempts
to commit any act which endangers or tends to endanger the existence of said right,
or of the urgent need to prevent serious damage, is a sufficient ground for denying
the preliminary injunction.28
It is beyond cavil that R.A. No. 7227 granted private respondents exemption from
local and national taxes, including excise taxes, on their importations of general
134
merchandise, for which reason they enjoyed tax-exempt status until the effectivity of purchasers or recipients shall be purchasers or recipients shall be
R.A. No. 9334. considered the importers considered the importers
thereof, and shall be liable for thereof, and shall be liable for
By subsequently enacting R.A. No. 9334, however, Congress expressed its intention the duty and internal revenue tax the duty and internal revenue tax
to withdraw private respondents’ tax exemption privilege on their importations of due on such importation. due on such importation.
cigars, cigarettes, distilled spirits, fermented liquors and wines. Juxtaposed to show
this intention are the respective provisions of Section 131 of the NIRC before and The provision of any special or The provision of any special
after its amendment by R.A. No. 9334: general law to the contrary or general law to the contrary
notwithstanding, the importation notwithstanding, the
x x x x. of cigars and cigarettes, distilled importation of cigars and
spirits, fermented liquors and cigarettes, distilled spirits,
Sec. 131 of NIRC before R.A. Sec. 131, as amended by R.A. wines into the Philippines, even fermented liquors and wines
No. 9334 No. 9334 if destined for tax and duty free into the Philippines, even if
shops, shall be subject to all destined for tax and duty free
Sec. 131. Payment of Excise Sec. 131. Payment of Excise
applicable taxes, duties, shops, shall be subject to all
Taxes on Imported Articles. – Taxes on Imported Articles. –
charges, including excise taxes applicable taxes, duties,
due thereon. Provided, charges, including excise
(A) Persons Liable. – Excise (A) Persons Liable. – Excise however, That this shall not taxes due thereon. This
taxes on imported articles shall taxes on imported articles shall apply to cigars and cigarettes, shall apply to cigars and
be paid by the owner or importer be paid by the owner or importer fermented spirits and wines cigarettes, distilled spirits,
to the Customs Officers, to the Customs Officers, brought directly into the duly fermented liquors and wines
conformably with the regulations conformably with the regulations chartered or legislated brought directly into the duly
of the Department of Finance of the Department of Finance freeports of the Subic chartered or legislated
and before the release of such and before the release of such Economic Freeport Zone, freeports of the Subic
articles from the customs house articles from the customs house created under Republic Act Economic Freeport Zone,
or by the person who is found in or by the person who is found in No. 7227; the Cagayan Special created under Republic Act
possession of articles which are possession of articles which are Economic Zone and Freeport, No. 7227; the Cagayan Special
exempt from excise taxes other exempt from excise taxes other created under Republic Act Economic Zone and Freeport,
than those legally entitled to than those legally entitled to No. 7922; and the Zamboanga created under Republic Act
exemption. exemption. City Special Economic Zone, No. 7922; and the Zamboanga
created under Republic Act No. City Special Economic Zone,
In the case of tax-free articles In the case of tax-free articles 7903, and are not transshipped created under Republic Act No.
brought or imported into the brought or imported into the to any other port in the 7903, and such other freeports
Philippines by persons, entities Philippines by persons, entities Philippines: Provided, further, as may hereafter be established
or agencies exempt from tax or agencies exempt from tax That importations of cigars and or created by law: Provided,
which are subsequently sold, which are subsequently sold, cigarettes, distilled spirits, further, That importations of
transferred or exchanged in the transferred or exchanged in the fermented liquors and wines cigars and cigarettes, distilled
Philippines to non-exempt Philippines to non-exempt made directly by a government- spirits, fermented liquors and
persons or entities, the persons or entities, the owned and operated duty-free wines made directly by a
135
 shop, like the Duty Free government-owned and To note, the old Section 131 of the NIRC expressly provided that all taxes, duties,
Philippines (DFP), shall be operated duty-free shop, like the charges, including excise taxes shall not apply to importations of cigars, cigarettes,
exempted from all applicable Duty Free Philippines (DFP), fermented spirits and wines brought directly into the duly chartered or legislated
duties, charges, including excise shall be exempted from all freeports of the SBF.
tax due thereon; Provided still applicable duties only: Provided
further, That such articles still further, That such articles On the other hand, Section 131, as amended by R.A. No. 9334, now provides that
directly imported by a directly imported by a such taxes, duties and charges, including excise taxes, shall apply to importation of
government-owned and government-owned and cigars and cigarettes, distilled spirits, fermented liquors and wines into the SBF.
operated duty-free shop, like the operated duty-free shop, like the
Duty-Free Philippines, shall be Duty-Free Philippines, shall be Without necessarily passing upon the validity of the withdrawal of the tax exemption
labeled "tax and duty-free" and labeled "tax and duty-free" and privileges of private respondents, it behooves this Court to state certain basic
"not for resale": Provided, still "not for resale": Provided, finally, principles and observations that should throw light on the propriety of the issuance of
further, That if such articles That the removal and transfer of the writ of preliminary injunction in this case.
brought into the duly chartered tax and duty-free goods,
or legislated freeports under products, machinery, equipment First. Every presumption must be indulged in favor of the constitutionality of a
Republic Acts Nos. 7227, 7922 and other similar articles other statute.29 The burden of proving the unconstitutionality of a law rests on the party
and 7903 are subsequently than cigars and cigarettes, assailing the law.30 In passing upon the validity of an act of a co-equal and coordinate
introduced into the Philippine distilled spirits, fermented liquors branch of the government, courts must ever be mindful of the time-honored principle
customs territory, then such and wines, from one Freeport to that a statute is presumed to be valid.
articles shall, upon such another Freeport, shall not be
introduction, be deemed deemed an introduction into the
imported into the Philippines and Philippine customs territory. Second. There is no vested right in a tax exemption, more so when the latest
shall be subject to all imposts expression of legislative intent renders its continuance doubtful. Being a mere
and excise taxes provided statutory privilege,31 a tax exemption may be modified or withdrawn at will by the
x x x x. granting authority.32
herein and other statutes:
Provided, finally, That the
removal and transfer of tax and To state otherwise is to limit the taxing power of the State, which is unlimited,
duty-free goods, products, plenary, comprehensive and supreme. The power to impose taxes is one so
machinery, equipment and other unlimited in force and so searching in extent, it is subject only to restrictions which
similar articles, from one freeport rest on the discretion of the authority exercising it.33
to another freeport, shall not be
deemed an introduction into the Third. As a general rule, tax exemptions are construed strictissimi juris against the
Philippine customs territory. taxpayer and liberally in favor of the taxing authority.34 The burden of proof rests
upon the party claiming exemption to prove that it is in fact covered by the exemption
x x x x. so claimed.35 In case of doubt, non-exemption is favored.36

