G.R. No.

195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules
of Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals
(CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This
Court resolves this case on a pure question of law, which involves the interpretation
of Section 27(B) vis-à-vis Section 30(E) and (G) of the National Internal Revenue
Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. Under its articles of incorporation, among its corporate
purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

benevolent, charitable and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick, diseased and disabled persons;
provided that purely medical and surgical services shall be performed by duly
licensed physicians and surgeons who may be freely and individually
contracted by patients;
 (b) To provide a career of health science education and provide medical
services to the community through organized clinics in such specialties as the
facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion

of health as well as provide facilities for scientific and medical researches
which, in the opinion of the Board of Trustees, may be justified by the facilities,
personnel, funds, or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both

government and private sector; establish rules and regulations consistent with
the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting to ₱76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the
First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against
the deficiency tax assessments. The BIR did not act on the protest within the 180-day
period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is
a new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section 26 of the
1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only
13% of its revenues came from charitable purposes. Moreover, the hospital's board
of trustees, officers and employees directly benefit from its profits and assets. St.
Luke's had total revenues of ₱1,730,367,965 or approximately ₱1.73 billion from
patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its
free services to patients was ₱218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses) of ₱334,642,615. 8 St. Luke's also
claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole
issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals
out of the income tax exemption under Section 30 of the NIRC and instead, imposes
a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be
ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment
and withholding of a part of its income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual
review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power
is generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a
recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of ₱110,000.00 is hereby CANCELLED and
WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income
tax and deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency

interest on the total amount of ₱6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared
as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the
remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the 10%
tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income
derived by St. Luke's from services to its patients, whether paying or non-paying. The
CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner
of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its
articles of incorporation and various documents 17 identifying St. Luke's as a charitable
institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which
states that "a charitable institution does not lose its charitable character and its
consequent exemption from taxation merely because recipients of its benefits who are
able to pay are required to do so, where funds derived in this manner are devoted to
the charitable purposes of the institution x x x." 19 The generation of income from
paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure its existence, by
operating within the limits of its own resources, especially its regular income. In other
words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)
requires a hospital to be "non-profit." On the other hand, Congress specifically used
the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is
clear that non-stock, non-profit hospitals operated exclusively for charitable purpose
are exempt from income tax on income received by them as such, applying the
provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income
of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960
because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of
Court, "[t]he petition shall raise only questions of law which must be distinctly set
forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review
"when the Court of Appeals [in this case, the CTA] manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated
that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being
allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is
not a case of overlooking or failing to consider relevant evidence. The CTA obviously
considered the evidence and concluded that it is self-serving. The CTA declared that
it has "gone through the records of this case and found no other evidence aside from
the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the
25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the
deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of
₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes
only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency
interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section
30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational

institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: Provided, That
if the gross income from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this Subsection, the term
'unrelated trade, business or other activity' means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as
the case may be, in accordance with existing laws and regulations. (Emphasis
supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends
that it is a charitable institution and an organization promoting social welfare. The
arguments of St. Luke's focus on the wording of Section 30(E) exempting from income
tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative
intent of introducing Section 27(B) was only to remove the exemption for "proprietary
non-profit" hospitals. 35 The relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person;

xxxx
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the
removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions 36 and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to
Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals
or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue

v. Club Filipino Inc. de Cebu, 37 this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The club
was primarily funded by membership fees and dues. If it had profits, they were used
for overhead expenses and improving its golf course. 38 The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government." 41 A non-profit club for the benefit
of its members fails this test. An organization may be considered as non-profit if it
does not distribute any part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided in the last paragraph
of Section 30.

To be a charitable institution, however, an organization must meet the substantive test

of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from
the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members
of Congress." 43 The requirements for a tax exemption are strictly construed against
the taxpayer 44 because an exemption restricts the collection of taxes necessary for
the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling
uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and
its exemption from taxes simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that
"[c]haritable institutions, churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation." 48 The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the institution use
the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that
the Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property
not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article
VI of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be
devoted "exclusively" for charitable purposes. The organization of the institution refers
to its corporate form, as shown by its articles of incorporation, by-laws and other
constitutive documents. Section 30(E) of the NIRC specifically requires that the
corporation or association be non-stock, which is defined by the Corporation Code as
"one where no part of its income is distributable as dividends to its members, trustees,
or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized." 50 However, under Lung Center, any profit
by a charitable institution must not only be plowed back "whenever necessary or
proper," but must be "devoted or used altogether to the charitable object which it is
intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a part
of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit

charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property "actually, directly and exclusively" for
charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and operated exclusively" for
charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the
NIRC requires that the institution be "operated exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized
and operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements
in Section 30(E) that the "[n]on-stock corporation or association [must be] organized
and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies
the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively"
for charitable purposes, it is nevertheless allowed to engage in "activities conducted
for profit" without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the "income of whatever kind and character" of a charitable
institution "from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate
rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now
10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱1.73
billion from paying patients is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income received from "activities
conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to Patients"
in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R.
No. 195909, St. Luke's showed the following "calculation" to support its claim that
65.20% of its "income after expenses was allocated to free or charitable services" in
1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -

65.20%

INCOME FROM OPERATIONS, Net of FREE ₱116,455,117.00 34.80%

SERVICES

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred

from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude;
as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a "purpose to make profit over and
above the cost" of services. 55 The ₱1.73 billion total revenues from paying patients is
not even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying
patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the operating
income is reinvested in property, equipment or facilities used for services to paying
and non-paying patients, then it cannot be said that the income is "devoted or used
altogether to the charitable object which it is intended to achieve." 56 The income is
plowed back to the corporation not entirely for charitable purposes, but for profit as
well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such
income."

Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase "or from any activity
conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no

cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa;

pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posición social económica, lo que se paga por
estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos
tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution
like the College of Medicine of the University of Santo Tomas. Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one
of the reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational

institution. 58 However, it is applicable to charitable institutions because Senator
Cuenco's response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an institution
from tax. An institution cannot use its corporate form to prevent its profitable activities
from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section
27(B).

A tax exemption is effectively a social subsidy granted by the State because an

exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social welfare.
A profit-making entity should not be allowed to exploit this subsidy to the detriment of
the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-
profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of
its profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable
and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J.
Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good faith
and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.

195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc
dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No.
6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the
deficiency income tax in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249
of the National Internal Revenue Code. All other parts of the Decision and Resolution
of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.

SO ORDERED.

Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.

TOLENTINO VS. SOF

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions
filed in these cases for the declaration of unconstitutionality of R.A. No. 7716,
otherwise known as the Expanded Value-Added Tax Law. The motions, of which there
are 10 in all, have been filed by the several petitioners in these cases, with the
exception of the Philippine Educational Publishers Association, Inc. and the
Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment,

to which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine
Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in
G.R. No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995
a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the

petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber
of Real Estate and Builders Association (CREBA)) reiterate previous claims made by
them that R.A. No. 7716 did not "originate exclusively" in the House of
Representatives as required by Art. VI, §24 of the Constitution. Although they admit
that H. No. 11197 was filed in the House of Representatives where it passed three
readings and that afterward it was sent to the Senate where after first reading it was
referred to the Senate Ways and Means Committee, they complain that the Senate
did not pass it on second and third readings. Instead what the Senate did was to pass
its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino
adds that what the Senate committee should have done was to amend H. No. 11197
by striking out the text of the bill and substituting it with the text of S. No. 1630. That
way, it is said, "the bill remains a House bill and the Senate version just becomes the
text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed
an amendment to a House revenue bill by enacting its own version of a revenue bill.
On at least two occasions during the Eighth Congress, the Senate passed its own
version of revenue bills, which, in consolidation with House bills earlier passed,
became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987
BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX
AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was
approved by the President on April 10, 1992. This Act is actually a consolidation of H.
No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920,
which was approved by the Senate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL
GIVE REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC
GAMES) which was approved by the President on May 22, 1992. This Act is a
consolidation of H. No. 22232, which was approved by the House of Representatives
on August 2, 1989, and S. No. 807, which was approved by the Senate on October
21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the
result of the consolidation of House and Senate bills. These are the following, with
indications of the dates on which the laws were approved by the President and dates
the separate bills of the two chambers of Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION,

AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS OF
THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL

REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-ADDED
TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS
TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE
CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL

REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF
INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED (February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS

POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES
INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE
VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%)
ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX
PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED
BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND

ADMINISTRATION OF THE DOCUMENTARY STAMP TAX,
AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE

OF SHARES OF STOCK LISTED AND TRADED THROUGH THE
LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC
OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW
 SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF
(May 5, 1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in
the exercise of its power to propose amendments to bills required to originate in the
House, passed its own version of a House revenue measure. It is noteworthy that, in
the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the
Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner

Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like
S. No. 1630 is instead enacted as a substitute measure, "taking into Consideration . .
. H.B. 11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be
considered.