(Emphasis and underscoring supplied) Fourth. A tax exemption cannot be grounded upon the continued existence of a
statute which precludes its change or repeal.37 Flowing from the basic precept of
constitutional law that no law is irrepealable, Congress, in the legitimate exercise of
136
its lawmaking powers, can enact a law withdrawing a tax exemption just as
efficaciously as it may grant the same under Section 28(4) of Article VI38 of the
Constitution. There is no gainsaying therefore that Congress can amend Section 131
of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334.
Fifth. The rights granted under the Certificates of Registration and Tax Exemption of
private respondents are not absolute and unconditional as to constitute rights in esse
– those clearly founded on or granted by law or is enforceable as a matter of law.39
These certificates granting private respondents a "permit to operate" their respective
businesses are in the nature of licenses, which the bulk of jurisprudence considers
as neither a property nor a property right.40 The licensee takes his license subject to
such conditions as the grantor sees fit to impose, including its revocation at
pleasure.41 A license can thus be revoked at any time since it does not confer an
absolute right.42
While the tax exemption contained in the Certificates of Registration of private
respondents may have been part of the inducement for carrying on their businesses
in the SBF, this exemption, nevertheless, is far from being contractual in nature in the
sense that the non-impairment clause of the Constitution can rightly be invoked.43
Sixth. Whatever right may have been acquired on the basis of the Certificates of
Registration and Tax Exemption must yield to the State’s valid exercise of police
power.44 It is well to remember that taxes may be made the implement of the police
power.45
It is not difficult to recognize that public welfare and necessity underlie the enactment
of R.A. No. 9334. As petitioners point out, the now assailed provision was passed to
curb the pernicious practice of some unscrupulous business enterprises inside the
SBF of using their tax exemption privileges for smuggling purposes. Smuggling in
whatever form is bad enough; it is worse when the same is allegedly perpetrated,
condoned or facilitated by enterprises hiding behind the cloak of their tax exemption
privileges.
Seventh. As a rule, courts should avoid issuing a writ of preliminary injunction which
would in effect dispose of the main case without trial.46 This rule is intended to
preclude a prejudgment of the main case and a reversal of the rule on the burden of
proof since by issuing the injunctive writ, the court would assume the proposition that
petitioners are inceptively duty bound to prove.47
Eighth. A court may issue a writ of preliminary injunction only when the petitioner
assailing a statute has made out a case of unconstitutionality or invalidity strong
enough, in the mind of the judge, to overcome the presumption of validity, in
addition to a showing of a clear legal right to the remedy sought.48
Thus, it is not enough that petitioners make out a case of unconstitutionality or
invalidity to overcome the prima faciepresumption of validity of a statute; they must
also be able to show a clear legal right that ought to be protected by the court. The
issuance of the writ is therefore not proper when the complainant’s right is doubtful or
disputed.49
Ninth. The feared injurious effects of the imposition of duties, charges and taxes on
imported cigars, cigarettes, distilled spirits, fermented liquors and wines on private
respondents’ businesses cannot possibly outweigh the dire consequences that the
non-collection of taxes, not to mention the unabated smuggling inside the SBF,
would wreak on the government. Whatever damage would befall private respondents
must perforce take a back seat to the pressing need to curb smuggling and raise
revenues for governmental functions.
All told, while the grant or denial of an injunction generally rests on the sound
discretion of the lower court, this Court may and should intervene in a clear case of
abuse.50
One such case of grave abuse obtained in this case when public respondent issued
his Order of May 4, 2005 and the Writ of Preliminary Injunction on May 11,
200551 despite the absence of a clear and unquestioned legal right of private
respondents.
In holding that the presumption of constitutionality and validity of R.A. No. 9334 was
overcome by private respondents for the reasons public respondent cited in his May
4, 2005 Order, he disregarded the fact that as a condition sine qua non to the
issuance of a writ of preliminary injunction, private respondents needed also to show
a clear legal right that ought to be protected. That requirement is not satisfied in this
case.
137
To stress, the possibility of irreparable damage without proof of an actual existing
right would not justify an injunctive relief.52
Besides, private respondents are not altogether lacking an appropriate relief under
the law. As petitioners point out in their Petition53 before this Court, private
respondents may avail themselves of a tax refund or tax credit should R.A. No. 9334
be finally declared invalid.
Indeed, Sections 20454 and 22955 of the NIRC provide for the recovery of erroneously
or illegally collected taxes which would be the nature of the excise taxes paid by
private respondents should Section 6 of R.A. No. 9334 be declared unconstitutional
or invalid.
It may not be amiss to add that private respondents can also opt not to import, or to
import less of, those items which no longer enjoy tax exemption under R.A. No. 9334
to avoid the payment of taxes thereon.
The Court finds that public respondent had also ventured into the delicate area which
courts are cautioned from taking when deciding applications for the issuance of the
writ of preliminary injunction. Having ruled preliminarily against the prima
facie validity of R.A. No. 9334, he assumed in effect the proposition that private
respondents in their petition for declaratory relief were duty bound to prove, thereby
shifting to petitioners the burden of proving that R.A. No. 9334 is not unconstitutional
or invalid.
In the same vein, the Court finds public respondent to have overstepped his
discretion when he arbitrarily fixed the injunction bond of the SBF enterprises at
only P1million.
The alleged sparseness of the testimony of Indigo Corporation’s representative56 on
the injury to be suffered by private respondents may be excused because evidence
for a preliminary injunction need not be conclusive or complete. Nonetheless,
considering the number of private respondent enterprises and the volume of their
businesses, the injunction bond is undoubtedly not sufficient to answer for the
damages that the government was bound to suffer as a consequence of the
suspension of the implementation of the assailed provisions of R.A. No. 9334.
Rule 58, Section 4(b) provides that a bond is executed in favor of the party enjoined
to answer for all damages which it may sustain by reason of the injunction. The
purpose of the injunction bond is to protect the defendant against loss or damage by
reason of the injunction in case the court finally decides that the plaintiff was not
entitled to it, and the bond is usually conditioned accordingly.57
Recalling this Court’s pronouncements in Olalia v. Hizon58 that:
x x x [T]here is no power the exercise of which is more delicate, which
requires greater caution, deliberation and sound discretion, or more
dangerous in a doubtful case, than the issuance of an injunction. It is the
strong arm of equity that should never be extended unless to cases of great
injury, where courts of law cannot afford an adequate or commensurate
remedy in damages.
Every court should remember that an injunction is a limitation upon the
freedom of action of the defendant and should not be granted lightly or
precipitately. It should be granted only when the court is fully satisfied that the
law permits it and the emergency demands it,
it cannot be overemphasized that any injunction that restrains the collection of taxes,
which is the inevitable result of the suspension of the implementation of the assailed
Section 6 of R.A. No. 9334, is a limitation upon the right of the government to its
lifeline and wherewithal.
The power to tax emanates from necessity; without taxes, government cannot fulfill
its mandate of promoting the general welfare and well-being of the people.59 That the
enforcement of tax laws and the collection of taxes are of paramount importance for
the sustenance of government has been repeatedly observed. Taxes being the
lifeblood of the government that should be collected without unnecessary
hindrance,60 every precaution must be taken not to unduly suppress it.
Whether this Court must issue the writ of prohibition, suffice it to stress that being
possessed of the power to act on the petition for declaratory relief, public respondent
can proceed to determine the merits of the main case. To halt the proceedings at this
point may be acting too prematurely and would not be in keeping with the policy that
courts must decide controversies on the merits.
138
Moreover, lacking the requisite proof of public respondent’s alleged partiality, this
Court has no ground to prohibit him from proceeding with the case for declaratory
relief. For these reasons, prohibition does not lie.

WHEREFORE, the Petition is PARTLY GRANTED. The writ of certiorari to nullify

and set aside the Order of May 4, 2005 as well as the Writ of Preliminary Injunction
issued by respondent Judge Caguioa on May 11, 2005 is GRANTED. The assailed
Order and Writ of Preliminary Injunction are hereby declared NULL AND VOID and
accordingly SET ASIDE. The writ of prohibition prayed for is, however, DENIED.

SO ORDERED.

Puno, (Chief Justice), Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio,

Austria-Martinez, Corona, Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr.,
Nachura, Reyes, JJ., concur.

139
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24756 October 31, 1968
CITY OF BAGUIO, plaintiff-appellee,
vs.
FORTUNATO DE LEON, defendant-appellant.
The City Attorney for plaintiff-appellee.
Fortunato de Leon for and in his own behalf as defendant-appellant.
FERNANDO, J.:
In this appeal, a lower court decision upholding the validity of an ordinance 1 of the City of
Baguio imposing a license fee on any person, firm, entity or corporation doing business in
the City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held
liable as a real estate dealer with a property therein worth more than P10,000, but not in
excess of P50,000, and therefore obligated to pay under such ordinance the P50 annual
fee. That is the principal question. In addition, there has been a firm and unyielding
insistence by defendant-appellant of the lack of jurisdiction of the City Court of Baguio,
where the suit originated, a complaint having been filed against him by the City Attorney
of Baguio for his failure to pay the amount of P300 as license fee covering the period
from the first quarter of 1958 to the fourth quarter of 1962, allegedly, inspite of repeated
demands. Nor was defendant-appellant agreeable to such a suit being instituted by the
City Treasurer without the consent of the Mayor, which for him was indispensable. The
lower court was of a different mind.
In its decision of December 19, 1964, it declared the above ordinance as amended, valid
and subsisting, and held defendant-appellant liable for the fees therein prescribed as a
real estate dealer. Hence, this appeal. Assume the validity of such ordinance, and there
would be no question about the liability of defendant-appellant for the above license fee,
it being shown in the partial stipulation of facts, that he was "engaged in the rental of his
property in Baguio" deriving income therefrom during the period covered by the first
quarter of 1958 to the fourth quarter of 1962.
The source of authority for the challenged ordinance is supplied by Republic Act No. 329,
amending the city charter of Baguio2 empowering it to fix the license fee and regulate
"businesses, trades and occupations as may be established or practiced in the City."
Unless it can be shown then that such a grant of authority is not broad enough to justify
the enactment of the ordinance now assailed, the decision appealed from must be
affirmed. The task confronting defendant-appellant, therefore, was far from easy. Why he
failed is understandable, considering that even a cursory reading of the above
amendment readily discloses that the enactment of the ordinance in question finds
support in the power thus conferred.
Nor is the question raised by him as to the validity thereof novel in character. In Medina v.
City of Baguio,3 the effect of the amendatory section insofar as it would expand the
previous power vested by the city charter was clarified in these terms: "Appellants
apparently have in mind section 2553, paragraph (c) of the Revised Administrative Code,
which empowers the City of Baguio merely to impose a license fee for the purpose of
rating the business that may be established in the city. The power as thus conferred is
indeed limited, as it does not include the power to levy a tax. But on July 15, 1948,
Republic Act No. 329 was enacted amending the charter of said city and adding to its
power to license the power to tax and to regulate. And it is precisely having in view this
amendment that Ordinance No. 99 was approved in order to increase the revenues of the
city. In our opinion, the amendment above adverted to empowers the city council not only
to impose a license fee but also to levy a tax for purposes of revenue, more so when in
amending section 2553 (b), the phrase 'as provided by law' has been removed by section
2 of Republic Act No. 329. The city council of Baguio, therefore, has now the power to
tax, to license and to regulate provided that the subjects affected be one of those
included in the charter. In this sense, the ordinance under consideration cannot be
considered ultra vires whether its purpose be to levy a tax or impose a license fee. The
terminology used is of no consequence."
It would be an undue and unwarranted emasculation of the above power thus granted if
defendant-appellant were to be sustained in his contention that no such statutory
authority for the enactment of the challenged ordinance could be discerned from the
language used in the amendatory act. That is about all that needs to be said in upholding
the lower court, considering that the City of Baguio was not devoid of authority in
enacting this particular ordinance. As mentioned at the outset, however, defendant-
appellant likewise alleged procedural missteps and asserted that the challenged
ordinance suffered from certain constitutional infirmities. To such points raised by him, we
shall now turn.
140
1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City Court of
Baguio in the suit for the collection of the real estate dealer's fee from him in the amount
of P300. He contended before the lower court, and it is his contention now, that while the
amount of P300 sought was within the jurisdiction of the City Court of Baguio where this
action originated, since the principal issue was the legality and constitutionality of the
challenged ordinance, it is not such City Court but the Court of First Instance that has
original jurisdiction.
There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction.
Only recently, on September 7, 1968 to be exact, we rejected a contention similar in
character in Nemenzo v. Sabillano.4 The plaintiff in that case filed a claim for the payment
of his salary before the Justice of the Peace Court of Pagadian, Zamboanga del Sur. The
question of jurisdiction was raised; the defendant Mayor asserted that what was in issue
was the enforcement of the decision of the Commission of Civil Service; the Justice of the
Peace Court was thus without jurisdiction to try the case. The above plea was curtly
dismissed by Us, as what was involved was "an ordinary money claim" and therefore
"within the original jurisdiction of the Justice of the Peace Court where it was filed,
considering the amount involved." Such is likewise the situation here.
Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendant this
license fee corresponding to the years 1951 and 1952 was filed with the Municipal Court
of Manila, in view of the amount involved. The thought that the municipal court lacked
jurisdiction apparently was not even in the minds of the parties and did not receive any
consideration by this Court.
Evidently, the fear is entertained by defendant-appellant that whenever a constitutional
question is raised, it is the Court of First Instance that should have original jurisdiction on
the matter. It does not admit of doubt, however, that what confers jurisdiction is the
amount set forth in the complaint. Here, the sum sought to be recovered was clearly
within the jurisdiction of the City Court of Baguio.
Nor could it be plausibly maintained that the validity of such ordinance being open to
question as a defense against its enforcement from one adversely affected, the matter
should be elevated to the Court of First Instance. For the City Court could rely on the
presumption of the validity of such ordinance,6 and the mere fact, however, that in the