No amendment by substitution shall be entertained unless the text

thereof is submitted in writing.

Any of said amendments may be withdrawn before a vote is taken

thereon.

§69. No amendment which seeks the inclusion of a legislative provision

foreign to the subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with

another which covers a subject distinct from that proposed in the original
bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the
Philippine Senate possesses less power than the U.S. Senate because of textual
differences between constitutional provisions giving them the power to propose or
concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of

Representatives; but the Senate may propose or concur with
amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the

public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision
to drop the phrase "as on other Bills" in the American version, according to petitioners,
shows the intention of the framers of our Constitution to restrict the Senate's power to
propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills'
(sic) were eliminated so as to show that these bills were not to be like other bills but
must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the
power of the Senate. It will be recalled that the 1935 Constitution originally provided
for a unicameral National Assembly. When it was decided in 1939 to change to a
bicameral legislature, it became necessary to provide for the procedure for lawmaking
by the Senate and the House of Representatives. The work of proposing amendments
to the Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's lawmaking
powers, sought to curtail the powers of the proposed Senate. Accordingly they
proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the Assembly,
but the Senate may propose or concur with amendments. In case of
disapproval by the Senate of any such bills, the Assembly may repass
the same by a two-thirds vote of all its members, and thereupon, the bill
so repassed shall be deemed enacted and may be submitted to the
 President for corresponding action. In the event that the Senate should
fail to finally act on any such bills, the Assembly may, after thirty days
from the opening of the next regular session of the same legislative term,
reapprove the same with a vote of two-thirds of all the members of the
Assembly. And upon such reapproval, the bill shall be deemed enacted
and may be submitted to the President for corresponding action.

The special committee on the revision of laws of the Second National Assembly
vetoed the proposal. It deleted everything after the first sentence. As rewritten, the
proposal was approved by the National Assembly and embodied in Resolution No.
38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION
65-66 (1950)). The proposed amendment was submitted to the people and ratified by
them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24
of the present Constitution was derived. It explains why the word "exclusively" was
added to the American text from which the framers of the Philippine Constitution
borrowed and why the phrase "as on other Bills" was not copied. Considering the
defeat of the proposal, the power of the Senate to propose amendments must be
understood to be full, plenary and complete "as on other Bills." Thus, because revenue
bills are required to originate exclusively in the House of Representatives, the Senate
cannot enact revenue measures of its own without such bills. After a revenue bill is
passed and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of the two
chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power
to concur is clear from the following commentaries:

The power of the Senate to propose or concur with amendments is

apparently without restriction. It would seem that by virtue of this power,
the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a general revenue
bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by
the Senate into a corporation tax. The amending authority of the Senate
was declared by the United States Supreme Court to be sufficiently
broad to enable it to make the alteration. [Flint v. Stone Tracy Company,
220 U.S. 107, 55 L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE

PHILIPPINES 247 (1961))
 The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and
therefore also more representative of the people. Moreover, its members
are presumed to be more familiar with the needs of the country in regard
to the enactment of the legislation involved.

The Senate is, however, allowed much leeway in the exercise of its
power to propose or concur with amendments to the bills initiated by the
House of Representatives. Thus, in one case, a bill introduced in the U.S.
House of Representatives was changed by the Senate to make a
proposed inheritance tax a corporation tax. It is also accepted practice
for the Senate to introduce what is known as an amendment by
substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate
may propose or concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. As petitioner Tolentino
states in a high school text, a committee to which a bill is referred may do any of the
following:

(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be known
as a committee bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258

(1950))

To except from this procedure the amendment of bills which are required to originate
in the House by prescribing that the number of the House bill and its other parts up to
the enacting clause must be preserved although the text of the Senate amendment
may be incorporated in place of the original body of the bill is to insist on a mere
technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a
substitute measure, is therefore as much an amendment of H. No. 11197 as any which
the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that
they assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of
S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197,"
implying that there is something substantially different between the reference to S.
No. 1129 and the reference to H. No. 11197. From this premise, they conclude that
R.A. No. 7716 originated both in the House and in the Senate and that it is the product
of two "half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by
both houses of Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to
be mere amendments of the corresponding provisions of H. No. 11197. The very
tabular comparison of the provisions of H. No. 11197 and S. No. 1630 attached as
Supplement A to the basic petition of petitioner Tolentino, while showing differences
between the two bills, at the same time indicates that the provisions of the Senate bill
were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the
Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form
did not have to pass the Senate on second and three readings. It was enough that
after it was passed on first reading it was referred to the Senate Committee on Ways
and Means. Neither was it required that S. No. 1630 be passed by the House of
Representatives before the two bills could be referred to the Conference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S.
No. 1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act
prohibiting the disclosure of bank deposits), were referred to a conference committee,
the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice
versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If

a House bill is passed by the House but not passed by the Senate, and
a Senate bill of a similar nature is passed in the Senate but never passed
in the House, can the two bills be the subject of a conference, and can a
law be enacted from these two bills? I understand that the Senate bill in
this particular instance does not refer to investments in government
securities, whereas the bill in the House, which was introduced by the
Speaker, covers two subject matters: not only investigation of deposits
in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law
can be enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
 THE SPEAKER. The report of the conference committee is in order. It is
precisely in cases like this where a conference should be had. If the
House bill had been approved by the Senate, there would have been no
need of a conference; but precisely because the Senate passed another
bill on the same subject matter, the conference committee had to be
created, and we are now considering the report of that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No.
1630 are distinct and unrelated measures also accounts for the petitioners'
(Kilosbayan's and PAL's) contention that because the President separately certified
to the need for the immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version of the same
revenue bill which at the moment was being considered. Otherwise, to follow
petitioners' theory, it would be necessary for the President to certify as many bills as
are presented in a house of Congress even though the bills are merely versions of the
bill he has already certified. It is enough that he certifies the bill which, at the time he
makes the certification, is under consideration. Since on March 22, 1994 the Senate
was considering S. No. 1630, it was that bill which had to be certified. For that matter
on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the
House. This bill was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the

main decision that the phrase "except when the President certifies to the necessity of
its immediate enactment, etc." in Art. VI, §26 (2) qualifies not only the requirement
that "printed copies [of a bill] in its final form [must be] distributed to the members three
days before its passage" but also the requirement that before a bill can become a law
it must have passed "three readings on separate days." There is not only textual
support for such construction but historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been
printed and copies thereof in its final form furnished its Members at least
three calendar days prior to its passage, except when the President shall
have certified to the necessity of its immediate enactment. Upon the last
reading of a bill, no amendment thereof shall be allowed and the question
upon its passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):
 (2) No bill shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been
distributed to the Members three days before its passage, except when
the Prime Minister certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading of a bill,
no amendment thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeas and nays entered in the
Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI,
§26 (2) of the present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof in
its final form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the
last reading of a bill, no amendment thereto shall be allowed, and the
vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three
readings on separate days are required and a bill has to be printed in final form before
it can be passed, the need for a law may be rendered academic by the occurrence of
the very emergency or public calamity which it is meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency,

especially in a country like the Philippines where budget deficit is a chronic condition.
Even if this were the case, an enormous budget deficit does not make the need for
R.A. No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.