answer to such a complaint a constitutional question was raised did not suffice to oust the
City Court of its jurisdiction. The suit remains one for collection, the lack of validity being
only a defense to such an attempt at recovery. Since the City Court is possessed of
judicial power and it is likewise axiomatic that the judicial power embraces the
ascertainment of facts and the application of the law, the Constitution as the highest law
superseding any statute or ordinance in conflict therewith, it cannot be said that a City
Court is bereft of competence to proceed on the matter. In the exercise of such delicate
power, however, the admonition of Cooley on inferior tribunals is well worth remembering.
Thus: "It must be evident to any one that the power to declare a legislative enactment
void is one which the judge, conscious of the fallibility of the human judgment, will shrink
from exercising in any case where he can conscientiously and with due regard to duty
and official oath decline the responsibility."7 While it remains undoubted that such a
power to pass on the validity of an ordinance alleged to infringe certain constitutional
rights of a litigant exists, still it should be exercised with due care and circumspection,
considering not only the presumption of validity but also the relatively modest rank of a
city court in the judicial hierarchy.
2. To repeat the challenged ordinance cannot be considered ultra vires as there is more
than ample statutory authority for the enactment thereof. Nonetheless, its validity on
constitutional grounds is challenged because of the allegation that it imposed double
taxation, which is repugnant to the due process clause, and that it violated the
requirement of uniformity. We do not view the matter thus.
As to why double taxation is not violative of due process, Justice Holmes made clear in
this language: "The objection to the taxation as double may be laid down on one side. ...
The 14th Amendment [the due process clause] no more forbids double taxation than it
does doubling the amount of a tax, short of confiscation or proceedings unconstitutional
on other grounds."8With that decision rendered at a time when American sovereignty in
the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup de graceto the bogey of double taxation as a constitutional
bar to the exercise of the taxing power. It would seem though that in the United States, as
with us, its ghost as noted by an eminent critic, still stalks the juridical state. In a 1947
decision, however,9 we quoted with approval this excerpt from a leading American
decision:10 "Where, as here, Congress has clearly expressed its intention, the statute
must be sustained even though double taxation results."
At any rate, it has been expressly affirmed by us that such an "argument against double
taxation may not be invoked where one tax is imposed by the state and the other is
imposed by the city ..., it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted with respect to the
same occupation, calling or activity by both the state and the political subdivisions
thereof."11
The above would clearly indicate how lacking in merit is this argument based on double
taxation.
141
Now, as to the claim that there was a violation of the rule of uniformity established by the
constitution. According to the challenged ordinance, a real estate dealer who leases
property worth P50,000 or above must pay an annual fee of P100. If the property is worth
P10,000 but not over P50,000, then he pays P50 and P24 if the value is less than
P10,000. On its face, therefore, the above ordinance cannot be assailed as violative of
the constitutional requirement of uniformity. In Philippine Trust Company v.
Yatco,12 Justice Laurel, speaking for the Court, stated: "A tax is considered uniform when
it operates with the same force and effect in every place where the subject may be
found."
There was no occasion in that case to consider the possible effect on such a
constitutional requirement where there is a classification. The opportunity came
in Eastern Theatrical Co. v. Alfonso.13 Thus: "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; ..." About two years later, Justice Tuason, speaking for this
Court in Manila Race Horses Trainers Assn. v. De la Fuente 14incorporated the above
excerpt in his opinion and continued: "Taking everything into account, the differentiation
against which the plaintiffs complain conforms to the practical dictates of justice and
equity and is not discriminatory within the meaning of the Constitution."
To satisfy this requirement then, all that is needed as held in another case decided two
years later, 15 is that the statute or ordinance in question "applies equally to all persons,
firms and corporations placed in similar situation." This Court is on record as accepting
the view in a leading American case16 that "inequalities which result from a singling out of
one particular class for taxation or exemption infringe no constitutional limitation." 17
It is thus apparent from the above that in much the same way that the plea of double
taxation is unavailing, the allegation that there was a violation of the principle of
uniformity is inherently lacking in persuasiveness. There is no need to pass upon the
other allegations to assail the validity of the above ordinance, it being maintained that the
license fees therein imposed "is excessive, unreasonable and oppressive" and that there
is a failure to observe the mandate of equal protection. A reading of the ordinance will
readily disclose their inherent lack of plausibility.
3. That would dispose of all the errors assigned, except the last two, which would
predicate a grievance on the complaint having been started by the City Treasurer rather
than the City Mayor of Baguio. These alleged errors, as was the case with the others
assigned, lack merit.
In much the same way that an act of a department head of the national government,
performed within the limits of his authority, is presumptively the act of the President
unless reprobated or disapproved,18 similarly the act of the City Treasurer, whose
position is roughly analogous, may be assumed to carry the seal of approval of the City
Mayor unless repudiated or set aside. This should be the case considering that such city
official is called upon to see to it that revenues due the City are collected. When
administrative steps are futile and unavailing, given the stubbornness and obduracy of a
taxpayer, convinced in good faith that no tax was due, judicial remedy may be resorted to
by him. It would be a reflection on the state of the law if such fidelity to duty would be met
by condemnation rather than commendation.
So, much for the analytical approach. The conclusion thus reached has a reinforcement
that comes to it from the functional and pragmatic test. If a city treasurer has to await the
nod from the city mayor before a municipal ordinance is enforced, then opportunity exists
for favoritism and undue discrimination to come into play. Whatever valid reason may
exist as to why one taxpayer is to be accorded a treatment denied another, the suspicion
is unavoidable that such a manifestation of official favor could have been induced by
unnamed but not unknown consideration. It would not be going too far to assert that even
defendant-appellant would find no satisfaction in such a sad state of affairs. The more
desirable legal doctrine therefore, on the assumption that a choice exists, is one that
would do away with such temptation on the part of both taxpayer and public official alike.
WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed. Costs
against defendant-appellant.
Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and
Capistrano, JJ., concur.
Zaldivar, J., is on leave.
142
 Republic of the Philippines (1) If the net retail price (excluding the excise tax and the value-added
SUPREME COURT tax) is above Ten pesos (₱10.00) per pack, the tax shall be Twelve
Manila pesos (₱12.00) per pack;

SECOND DIVISION (2) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (₱6.50) but does not exceed
G.R. No. 180006 September 28, 2011 Ten pesos (₱10.00) per pack, the tax shall be Eight pesos (₱8.00) per
pack;
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. (3) If the net retail price (excluding the excise tax and the value-added
FORTUNE TOBACCO CORPORATION, Respondent. tax) is Five pesos (₱5.00) but does not exceed Six pesos and fifty
centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;
DECISION
(4) If the net retail price (excluding the excise tax and the [value]-added
BRION, J.: tax) is below Five pesos (₱5.00) per pack, the tax shall be One peso
(₱1.00) per pack.
Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of
xxxx
Court by petitioner Commissioner of Internal Revenue (CIR), assailing the decision dated
July 12, 20071 and the resolution dated October 4, 2007,2 both issued by the Court of Tax
Appeals (CTA) en banc in CTA E.B. No. 228. The specific tax from any brand of cigarettes within the next three (3) years of effectivity
of this Act shall not be lower than the tax [which] is due from each brand on October 1,
BACKGROUND FACTS 1996: Provided, however, That in cases where the specific tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of
more than seventy percent (70%), for a brand of cigarette, the increase shall take effect
Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one
products. Prior to January 1, 1997, the excises taxes on these products were in the form hundred percent (100%) of the increase shall be effective in 1998.
of ad valorem taxes, pursuant to Section 142 of the 1977 National Internal Revenue
Code (1977 Tax Code).
xxxx
Beginning January 1, 1997, Republic Act No. (RA) 82403 took effect and a shift from ad
The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4)
valorem to specific taxes was made. Section 142(c) of the 1977 Tax Code, as amended
by RA 8240, reads in part: hereof, shall be increased by twelve percent (12%) on January 1, 2000. [emphases ours]

To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue
Sec. 142. Cigars and cigarettes. — x x x.
Regulation No. (RR) 1-97 whose Section 3(c) and (d) echoed the above-quoted portion of
Section 142 of the 1977 Tax Code, as amended.4
(c) Cigarettes packed by machine. — There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue
Code of 1997 (1997 Tax Code), and Section 142, as amended by RA 8240, was
renumbered as Section 145.
143
This time, to implement the 12% increase in specific taxes mandated under Section 145 lower than the excise tax that is actually being paid prior to January 1, 2000. [emphasis
of the 1997 Tax Code and again pursuant to its rule-making powers, the CIR issued RR ours]
17-99, which reads:
THE FACTS OF THE CASE
Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following
sections are hereby increased by twelve percent (12%) and the new rates to be levied, Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco)
assessed, and collected are as follows: paid in advance excise taxes for the year 2003 in the amount of ₱11.15 billion, and for
the period covering January 1 to May 31, 2004 in the amount of ₱4.90 billion.5
Section Description of Present Specific New Specific
Articles Tax Rates (Prior Tax Rates In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR
to January 1, (Effective for erroneously and/or illegally collected taxes in the amount of ₱491 million.6 Without
2000) January 1, waiting for the CIR’s action on its claim, Fortune Tobacco filed with the CTA a judicial
2000) claim for tax refund.7