Apparently, the members of the Senate (including some of the petitioners in these
cases) believed that there was an urgent need for consideration of S. No. 1630,
because they responded to the call of the President by voting on the bill on second
and third readings on the same day. While the judicial department is not bound by the
Senate's acceptance of the President's certification, the respect due coequal
departments of the government in matters committed to them by the Constitution and
the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the
Senate where it was discussed for six days. Only its distribution in advance in its final
printed form was actually dispensed with by holding the voting on second and third
readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on
March 24, 1994 elapsed before it was finally voted on by the Senate on third reading.

The purpose for which three readings on separate days is required is said to be two-
fold: (1) to inform the members of Congress of what they must vote on and (2) to give
them notice that a measure is progressing through the enacting process, thus
enabling them and others interested in the measure to prepare their positions with
reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY
CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially
achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc.

and the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc.
(MABINI)) that in violation of the constitutional policy of full public disclosure and the
people's right to know (Art. II, §28 and Art. III, §7) the Conference Committee met for
two days in executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to
hold such sessions with only the conferees and their staffs in attendance and it was
only in 1975 when a new rule was adopted requiring open sessions. Unlike its
American counterpart, the Philippine Congress has not adopted a rule prescribing
open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in
1975, at least staff members were present. These were staff members of the Senators
and Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were
excluded. There is no showing that the conferees themselves did not take notes of
their proceedings so as to give petitioner Kilosbayan basis for claiming that even in
secret diplomatic negotiations involving state interests, conferees keep notes of their
meetings. Above all, the public's right to know was fully served because the
Conference Committee in this case submitted a report showing the changes made on
the differing versions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee
reports must contain "a detailed, sufficiently explicit statement of the changes in or
other amendments." These changes are shown in the bill attached to the Conference
Committee Report. The members of both houses could thus ascertain what changes
had been made in the original bills without the need of a statement detailing the
changes.
The same question now presented was raised when the bill which became R.A. No.
1400 (Land Reform Act of 1955) was reported by the Conference Committee.
Congressman Bengzon raised a point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the

report of the conference committee regarding House Bill No. 2557 by
reason of the provision of Section 11, Article XII, of the Rules of this
House which provides specifically that the conference report must be
accompanied by a detailed statement of the effects of the amendment
on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out
of order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in
connection with the point of order raised by the gentleman from
Pangasinan.

There is no question about the provision of the Rule cited by the

gentleman from Pangasinan, but this provision applies to those cases
where only portions of the bill have been amended. In this case before
us an entire bill is presented; therefore, it can be easily seen from the
reading of the bill what the provisions are. Besides, this procedure has
been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into

the reason for the provisions of the Rules, and the reason for the
requirement in the provision cited by the gentleman from Pangasinan is
when there are only certain words or phrases inserted in or deleted from
the provisions of the bill included in the conference report, and we cannot
understand what those words and phrases mean and their relation to the
bill. In that case, it is necessary to make a detailed statement on how
those words and phrases will affect the bill as a whole; but when the
entire bill itself is copied verbatim in the conference report, that is not
necessary. So when the reason for the Rule does not exist, the Rule
does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the
ruling was appealed, it was upheld by viva voce and when a division of the House was
called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new
provisions as long as these are germane to the subject of the conference. As this
Court held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an
opinion written by then Justice Cruz, the jurisdiction of the conference committee is
not limited to resolving differences between the Senate and the House. It may propose
an entirely new provision. What is important is that its report is subsequently approved
by the respective houses of Congress. This Court ruled that it would not entertain
allegations that, because new provisions had been added by the conference
committee, there was thereby a violation of the constitutional injunction that "upon the
last reading of a bill, no amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners'

charges that an amendment was made upon the last reading of the
bill that eventually became R.A. No. 7354 and that copies thereof in its
final form were not distributed among the members of each House. Both
the enrolled bill and the legislative journals certify that the measure was
duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a
coordinate department of the government, to which we owe, at the very
least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the

Philippines in a 1979 study:

Conference committees may be of two types: free or instructed. These

committees may be given instructions by their parent bodies or they may
be left without instructions. Normally the conference committees are
without instructions, and this is why they are often critically referred to as
"the little legislatures." Once bills have been sent to them, the conferees
have almost unlimited authority to change the clauses of the bills and in
fact sometimes introduce new measures that were not in the original
legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his
idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both
 houses, and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES

AND LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES
AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees.

We cite it only to say that conference committees here are no different from their
counterparts in the United States whose vast powers we noted in Philippine Judges
Association v. Prado, supra. At all events, under Art. VI, §16(3) each house has the
power "to determine the rules of its proceedings," including those of its committees.
Any meaningful change in the method and procedures of Congress or its committees
must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716
violates Art. VI, §26 (1) of the Constitution which provides that "Every bill passed by
Congress shall embrace only one subject which shall be expressed in the title thereof."
PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue
"in lieu of all other taxes, duties, royalties, registration, license and other fees and
charges of any kind, nature, or description, imposed, levied, established, assessed or
collected by any municipal, city, provincial or national authority or government agency,
now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of
the National Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the

value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international

agreements to which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL,
by amending §103, as follows:

§103. Exempt transactions. — The following shall be exempt from the

value-added tax:
 xxx xxx xxx

(q) Transactions which are exempt under special laws, except those
granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,

WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses
its intention to amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the
law by specific reference to P.D. No. 1590. It is unnecessary to do this in order to
comply with the constitutional requirement, since it is already stated in the title that the
law seeks to amend the pertinent provisions of the NIRC, among which is §103(q), in
order to widen the base of the VAT. Actually, it is the bill which becomes a law that is
required to express in its title the subject of legislation. The titles of H. No. 11197 and
S. No. 1630 in fact specifically referred to §103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had been given of the
pendency of these bills in Congress before they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now

made by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE
PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS
AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY
AND FOR OTHER PURPOSES CONNECTED THEREWITH. It contained a provision
repealing all franking privileges. It was contended that the withdrawal of franking
privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking
privileges, this Court held:
 To require every end and means necessary for the accomplishment of
the general objectives of the statute to be expressed in its title would not
only be unreasonable but would actually render legislation impossible.
[Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly
explained:

The details of a legislative act need not be specifically

stated in its title, but matter germane to the subject as
expressed in the title, and adopted to the accomplishment
of the object in view, may properly be included in the act.
Thus, it is proper to create in the same act the machinery
by which the act is to be enforced, to prescribe the penalties
for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the
subject as expressed in the title, it is unnecessary that they
should also have special mention in the title. (Southern Pac.
Co. v. Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A.
No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the
press. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally
guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted
the press a privilege, the law could take back the privilege anytime without offense to
the Constitution. The reason is simple: by granting exemptions, the State does not
forever waive the exercise of its sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same
tax burden to which other businesses have long ago been subject. It is thus different
from the tax involved in the cases invoked by the PPI. The license tax in Grosjean
v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of
newspapers whose weekly circulation was over 20,000, with the result that the tax
applied only to 13 out of 124 publishers in Louisiana. These large papers were critical
of Senator Huey Long who controlled the state legislature which enacted the license
tax. The censorial motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of
Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be
discriminatory because although it could have been made liable for the sales tax or,
in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible
goods, the press was not. Instead, the press was exempted from both taxes. It was,
however, later made to pay a special use tax on the cost of paper and ink which made
these items "the only items subject to the use tax that were component of goods to be
sold at retail." The U.S. Supreme Court held that the differential treatment of the press
"suggests that the goal of regulation is not related to suppression of expression, and
such goal is presumptively unconstitutional." It would therefore appear that even a law
that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in
that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from
the VAT, such as those previously granted to PAL, petroleum concessionaires,
enterprises registered with the Export Processing Zone Authority, and many more are
likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in
an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact
that transactions, which are profit oriented, continue to enjoy exemption under R.A.
No. 7716. An enumeration of some of these transactions will suffice to show that by
and large this is not so and that the exemptions are granted for a purpose. As the
Solicitor General says, such exemptions are granted, in some cases, to encourage
agricultural production and, in other cases, for the personal benefit of the end-user
rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn, sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and