145 CIGARS and In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune
CIGARETTES Tobacco and granted its claim for refund.8 The CTA First Division’s ruling was upheld on
B) Cigarettes appeal by the CTA en banc in its decision dated July 12, 2007.9 The CIR’s motion for
Packed by Machine reconsideration of the CTA en banc’s decision was denied in a resolution dated October
4, 2007.10
(1) Net Retail Price ₱12.00/pack ₱13.44/pack
(excluding VAT & THE ISSUE
Excise) exceeds
₱10.00 per pack
Fortune Tobacco’s claim for refund of overpaid excise taxes is based primarily on what it
(2) Net Retail Price ₱8.00/pack ₱8.96/pack considers as an "unauthorized administrative legislation" on the part of the CIR.
(excluding VAT & Specifically, it assails the proviso in Section 1 of RR 17-99 that requires the payment of
Excise) is ₱6.51 up the "excise tax actually being paid prior to January 1, 2000" if this amount is higher than
to ₱10.00 per pack the new specific tax rate, i.e., the rates of specific taxes imposed in 1997 for each
category of cigarette, plus 12%. It claimed that by including the proviso, the CIR went
(3) Net Retail Price ₱5.00/pack ₱5.60/pack beyond the language of the law and usurped Congress’ power. As mentioned, the CTA
(excluding VAT & sided with Fortune Tobacco and allowed the latter to claim the refund.
Excise) is ₱5.00 to
₱6.50 per pack The CIR disagrees with the CTA’s ruling and assails it before this Court through the
(4) Net Retail Price ₱1.00/pack ₱1.12/pack present petition for review on certiorari. The CIR posits that the inclusion of the proviso in
(excluding VAT & Section 1 of RR 17-99 was made to carry into effect the law’s intent and is well within the
Excise) is below scope of his delegated legislative authority.11 He claims that the CTA’s strict interpretation
₱5.00 per pack of the law ignored Congress’ intent "to increase the collection of excise taxes by
increasing specific tax rates on ‘sin’ products."12 He cites portions of the Senate’s
deliberation on House Bill No. 7198 (the precursor of RA 8240) that conveyed the
Provided, however, that the new specific tax rate for any existing brand of cigars [and] legislative intent to increase the excise taxes being paid.13
cigarettes packed by machine, distilled spirits, wines and fermented liquors shall not be
144
The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that
"[t]he excise tax from any brand of cigarettes within the [three-year transition period from
January 1, 1997 to December 31, 1999] shall not be lower than the tax, which is due from
each brand on October 1, 1996." He posits that there is no plausible reason why the new
specific tax rates due beginning January 1, 2000 should not be subject to the same rule
as those due during the transition period. To the CIR, the adoption of the "higher tax rule"
during the transition period unmistakably shows the intent of Congress not to lessen the
excise tax collection. Thus, the CTA should have construed the ambiguity or omission in
Section 145(c) in a manner that would uphold the law’s policy and intent.
Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and
interpreted as it is written; it imposes a 12% increase on the rates of excise taxes
provided under sub-paragraphs (1), (2), (3), and (4) only; it does not say that the tax due
during the transition period shall continue to be collected if the amount is higher than the
new specific tax rates. It contends that the "higher tax rule" applies only to the three-year
transition period to offset the burden caused by the shift from ad valorem to specific
taxes.
THE COURT’S RULING
Except for the tax period and the amounts involved,14 the case at bar presents the same
issue that the Court already resolved in 2008 in CIR v. Fortune Tobacco Corporation. 15 In
the 2008 Fortune Tobacco case, the Court upheld the tax refund claims of Fortune
Tobacco after finding invalid the proviso in Section 1 of RR 17-99. We ruled:
Section 145 states that during the transition period, i.e., within the next three (3) years
from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not
be lower than the tax due from each brand on 1 October 1996. This qualification,
however, is conspicuously absent as regards the 12% increase which is to be applied on
cigars and cigarettes packed by machine, among others, effective on 1 January 2000.
Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes
packed by machine due to the 12% increase effective on 1 January 2000 without regard
to whether the revenue collection starting from this period may turn out to be lower than
that collected prior to this date.
By adding the qualification that the tax due after the 12% increase becomes effective
shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation
No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem
tax being paid at the end of the three (3)-year transition period and the specific tax under
paragraph C, sub-paragraph (1)-(4), as increased by 12% – a situation not supported by
the plain wording of Section 145 of the Tax Code.16
Following the principle of stare decisis,17 our ruling in the present case should no longer
come as a surprise. The proviso in Section 1 of RR 17-99 clearly went beyond the terms
of the law it was supposed to implement, and therefore entitles Fortune Tobacco to claim
a refund of the overpaid excise taxes collected pursuant to this provision.
The amount involved in the present case and the CIR’s firm insistence of its arguments
nonetheless compel us to take a second look at the issue, but our findings ultimately lead
us to the same conclusion. Indeed, we find more reasons to disagree with the CIR’s
construction of the law than those stated in our 2008 Fortune Tobacco ruling, which was
largely based on the application of the rules of statutory construction.
Raising government revenue is not the sole objective of RA 8240
That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise
government revenues is a given fact, but this is not the sole and only objective of the
law.18 Congressional deliberations show that the shift from ad valorem to specific taxes
introduced by the law was also intended to curb the corruption that became endemic to
the imposition of ad valorem taxes.19 Since ad valorem taxes were based on the value of
the goods, the prices of the goods were often manipulated to yield lesser taxes. The
imposition of specific taxes, which are based on the volume of goods produced, would
prevent price manipulation and also cure the unequal tax treatment created by the
skewed valuation of similar goods.
Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99
The Constitution requires that taxation should be uniform and equitable.20 Uniformity in
taxation requires that all subjects or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities.21 This requirement, however, is unwittingly
violated when the proviso in Section 1 of RR 17-99 is applied in certain cases. To
illustrate this point, we consider three brands of cigarettes, all classified as lower-priced
cigarettes under Section 145(c)(4) of the 1997 Tax Code, since their net retail price is
below ₱5.00 per pack:
Net (A) (B) (C) (D) (E)
Brand22 Retail Ad Specific Specific New New
Price Valorem Tax under Tax Due Specific Tax Specific
145
 per Tax Due Section Jan 1997 imposing Tax Due When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these
pack prior to 145(C)(4) to Dec 12% by Jan products are read, however, there is nothing similar to the third paragraph of Section
Jan 1997 1999 increase by 2000 145(c) that can be found in the provisions imposing excise taxes on distilled spirits
Jan 2000 per RR (Section 14123 ) and wines (Section 14224 ). In fact, the rule will also not apply to cigars
17-99 as these products fall under Section 145(a).25

Camel KS 4.71 5.50 1.00/pack 5.50 1.12/pack 5.50

Evidently, the 1997 Tax Code’s provisions on excise taxes have omitted the adoption of
Champion 4.56 3.30 1.00/pack 3.30 1.12/pack 3.30 certain tax measures. To our mind, these omissions are telling indications of the intent of
M 100 Congress not to adopt the omitted tax measures; they are not simply unintended lapses
in the law’s wording that, as the CIR claims, are nevertheless covered by the spirit of the
Union 4.64 1.09 1.00/pack 1.09 1.12/pack 1.12 law. Had the intention of Congress been solely to increase revenue collection, a provision
American similar to the third paragraph of Section 145(c) would have been incorporated in Sections
Blend 141 and 142 of the 1997 Tax Code. This, however, is not the case.

Although the brands all belong to the same category, the proviso in Section 1, RR 17-99
authorized the imposition of different (and grossly disproportionate) tax rates (see column
[D]). It effectively extended the qualification stated in the third paragraph of Section
145(c) of the 1997 Tax Code that was supposed to apply only during the transition
period:
We note that Congress was not unaware that the "higher tax rule" is a proviso that should
ideally apply to the increase after the transition period (as the CIR embodied in the
proviso in Section 1 of RR 17-99). During the deliberations for the law amending Section
145 of the 1997 Tax Code (RA 9334), Rep. Jesli Lapuz adverted to the "higher tax rule"
after December 31, 1999 when he stated:

The excise tax from any brand of cigarettes within the next three (3) years from the
effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand
on October 1, 1996[.]
In the process, the CIR also perpetuated the unequal tax treatment of similar goods that
was supposed to be cured by the shift from ad valorem to specific taxes.
The omission in the law in fact reveals the legislative intent not to adopt the "higher tax
rule"
The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third
paragraph of Section 145(c) of the 1997 Tax Code. Since the law’s intent was to increase
revenue, it found no reason not to apply the same "higher tax rule" to excise taxes due
after the transition period despite the absence of a similar text in the wording of Section
145(c). What the CIR misses in his argument is that he applied the rule not only for
cigarettes, but also for cigars, distilled spirits, wines and fermented liquors:
Provided, however, that the new specific tax rate for any existing brand of cigars [and]
cigarettes packed by machine, distilled spirits, wines and fermented liquors shall not be
lower than the excise tax that is actually being paid prior to January 1, 2000.
This bill serves as a catch-up measure as government attempts to collect additional
revenues due it since 2001. Modifications are necessary indeed to capture the loss
proceeds and prevent further erosion in revenue base. x x x. As it is, it plugs a major
loophole in the ambiguity of the law as evidenced by recent disputes resulting in the
government being ordered by the courts to refund taxpayers.1âwphi1 This bill clarifies
that the excise tax due on the products shall not be lower than the tax due as of the date
immediately prior to the effectivity of the act or the excise tax due as of December 31,
1999.26
This remark notwithstanding, the final version of the bill that became RA 9334 contained
no provision similar to the proviso in Section 1 of RR 17-99 that imposed the tax due as
of December 31, 1999 if this tax is higher than the new specific tax rates. Thus, it
appears that despite its awareness of the need to protect the increase of excise taxes to
increase government revenue, Congress ultimately decided against adopting the "higher
tax rule.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision dated July
12, 2007 and the resolution dated October 4, 2007 of the Court of Tax Appeals in CTA
E.B. No. 228 are AFFIRMED. No pronouncement as to costs.
146
SO ORDERED. Footnotes

ARTURO D. BRION* * Designated as Acting Chairperson in lieu of Associate Justice Antonio T.

Associate Justice Carpio, per Special Order No. 1083 dated September 13, 2011.

WE CONCUR: ** Designated as Additional Member of the Second Division in lieu of Associate

Justice Antonio T. Carpio, per Special Order No. 1084 dated September 13,
MARIANO C. DEL CASTILLO** 2011.
Associate Justice
*** Designated as Additional Member of the Second Division in lieu of Associate
JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA*** Justice Bienvenido L. Reyes, per Special Order No. 1107 dated September 27,
Associate Justice Associate Justice 2011.

1Penned by CTA Justice Juanito C. Castañeda, Jr., and concurred in by CTA

MARIA LOURDES P. A. SERENO Justices Lovell R. Bautista, Erlina P. Uy, Caesar A. Casanova, and Olga
Associate Justice Palanca-Enriquez; rollo, pp. 41-54. CTA Presiding Justice Ernesto D. Acosta
dissented from the majority; id. at 55-63.
ATTESTATION
2Id. at 64-66. CTA Justice Ernesto D. Acosta reiterated his dissent from the
I attest that the conclusions in the above Decision had been reached in consultation majority opinion; id. at 67-70.
before the case was assigned to the writer of the opinion of the Court’s Division.
3An Act Amending Sections 138, 139, 140 and 142 of the National Internal
ARTURO D. BRION Revenue Code, as amended, and For Other Purposes.
Associate Justice
Acting Chairperson, Second Division 4SEC. 3. Rates and Bases of Tax. – There shall be levied, assessed and
collected on cigars and cigarettes excise tax as follows:
CERTIFICATION
(c) Cigarettes Packed by Machine:
Pursuant to Section 13, Article VIII of the Constitution, and the Division Acting
Chairperson's Attestation, I certify that the conclusions in the above Decision had been (1) Per pack – ₱12.00 if the net retail price per pack (exclusive of
reached in consultation before the case was assigned to the writer of the opinion of the VAT and excise tax) is over ₱10.00;
Court’s Division.
(2) Per pack – ₱8.00 if the net retail price per pack (exclusive of
RENATO C. CORONA VAT and excise tax) is over ₱6.50 but not over ₱10.00;
Chief Justice
(3) Per pack – ₱5.00 if the net retail price per pack (exclusive of
VAT and excise tax) is ₱5.00 but not over ₱6.50;