personal effects of citizens returning to the Philippines) or for
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
 (c) Goods subject to excise tax such as petroleum products or to be used
for manufacture of petroleum products subject to excise tax and services
subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary

services, and services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international

agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not

exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for

Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against
the press because "even nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this assertion the following
statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The

protection afforded by the First Amendment is not so restricted. A license
tax certainly does not acquire constitutional validity because it classifies
the privileges protected by the First Amendment along with the wares
and merchandise of hucksters and peddlers and treats them all alike.
Such equality in treatment does not save the ordinance. Freedom of
press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is
mainly for regulation. Its imposition on the press is unconstitutional because it lays a
prior restraint on the exercise of its right. Hence, although its application to others,
such those selling goods, is valid, its application to the press or to religious groups,
such as the Jehovah's Witnesses, in connection with the latter's sale of religious books
and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing
to impose a tax on income or property of a preacher. It is quite another thing to exact
a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila,
101 Phil. 386 (1957) which invalidated a city ordinance requiring a business license
fee on those engaged in the sale of general merchandise. It was held that the tax
could not be imposed on the sale of bibles by the American Bible Society without
restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of
a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which
are given free to those who cannot afford to pay so that to tax the sales would be to
increase the price, while reducing the volume of sale. Granting that to be the case,
the resulting burden on the exercise of religious freedom is so incidental as to make
it difficult to differentiate it from any other economic imposition that might make the
right to disseminate religious doctrines costly. Otherwise, to follow the petitioner's
argument, to increase the tax on the sale of vestments would be to lay an
impermissible burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as
amended by §7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to
accounting in §108 of the NIRC. That the PBS distributes free bibles and therefore is
not liable to pay the VAT does not excuse it from the payment of this fee because it
also sells some copies. At any rate whether the PBS is liable for the VAT must be
decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and
the rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without reasonable basis
and (3) violates the rule that taxes should be uniform and equitable and that Congress
shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to
existing contracts of the sale of real property by installment or on deferred payment
basis would result in substantial increases in the monthly amortizations to be paid
because of the 10% VAT. The additional amount, it is pointed out, is something that
the buyer did not anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities
from numerous sources are cited by the plaintiffs, but none of them show that a lawful
tax on a new subject, or an increased tax on an old one, interferes with a contract or
impairs its obligation, within the meaning of the Constitution. Even though such
taxation may affect particular contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional burdens upon one class and
release the burdens of another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any existing contract in
its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil.
567, 574 (1919)). Indeed not only existing laws but also "the reservation of the
essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal
order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147
(1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of
contract can extend to the defeat of that authority. (Norman v. Baltimore and Ohio
R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the
sale of agricultural products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property which is equally essential.
The sale of real property for socialized and low-cost housing is exempted from the
tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle
class, who are equally homeless, should likewise be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are
essential goods and services was already exempt under §103, pars. (b) (d) (1) of the
NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that
R.A. No. 7716 granted exemption to these transactions, while subjecting those of
petitioner to the payment of the VAT. Moreover, there is a difference between the
"homeless poor" and the "homeless less poor" in the example given by petitioner,
because the second group or middle class can afford to rent houses in the meantime
that they cannot yet buy their own homes. The two social classes are thus differently
situated in life. "It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that 'inequalities which result
from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of
Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663
(1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163
SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates
Art. VI, §28(1) which provides that "The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property
of the same class be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies equally to all persons,
forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra;
Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original
VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in
violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the challenge to the
law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax.
It is uniform. . . .

The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate of
0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of

goods or services by persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00. Small corner sari-sari stores
are consequently exempt from its application. Likewise exempt from the
tax are sales of farm and marine products, so that the costs of basic food
and other necessities, spared as they are from the incidence of the VAT,
are expected to be relatively lower and within the reach of the general
public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the
Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David
argues that the law contravenes the mandate of Congress to provide for a progressive
system of taxation because the law imposes a flat rate of 10% and thus places the tax
burden on all taxpayers without regard to their ability to pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted to
mean simply that "direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17(1) of the 1973 Constitution from which the present Art.
VI, §28(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:

(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and

personal effects of citizens returning to the Philippines) and or
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used

for manufacture of petroleum products subject to excise tax and services
subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary

services, and services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international

agreements.

(g) Export-sales by persons not VAT-registered.

 (h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for

Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly by higher income
groups. These include real properties held primarily for sale to customers or for lease
in the ordinary course of trade or business, the right or privilege to use patent,
copyright, and other similar property or right, the right or privilege to use industrial,
commercial or scientific equipment, motion picture films, tapes and discs, radio,
television, satellite transmission and cable television time, hotels, restaurants and
similar places, securities, lending investments, taxicabs, utility cars for rent, tourist
buses, and other common carriers, services of franchise grantees of telephone and
telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There
is no fully developed record which can impart to adjudication the impact of actuality.
There is no factual foundation to show in the concrete the application of the law
to actual contracts and exemplify its effect on property rights. For the fact is that
petitioner's members have not even been assessed the VAT. Petitioner's case is not
made concrete by a series of hypothetical questions asked which are no different from
those dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges

arbitrariness. A mere allegation, as here, does not suffice. There must
be a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void on its face, he
has not made out a case. This is merely to adhere to the authoritative
doctrine that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad
standards, there is a need for proof of such persuasive character as
would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It
may be that postponement of adjudication would result in a multiplicity of suits. This
need not be the case, however. Enforcement of the law may give rise to such a case.
A test case, provided it is an actual case and not an abstract or hypothetical one, may
thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract

issues. Otherwise, adjudication would be no different from the giving of advisory
opinion that does not really settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is
made that "there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the government." This duty
can only arise if an actual case or controversy is before us. Under Art . VIII, §5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, §1, ¶2 can plausibly
mean is that in the exercise of that jurisdiction we have the judicial power to determine
questions of grave abuse of discretion by any branch or instrumentality of the
government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the
right to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil.
456, 559 (1912)), as distinguished from legislative and executive power. This power
cannot be directly appropriated until it is apportioned among several courts either by
the Constitution, as in the case of Art. VIII, §5, or by statute, as in the case of the
Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980
(B.P. Blg. 129). The power thus apportioned constitutes the court's "jurisdiction,"
defined as "the power conferred by law upon a court or judge to take cognizance of a
case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without
an actual case coming within its jurisdiction, this Court cannot inquire into any
allegation of grave abuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the
Cooperative Union of the Philippines (CUP), after briefly surveying the course of
legislation, argues that it was to adopt a definite policy of granting tax exemption to
cooperatives that the present Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to infringe a constitutional policy.
Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives
from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No.
1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income
and sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked
the exemption; and that finally in 1987 the framers of the Constitution "repudiated the
previous actions of the government adverse to the interests of the cooperatives, that
is, the repeated revocation of the tax exemption to cooperatives and instead upheld
the policy of strengthening the cooperatives by way of the grant of tax exemptions,"
by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution
of opportunities, income, and wealth; a sustained increase in the amount
of goods and services produced by the nation for the benefit of the
people; and an expanding productivity as the key to raising the quality of
life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on

sound agricultural development and agrarian reform, through industries
that make full and efficient use of human and natural resources, and
which are competitive in both domestic and foreign markets. However,
the State shall protect Filipino enterprises against unfair foreign
competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions
of the country shall be given optimum opportunity to develop. Private
enterprises, including corporations, cooperatives, and similar collective
organizations, shall be encouraged to broaden the base of their
ownership.

§15. The Congress shall create an agency to promote the viability and
growth of cooperatives as instruments for social justice and economic
development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955
singled out cooperatives by withdrawing their exemption from income and sales taxes
under P.D. No. 175, §5. What P.D. No. 1955, §1 did was to withdraw the exemptions
and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after
P.D. No. 2008, §2 had restored the tax exemptions of cooperatives in 1986, the
exemption was again repealed by E.O. No. 93, §1, but then again cooperatives were
not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned, and that it was to put
an end to this indecision that the constitutional provisions cited were adopted. Perhaps
as a matter of policy cooperatives should be granted tax exemptions, but that is left to
the discretion of Congress. If Congress does not grant exemption and there is no
discrimination to cooperatives, no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives
are exempt from taxation. Such theory is contrary to the Constitution under which only
the following are exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law because electric cooperatives are
exempted from the VAT. The classification between electric and other cooperatives
(farmers cooperatives, producers cooperatives, marketing cooperatives, etc.)
apparently rests on a congressional determination that there is greater need to provide
cheaper electric power to as many people as possible, especially those living in the
rural areas, than there is to provide them with other necessities in life. We cannot say
that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity
of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have now come to the conclusion
that the law suffers from none of the infirmities attributed to it by petitioners and that
its enactment by the other branches of the government does not constitute a grave
abuse of discretion. Any question as to its necessity, desirability or expediency must
be addressed to Congress as the body which is electorally responsible, remembering
that, as Justice Holmes has said, "legislators are the ultimate guardians of the liberties
and welfare of the people in quite as great a degree as are the courts." (Missouri,
Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is
not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce the
public accountability of legislators, that those who took part in passing the law in
question by voting for it in Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does not sit as a third branch
of the legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the
temporary restraining order previously issued is hereby lifted.

SO ORDERED.

Narvasa, C.J., Feliciano, Melo, Kapunan, Francisco and Hermosisima, Jr., JJ.,
concur.

Padilla and Vitug, JJ., maintained their separate opinion.

Regalado, Davide, Jr., Romero, Bellosillo and Puno, JJ, maintained their dissenting
opinion.
Panganiban, J., took no part.

G.R. No. 191667 April 17, 2013

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. CACAYURAN, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of
the Court of Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification
the April 10, 2007 Decision3 of the Regional Trial Court (RTC) of Agoo, La Union,
Branch 31, declaring inter alia the nullity of the loan agreements entered into by
petitioner Land Bank of the Philippines (Land Bank) and the Municipality of Agoo, La
Union (Municipality).

The Facts

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain
resolutions to implement a multi-phased plan (Redevelopment Plan) to redevelop the
Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal Monument
were situated.

To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-
20054 on April 19, 2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel) to
obtain a loan from Land Bank and incidental thereto, mortgage a 2,323.75 square
meter lot situated at the southeastern portion of the Agoo Plaza (Plaza Lot) as
collateral. To serve as additional security, it further authorized the assignment of a
portion of its internal revenue allotment (IRA) and the monthly income from the
proposed project in favor of Land Bank.5 The foregoing terms were confirmed,
approved and ratified on October 4, 2005 through Resolution No. 139-
2005.6 Consequently, on November 21, 2005, Land Bank extended a ₱4,000,000.00
loan in favor of the Municipality (First Loan),7 the proceeds of which were used to
construct ten (10) kiosks at the northern and southern portions of the Imelda Garden.
After completion, these kiosks were rented out.8
On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the
construction of a commercial center on the Plaza Lot as part of phase II of the
Redevelopment Plan. To finance the project, Mayor Eriguel was again authorized to
obtain a loan from Land Bank, posting as well the same securities as that of the First
Loan. All previous representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan10were ratified on September 5, 2006
through Resolution No. 128-2006.11 In consequence, Land Bank granted a second
loan in favor of the Municipality on October 20, 2006 in the principal amount of
₱28,000,000.00 (Second Loan).12

Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center
at the Agoo Plaza was vehemently objected to by some residents of the Municipality.
Led by respondent Eduardo Cacayuran (Cacayuran), these residents claimed that the
conversion of the Agoo Plaza into a commercial center, as funded by the proceeds
from the First and Second Loans (Subject Loans), were "highly irregular, violative of
the law, and detrimental to public interests, and will result to wanton desecration of
the said historical and public park."13 The foregoing was embodied in a
Manifesto,14 launched through a signature campaign conducted by the residents and
Cacayuran.

In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor

Eriguel, Vice Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB
namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy,
Crisogono Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo
Villanueva, and Gerard Mamuyac (Implicated Officers), expressing the growing public
clamor against the conversion of the Agoo Plaza into a commercial center. He then
requested the foregoing officers to furnish him certified copies of various documents
related to the aforementioned conversion including, among others, the resolutions
approving the Redevelopment Plan as well as the loan agreements for the sake of
public information and transparency.

Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a
Complaint16 against the Implicated Officers and Land Bank, assailing, among others,
the validity of the Subject Loans on the ground that the Plaza Lot used as collateral
thereof is property of public dominion and therefore, beyond the commerce of man.17

Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated
Officers and Land Bank filed their respective Answers.

For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of
destroying the Agoo Plaza. It further asserted that Cacayuran did not have a cause of
action against it since he was not privy to any of the Subject Loans.19
During the pendency of the proceedings, the construction of the commercial center
was completed and the said structure later became known as the Agoo’s People
Center (APC).

On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the
area where the APC stood as patrimonial property of the Municipality.

The Ruling of the RTC

In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring
the nullity of the Subject Loans.22 It found that the resolutions approving the said loans
were passed in a highly irregular manner and thus, ultra vires; as such, the
Municipality is not bound by the same.23 Moreover, it found that the Plaza Lot is
proscribed from collateralization given its nature as property for public use.24

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On the other hand,
the Implicated Officers’ appeal was deemed abandoned and dismissed for their failure
to file an appellants’ brief despite due notice.26 In this regard, only Land Bank’s appeal
was given due course by the CA.

Ruling of the CA

In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s
ruling, excluding Vice Mayor Eslao from any personal liability arising from the Subject
Loans.28

It held, among others, that: (1) Cacayuran had locus standi to file his complaint,
considering that (a) he was born, raised and a bona fide resident of the Municipality;
and (b) the issue at hand involved public interest of transcendental importance;29 (2)
Resolution Nos. 68-2005, 139-2005, 58-2006, 128-2006 and all other related
resolutions (Subject Resolutions) were invalidly passed due to the SB’s non-
compliance with certain sections of Republic Act No. 7160, otherwise known as the
"Local Government Code of 1991" (LGC); (3) the Plaza Lot, which served as collateral
for the Subject Loans, is property of public dominion and thus, cannot be appropriated
either by the State or by private persons;30 and (4) the Subject Loans are ultra vires
because they were transacted without proper authority and their collateralization
constituted improper disbursement of public funds.

Dissatisfied, Land Bank filed the instant petition.

Issues Before the Court

The following issues have been raised for the Court’s resolution: (1) whether
Cacayuran has standing to sue; (2) whether the Subject Resolutions were validly
passed; and (3) whether the Subject Loans are ultra vires.

The Court’s Ruling

The petition lacks merit.

A. Cacayuran’s standing to sue

Land Bank claims that Cacayuran did not have any standing to contest the
construction of the APC as it was funded through the proceeds coming from the
Subject Loans and not from public funds. Besides, Cacayuran was not even a party
to any of the Subject Loans and is thus, precluded from questioning the same.

The argument is untenable.

It is hornbook principle that a taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that public money is being deflected to any
improper purpose, or that there is wastage of public funds through the enforcement of
an invalid or unconstitutional law. A person suing as a taxpayer, however, must show
that the act complained of directly involves the illegal disbursement of public funds
derived from taxation. In other words, for a taxpayer’s suit to prosper, two requisites
must be met namely, (1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or some irregularity is
committed; and (2) the petitioner is directly affected by the alleged act.31

Records reveal that the foregoing requisites are present in the instant case.