147
 (4) Per pack – ₱1.00 if the net retail price per pack (exclusive of
VAT and excise tax) is below ₱5.00.
The specific tax from any brand of cigarettes within the next three (3)
years of effectivity of this Act shall not be lower than the tax which is due
from each brand on October 1, 1996: Provided, however, That in cases
where the specific tax rates imposed in paragraph (C), sub-paragraphs
(1), (2), (3) and (4) herein above, will result in an increase in excise tax of
more than seventy percent (70%), for a brand of cigarette, the increase
shall take effect in two tranches: (a) fifty percent (50%) of the increase
shall be effective in 1997; and (b) one hundred percent (100%) of the
increase shall be effective in 1998.
(d) Beginning January 1, 2000, the rates of specific tax on cigars and
cigarettes under paragraphs (A) and (C), sub-paragraphs (1), (2), (3) and
(4) hereof, shall be increased by twelve percent (12%).
5 Rollo, p. 45.
6 Ibid.
7 Id. at 46-47.
8The CIR’s motion for reconsideration of the CTA First Division’s decision dated
May 26, 2006 was denied in a resolution dated November 15, 2006; id. at 46-47.
9
Supra note 1.
10 Supra note 2.
11 Rollo, p. 209.
12 Ibid.
13The CIR referred to the exchange between Senator Juan Ponce Enrile and
Senators Neptali Gonzales and Franklin Drilon; Records of the Senate, No. 33,
Volume II, October 16, 1996.
14The 2008 Fortune Tobacco case involved refund of excise taxes amounting to
₱680,387,025.00 for the period of January 2000 to December 2001; and
₱355,385,920 for the period of January to December 2002.
15 G.R. Nos. 167274-75, July 21, 2008, 559 SCRA 160.
16 Id. at 177.
17 Under this doctrine, Courts are "to stand by precedent and not to disturb
settled point." Once the Court has "laid down a principle of law as applicable to a
certain state of facts, it will adhere to that principle, and apply it to all future
cases, where facts are substantially the same; regardless of whether the parties
or property are the same"; In the Matter of the Charges of Plagiarism, etc.,
Against Associate Justice Mariano C. del Castillo, A.M. No. 10-7-17-SC,
February 8, 2011. Also, in Ting v. Velez-Ting, G.R. No. 166562, March 31, 2009,
582 SCRA 694, 704-705, we said that "based on the principle that once a
question of law has been examined and decided, it should be deemed settled
and closed to further argument. Basically, it is a bar to any attempt to relitigate
the same issues, necessary for two simple reasons: economy and stability. In our
jurisdiction, the principle is entrenched in Article 8 of the Civil Code."
18Senator Enrile’s sponsorship speech, in fact, identifies three objectives for the
enactment of RA 8240: (1) to evolve a tax structure which will promote fair
competition among the players in the industries concerned and generate buoyant
and stable revenue for government; (2) to ensure that the tax burden is equitably
distributed; and (3) to simplify the tax administration and compliance with the tax
laws. Transcript of Senate Deliberations on House Bill No. 7198 dated October
15, 1996.
19 Senate deliberations dated October 16, 1996.
20 CONSTITUTION, Article VI, Section 28(1).
21
British American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009, 585
SCRA 36.
22 Camel and Champion are Fortune Tobacco brands; and Union American Blend
is a brand of Sterling Tobacco Corporation. See Annex "D" of the 1997 Tax
Code.
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23SEC. 141. Distilled Spirits. - On distilled spirits, there shall be collected,
subject to the provisions of Section 133 of this Code, excise taxes as follows:
(a) If produced from the sap of nipa, coconut, cassava, camote, or buri
palm or from the juice, syrup or sugar of the cane, provided such
materials are produced commercially in the country where they are
processed into distilled spirits, per proof liter, Eight pesos
(₱8.00): Provided, That if produced in a pot still or other similar primary
distilling apparatus by a distiller producing not more than one hundred
(100) liters a day, containing not more than fifty percent (50%) of alcohol
by volume, per proof liter, Four pesos (₱4.00);
(b) If produced from raw materials other than those enumerated in the
preceding paragraph, the tax shall be in accordance with the net retail
price per bottle of seven hundred fifty milliliter (750 ml.) volume capacity
(excluding the excise tax and the value-added tax) as follows:
(1) Less than Two hundred and fifty pesos (₱250) - Seventy-five
pesos (₱75), per proof liter;
(2) Two hundred and fifty pesos (₱250) up to Six hundred and
Seventy-Five pesos (₱675) - One hundred and fifty pesos
(₱150), per proof liter; and
(3) More than Six hundred and seventy-five pesos (₱675) -
Three hundred pesos (₱300), per proof liter.
(c) Medicinal preparations, flavoring extracts, and all other preparations,
except toilet preparations, of which, excluding water, distilled spirits for
the chief ingredient, shall be subject to the same tax as such chief
ingredient.
This tax shall be proportionally increased for any strength of the spirits
taxed over proof spirits, and the tax shall attach to this substance as
soon as it is in existence as such, whether it be subsequently separated
as pure or impure spirits, or transformed into any other substance either
in the process of original production or by any subsequent process.
"Spirits or distilled spirits" is the substance known as ethyl alcohol,
ethanol or spirits of wine, including all dilutions, purifications and mixtures
thereof, from whatever source, by whatever process produced, and shall
include whisky, brandy, rum, gin and vodka, and other similar products or
mixtures.
"Proof spirits" is liquor containing one-half (1/2) of its volume of alcohol of
a specific gravity of seven thousand nine hundred and thirty-nine ten
thousandths (0.7939) at fifteen degrees centigrade (15OC). A "proof
liter" means a liter of proof spirits.
The rates of tax imposed under this Section shall be increased by twelve
percent (12%) on January 1, 2000.
New brands shall be classified according to their current net retail price.
For the above purpose, "net retail price" shall mean the price at which
the distilled spirit is sold on retail in ten (10) major supermarkets in Metro
Manila, excluding the amount intended to cover the applicable excise tax
and the value-added tax as of October 1, 1996.
The classification of each brand of distilled spirits based on the average
net retail price as of October 1, 1996, as set forth in Annex "A," shall
remain in force until revised by Congress.
24SEC. 142. Wines. - On wines, there shall be collected per liter of volume
capacity, the following taxes:
(a) Sparkling wines/champagnes regardless of proof, if the net retail price
per bottle (excluding the excise tax and the value-added tax) is:
(1) Five hundred pesos (₱500) or less - One hundred pesos
(₱100); and (2) More than Five hundred pesos (₱500) - Three
hundred pesos (₱300).
(b) Still wines containing fourteen percent (14%) of alcohol by volume or
less, Twelve pesos (₱12.00); and
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 (c) Still wines containing more than fourteen percent (14%) but not more
than twenty-five percent (25%) of alcohol by volume, Twenty-four pesos
(₱24.00).

Fortified wines containing more than twenty-five percent (25%) of alcohol

by volume shall be taxed as distilled spirits. "Fortified wines" shall mean
natural wines to which distilled spirits are added to increase their
alcoholic strength.

The rates of tax imposed under this Section shall be increased by twelve
percent (12%) on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, "net retail price" shall mean the price at which
wine is sold on retail in ten (10) major supermarkets in Metro Manila,
excluding the amount intended to cover the applicable excise tax and the
value-added tax as of October 1, 1996.

The classification of each brand of wines based on its average net retail
price as of October 1, 1996, as set forth in Annex "B," shall remain in
force until revised by Congress.

25SEC. 145. Cigars and Cigarettes. - (A) Cigars. - There shall be levied,
assessed and collected on cigars a tax of One peso (₱1.00) per cigar[.]

26House Deliberations on RA 9334 (House Bill No. 3174), October 27, 2004, p.
19.

150