First, although the construction of the APC would be primarily sourced from the
proceeds of the Subject Loans, which Land Bank insists are not taxpayer’s money,
there is no denying that public funds derived from taxation are bound to be expended
as the Municipality assigned a portion of its IRA as a security for the foregoing loans.
Needless to state, the Municipality’s IRA, which serves as the local government unit’s
just share in the national taxes,32 is in the nature of public funds derived from taxation.
The Court believes, however, that although these funds may be posted as a security,
its collateralization should only be deemed effective during the incumbency of the
public officers who approved the same, else those who succeed them be effectively
deprived of its use.

In any event, it is observed that the proceeds from the Subject Loans had already
been converted into public funds by the Municipality’s receipt thereof. Funds coming
from private sources become impressed with the characteristics of public funds when
they are under official custody.33

Accordingly, the first requisite has been clearly met.

Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by

the conversion of the Agoo Plaza which was funded by the proceeds of the Subject
Loans. It is well-settled that public plazas are properties for public use34 and therefore,
belongs to the public dominion.35 As such, it can be used by anybody and no one can
exercise over it the rights of a private owner.36 In this light, Cacayuran had a direct
interest in ensuring that the Agoo Plaza would not be exploited for commercial
purposes through the APC’s construction. Moreover, Cacayuran need not be privy to
the Subject Loans in order to proffer his objections thereto. In Mamba v. Lara, it has
been held that a taxpayer need not be a party to the contract to challenge its validity;
as long as taxes are involved, people have a right to question contracts entered into
by the government.37

Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing
to file the instant suit.

B. Validity of the Subject Resolutions

Land Bank avers that the Subject Resolutions provided ample authority for Mayor
Eriguel to contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC
merely requires that the municipal mayor be authorized by the SB concerned and that
such authorization need not be embodied in an ordinance.38

A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the
authorization of the municipal mayor need not be in the form of an ordinance, the
obligation which the said local executive is authorized to enter into must be made
pursuant to a law or ordinance, viz:

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -

xxxx

(b) For efficient, effective and economical governance the purpose of which is the
general welfare of the municipality and its inhabitants pursuant to Section 16 of this
Code, the municipal mayor shall:

xxxx
(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its
business transactions and sign on its behalf all bonds, contracts, and obligations, and
such other documents made pursuant to law or ordinance; (Emphasis and
underscoring supplied)

In the present case, while Mayor Eriguel’s authorization to contract the Subject Loans
was not contained – as it need not be contained – in the form of an ordinance, the
said loans and even the Redevelopment Plan itself were not approved pursuant to
any law or ordinance but through mere resolutions. The distinction between
ordinances and resolutions is well-perceived. While ordinances are laws and possess
a general and permanent character, resolutions are merely declarations of the
sentiment or opinion of a lawmaking body on a specific matter and are temporary in
nature.39 As opposed to ordinances, "no rights can be conferred by and be inferred
from a resolution."40 In this accord, it cannot be denied that the SB violated Section
444(b)(1)(vi) of the LGC altogether.

Noticeably, the passage of the Subject Resolutions was also tainted with other
irregularities, such as (1) the SB’s failure to submit the Subject Resolutions to the
Sangguniang Panlalawigan of La Union for its review contrary to Section 56 of the
LGC;41 and (2) the lack of publication and posting in contravention of Section 59 of
the LGC.42

In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the
Subject Loans.

C. Ultra vires nature of the Subject

Loans

Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts
of the officers who approved the same.

Generally, an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law.43 There are two (2) types of ultra vires acts. As
held in Middletown Policemen's Benevolent Association v. Township of Middletown:44

There is a distinction between an act utterly beyond the jurisdiction of a municipal

corporation and the irregular exercise of a basic power under the legislative grant in
matters not in themselves jurisdictional. The former are ultra vires in the primary sense
and void; the latter, ultra vires only in a secondary sense which does not preclude
ratification or the application of the doctrine of estoppel in the interest of equity and
essential justice. (Emphasis and underscoring supplied)
In other words, an act which is outside of the municipality’s jurisdiction is considered
as a void ultra vires act, while an act attended only by an irregularity but remains within
the municipality’s power is considered as an ultra vires act subject to ratification and/or
validation. To the former belongs municipal contracts which (a) are entered into
beyond the express, implied or inherent powers of the local government unit; and (b)
do not comply with the substantive requirements of law e.g., when expenditure of
public funds is to be made, there must be an actual appropriation and certificate of
availability of funds; while to the latter belongs those which (a) are entered into by the
improper department, board, officer of agent; and (b)do not comply with the formal
requirements of a written contract e.g., the Statute of Frauds.45

Applying these principles to the case at bar, it is clear that the Subject Loans belong
to the first class of ultra vires acts deemed as void.

Records disclose that the said loans were executed by the Municipality for the purpose
of funding the conversion of the Agoo Plaza into a commercial center pursuant to the
Redevelopment Plan. However, the conversion of the said plaza is beyond the
Municipality’s jurisdiction considering the property’s nature as one for public use and
thereby, forming part of the public dominion. Accordingly, it cannot be the object of
appropriation either by the State or by private persons.46 Nor can it be the subject of
lease or any other contractual undertaking.47 In Villanueva v. Castañeda, Jr.,48 citing
Espiritu v. Municipal Council of Pozorrubio,49 the Court pronounced that:

x x x 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.1âwphi1

In this relation, Article 1409(1) of the Civil Code provides that a contract whose
purpose is contrary to law, morals, good customs, public order or public policy is
considered void50 and as such, creates no rights or obligations or any juridical
relations.51 Consequently, given the unlawful purpose behind the Subject Loans which
is to fund the commercialization of the Agoo Plaza pursuant to the Redevelopment
Plan, they are considered as ultra vires in the primary sense thus, rendering them void
and in effect, non-binding on the Municipality.

At this juncture, it is equally observed that the land on which the Agoo Plaza is situated
cannot be converted into patrimonial property – as the SB tried to when it passed
Municipal Ordinance No. 02-200752 – absent any express grant by the national
government.53 As public land used for public use, the foregoing lot rightfully belongs
to and is subject to the administration and control of the Republic of the
Philippines.54 Hence, without the said grant, the Municipality has no right to claim it as
patrimonial property.
Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra
vires, the officers who authorized the passage of the Subject Resolutions are
personally liable. Case law states that public officials can be held personally
accountable for acts claimed to have been performed in connection with official duties
where they have acted ultra vires,55 as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of
the Court of Appeals in CA-G.R. CV. No. 89732 is hereby AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

SECOND DIVISION

[G.R. NO. 156278 - March 29, 2004]

PLANTERS PRODUCTS, INC., Petitioner, v. FERTIPHIL

CORPORATION, Respondent.

DECISION

PUNO, J.:

Before us is a Petition for Review under Rule 45 assailing the Decision dated July 19,
20021 of the Court of Appeals in CA-G.R. SP No. 67434, and its Resolution dated
December 4, 2002 denying petitioners motion for reconsideration.

Petitioner Planters Products, Inc. ("PPI") and respondent Fertiphil Corporation

("Fertiphil") are domestic corporations engaged in the importation and distribution of
fertilizers, pesticides and agricultural chemicals. On the strength of Letter of
Instruction No. 1465 issued by then President Ferdinand E. Marcos on June 3, 1985,
Fertiphil and other domestic corporations engaged in the fertilizer business paid
P10.00 for every bag of fertilizer sold in the country to the Fertilizer and Pesticide
Authority (FPA), the government agency governing the fertilizer industry. FPA in turn
remitted the amount to PPI for its rehabilitation, according to the express mandate of
LOI No. 1465.2

After the EDSA I revolution in 1986, the imposition of P10.00 by the FPA on every bag
of fertilizer sold was voluntarily stopped. Fertiphil demanded from PPI the refund of
P6,698,144.00 which it paid under LOI No. 1465. PPI refused. Hence, on September
14, 1987, Fertiphil filed a collection and damage suit against FPA and PPI before the
Regional Trial Court of Makati City docketed as Civil Case No. 17835 demanding
refund of the P6,698,144.00. Fertiphil contended that LOI No. 1465 was void and
unconstitutional for being a glaring example of crony capitalism as it favored PPI only.
PPI filed its answer but for failure to attend the pre-trial conference, it was declared in
default and Fertiphil was allowed to present evidence ex-parte.

On November 20, 1991, the RTC of Makati City, Branch 147, decided in favor of
Fertiphil declaring LOI No. 1465 void and unconstitutional. It ordered PPI to return the
amount which Fertiphil paid thereunder, with twelve percent (12%) interest from the
time of judicial demand. PPIs motion for reconsideration was denied in an Order dated
February 13, 1992. Hence, it filed notice of appeal on February 20, 1992. At the same
time, Fertiphil moved for execution of the decision pending appeal. The trial court
granted the motion and a writ of execution pending appeal was issued upon the
posting of a surety bond by Fertiphil in the amount of P6,698,000.00. PPI assailed the
propriety of the execution pending appeal before the Court of Appeals and, thereafter,
to this Court. We resolved the case in its favor in our Decision dated October 22, 1999
in G.R. No. 106052.3 Fertiphil was ordered to return all the properties of PPI taken in
the course of execution pending appeal or the value thereof, if return is no longer
possible. After the decision became final and executory, PPI moved for execution
before the trial court and Fertiphils bank deposits were accordingly garnished.

On January 5, 2001, Fertiphil moved to dismiss PPIs appeal from the trial courts
Decision dated November 20, 1991 citing as grounds the non-payment of the
appellate docket fee and alleged failure of PPI to prosecute the appeal within a
reasonable time. The trial court denied the motion in an Order dated April 3, 2001
ruling that the payment of the appellate docket fee within the period for taking an
appeal is a new requirement under the 1997 Rules of Civil Procedure which was not
yet applicable when PPI filed its appeal in 1992. Moreover, the court found that PPI
did not fail to prosecute the appeal within a reasonable time.

On April 5, 2001, the court issued another order, upon PPIs motion, directing Fertiphils
banks to deliver to the Deputy Sheriff the garnished deposits maintained with them
and for the levying upon of the surety bond posted by Fertiphil.

Fertiphil moved to reconsider the Orders dated April 3 and 5, 2001, to no avail. Hence,
on October 30, 2001, it filed a special civil action for certiorari with the Court of
Appeals imputing grave abuse of discretion on the part of the trial court in issuing the
two orders.4 The Court of Appeals partially granted the petition and set aside the Order
dated April 3, 2001. It ruled that although PPI filed its appeal in 1992, the 1997 Rules
of Civil Procedure should nevertheless be followed since it applies to actions pending
and undetermined at the time of its passage. Due to PPIs failure to pay the appellate
docket fee for three (3) years from the time the 1997 Rules of Civil Procedure took
effect on July 1, 1997 until Fertiphil moved to dismiss the appeal in 2001, the trial
courts decision became final and executory. The Court of Appeals thus disposed of
the petition, viz:chanroblesvirtua1awlibrary

WHEREFORE, the instant petition is PARTIALLY GRANTED and the Order of 03 April
2001 of the Regional Trial Court of Makati City, Branch 147, is SET ASIDE. The
decision of 20 November 1991 of the said court is hereby declared final and executory.

The Clerk of Court is directed to return to the Regional Trial Court of Makati City,
Branch 147, the record of Civil Case No. 17385 (sic) entitled "Fertiphil Corporation v.
Planters Product(s) Inc., and Fertilizer and Pesticide Authority," for the computation
of the amount due the petitioner Fertiphil Corporation pursuant to the 20 November
1991 decision.

SO ORDERED.5

Hence, this petition by PPI.

As a general rule, rules of procedure apply to actions pending and undetermined at

the time of their passage, hence, retrospective in nature. However, the general rule is
not without an exception. Retrospective application is allowed if no vested rights are
impaired.6 Thus, in Land Bank of the Philippines v. de Leon7 our ruling that the
appropriate mode of review from decisions of Special Agrarian Courts is a Petition for
Review under Sec. 60 of R.A. No. 6657 and not an ordinary appeal as Sec. 61 thereof
seems to imply, was not given retroactive application. We held that to give our ruling
a retrospective application would prejudice petitioners pending appeals brought under
said Sec. 61 before the Court of Appeals at a time when there was yet no clear
pronouncement as to the proper interpretation of the seemingly conflicting Secs. 60
and 61. In fine, to apply the Courts ruling retroactively would prejudice LBPs right to
appeal because its pending appeals would then be dismissed outright on a mere
technicality thereby sacrificing the substantial merits of the cases.

In the instant case, at the time PPI filed its appeal in 1992, all that the rules required
for the perfection of its appeal was the filing of a notice of appeal with the court which
rendered the judgment or order appealed from, within fifteen (15) days from notice
thereof.8 PPI complied with this requirement when it filed a notice of appeal on
February 20, 1992 with the RTC of Makati City, Branch 147, after receiving copy of its
Order dated February 13, 1992 denying its motion for reconsideration of the adverse
Decision dated November 20, 1991 rendered in Civil Case No. 17835. PPIs appeal
was therefore already perfected at that time.
Thus, the 1997 Rules of Civil Procedure which took effect on July 1, 1997 and which
required that appellate docket and other lawful fees should be paid within the same
period for taking an appeal,9 can not affect PPIs appeal which was already perfected
in 1992. Much less could it be considered a ground for dismissal thereof since PPIs
period for taking an appeal, likewise the period for payment of the appellate docket
fee as now required by the rules, has long lapsed in 1992. While the right to appeal is
statutory, the mode or manner by which this right may be exercised is a question of
procedure which may be altered and modified only when vested rights are not
impaired.10 Thus, failure to pay the appellate docket fee when the 1997 Rules of
Procedure took effect cannot operate to deprive PPI of its right, already perfected in
1992, to have its case reviewed on appeal. In fact the Court of Appeals recognized
such fact when it gave PPI a fresh period to pay the appellate docket fee in an Order
dated April 9, 2002 issued in UDK-CV-No. 030411 directing it to pay the fee within
fifteen (15) days from receipt thereof.

This is not all. We have also previously ruled that failure to pay the appellate docket
fee does not automatically result in the dismissal of an appeal, dismissal being
discretionary on the part of the appellate court.12 And in determining whether or not to
dismiss an appeal on such ground, courts have always been guided by the peculiar
legal and equitable circumstances attendant to each case. Thus, in Pedrosa v.
Hill13 and Gegare v. Court of Appeals,14 the appeals were dismissed because
appellants failed to pay the appellate docket fees despite timely notice given them by
the Court of Appeals and despite its admonitions that the appeals would be dismissed
in case of non-compliance. On the other hand, the appeal in Mactan Cebu
International Airport Authority v. Mangubat15 was not dismissed because we took into
account the fact that the 1997 Rules of Civil Procedure had only been in effect for
fourteen (14) days when the Office of the Solicitor General appealed from the decision
of the RTC of Lapu-Lapu City on July 14, 1997 without paying the appellate court
docket fees as required by the new rules. Considering the recency of the changes and
appellants immediate payment of the fees when required to do so, the appeal was not
dismissed. We can do no less in the instant case where PPI was not even required
under the rules in 1992 to pay the appellate docket fees at the time it filed its appeal.
We note moreover that PPI, like the appellant in Mactan, promptly paid the fees when
required to do so for the first time by the RTC of Makati in its Order dated April 3,
2001, and informed the Court of Appeals of such compliance when it in turn notified
PPI that the fees were due, in an Order dated April 9, 2002. The remedy of appeal
being an essential part of our judicial system, caution must always be observed so
that every party-litigant is not deprived of its right to appeal, but rather, given amplest
opportunity for the proper and just disposition of his cause, freed from the constraints
of technicalities.16
Having so ruled, we shall refrain from delving into the merits of petitioners other
contentions, discussion of one being the proper subject of the appeal before the Court
of Appeals,17 and the other, being premature at this point.18

IN VIEW WHEREOF, the petition is GRANTED. The questioned Decision dated July
19, 2002 of the Court of Appeals in CA-G.R. SP No. 67434 and its Resolution dated
December 4, 2002 denying petitioners motion for reconsideration are SET ASIDE.

The Order dated April 3, 2001 of the Regional Trial Court of Makati City, Branch 147,
in Civil Case No. 17835 is reinstated, and the Court of Appeals is ordered to proceed
with the resolution of petitioners appeal docketed as CA-G.R. CV No. 75501 entitled
"Fertiphil Corporation v. Planters Products, Inc."

SO ORDERED.

Puno, J.,(Chairman) Quisumbing, Austria-Martinez, Callejo, Sr., and

TINGA, JJ. concur.

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.

G.R. No. 189999 June 27, 2012

ANGELES UNIVERSITY FOUNDATION, Petitioner,

vs.
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of
Angeles City and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles
City Building Official, Respondents.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse and set aside the Decision1 dated
July 28, 2009 and Resolution2 dated October 12, 2009 of the Court of Appeals (CA)
in CA-G.R. CV No. 90591. The CA reversed the Decision3 dated September 21, 2007
of the Regional Trial Court of Angeles City, Branch 57 in Civil Case No. 12995
declaring petitioner exempt from the payment of building permit and other fees and
ordering respondents to refund the same with interest at the legal rate.

The factual antecedents:

Petitioner Angeles University Foundation (AUF) is an educational institution

established on May 25, 1962 and was converted into a non-stock, non-profit education
foundation under the provisions of Republic Act (R.A.) No. 60554 on December 4,
1975.

Sometime in August 2005, petitioner filed with the Office of the City Building Official
an application for a building permit for the construction of an 11-storey building of the
Angeles University Foundation Medical Center in its main campus located at
MacArthur Highway, Angeles City, Pampanga. Said office issued a Building Permit
Fee Assessment in the amount of P126,839.20. An Order of Payment was also issued
by the City Planning and Development Office, Zoning Administration Unit requiring
petitioner to pay the sum of P238,741.64 as Locational Clearance Fee.5

In separate letters dated November 15, 2005 addressed to respondents City

Treasurer Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon,
petitioner claimed that it is exempt from the payment of the building permit and
locational clearance fees, citing legal opinions rendered by the Department of Justice
(DOJ). Petitioner also reminded the respondents that they have previously issued
building permits acknowledging such exemption from payment of building permit fees
on the construction of petitioner’s 4-storey AUF Information Technology Center
building and the AUF Professional Schools building on July 27, 2000 and March 15,
2004, respectively.6

Respondent City Treasurer referred the matter to the Bureau of Local Government
Finance (BLGF) of the Department of Finance, which in turn endorsed the query to
the DOJ. Then Justice Secretary Raul M. Gonzalez, in his letter-reply dated December
6, 2005, cited previous issuances of his office (Opinion No. 157, s. 1981 and Opinion
No. 147, s. 1982) declaring petitioner to be exempt from the payment of building permit
fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid
opinion of the DOJ stating further that "xxx the Department of Finance, thru this
Bureau, has no authority to review the resolution or the decision of the DOJ."7

Petitioner wrote the respondents reiterating its request to reverse the disputed
assessments and invoking the DOJ legal opinions which have been affirmed by
Secretary Gonzalez. Despite petitioner’s plea, however, respondents refused to issue
the building permits for the construction of the AUF Medical Center in the main
campus and renovation of a school building located at Marisol Village. Petitioner then
appealed the matter to City Mayor Carmelo F. Lazatin but no written response was
received by petitioner.8

Consequently, petitioner paid under protest9 the following:

Medical Center (new construction)

Building Permit and Electrical Fee P 217,475.20

Locational Clearance Fee 283,741.64
Fire Code Fee 144,690.00
Total - P 645,906.84

School Building (renovation)

Building Permit and Electrical Fee P 37,857.20

Locational Clearance Fee 6,000.57
Fire Code Fee 5,967.74
Total - P 49,825.51

Petitioner likewise paid the following sums as required by the City Assessor’s Office:

Real Property Tax – Basic Fee P 86,531.10

SEF 43,274.54
Locational Clearance Fee 1,125.00
Total – P130,930.6410
[GRAND TOTAL - P 826,662.99]

By reason of the above payments, petitioner was issued the corresponding Building
Permit, Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9,
2006, petitioner formally requested the respondents to refund the fees it paid under
protest. Under letters dated June 15, 2006 and August 7, 2006, respondent City
Treasurer denied the claim for refund.11

On August 31, 2006, petitioner filed a Complaint12 before the trial court seeking the
refund of P826,662.99 plus interest at the rate of 12% per annum, and also praying
for the award of attorney’s fees in the amount of P300,000.00 and litigation expenses.

In its Answer,13 respondents asserted that the claim of petitioner cannot be granted
because its structures are not among those mentioned in Sec. 209 of the National
Building Code as exempted from the building permit fee. Respondents argued that
R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of
the National Building Code. Since the disputed assessments are regulatory in nature,
they are not taxes from which petitioner is exempt. As to the real property taxes
imposed on petitioner’s property located in Marisol Village, respondents pointed out
that said premises will be used as a school dormitory which cannot be considered as
a use exclusively for educational activities.

Petitioner countered that the subject building permit are being collected on the basis
of Art. 244 of the Implementing Rules and Regulations of the Local Government Code,
which impositions are really taxes considering that they are provided under the
chapter on "Local Government Taxation" in reference to the "revenue raising power"
of local government units (LGUs). Moreover, petitioner contended that, as held in
Philippine Airlines, Inc. v. Edu,14 fees may be regarded as taxes depending on the
purpose of its exaction. In any case, petitioner pointed out that the Local Government
Code of 1991 provides in Sec. 193 that non-stock and non-profit educational
institutions like petitioner retained the tax exemptions or incentives which have been
granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and
DOJ rulings, petitioner is clearly exempt from the payment of building permit fees.15

On September 21, 2007, the trial court rendered judgment in favor of the petitioner
and against the respondents. The dispositive portion of the trial court’s
decision16 reads:

WHEREFORE, premises considered, judgment is rendered as follows:

a. Plaintiff is exempt from the payment of building permit and other fees
Ordering the Defendants to refund the total amount of Eight Hundred Twenty
Six Thousand Six Hundred Sixty Two Pesos and 99/100 Centavos
(P826,662.99) plus legal interest thereon at the rate of twelve percent (12%)
per annum commencing on the date of extra-judicial demand or June 14, 2006,
until the aforesaid amount is fully paid.

b. Finding the Defendants liable for attorney’s fees in the amount of Seventy
Thousand Pesos (Php70,000.00), plus litigation expenses.

c. Ordering the Defendants to pay the costs of the suit.

SO ORDERED.17

Respondents appealed to the CA which reversed the trial court, holding that while
petitioner is a tax-free entity, it is not exempt from the payment of regulatory fees. The
CA noted that under R.A. No. 6055, petitioner was granted exemption only from
income tax derived from its educational activities and real property used exclusively
for educational purposes. Regardless of the repealing clause in the National Building
Code, the CA held that petitioner is still not exempt because a building permit cannot
be considered as the other "charges" mentioned in Sec. 8 of R.A. No. 6055 which
refers to impositions in the nature of tax, import duties, assessments and other
collections for revenue purposes, following the ejusdem generisrule. The CA further
stated that petitioner has not shown that the fees collected were excessive and more
than the cost of surveillance, inspection and regulation. And while petitioner may be
exempt from the payment of real property tax, petitioner in this case merely alleged
that "the subject property is to be used actually, directly and exclusively for educational
purposes," declaring merely that such premises is intended to house the sports and
other facilities of the university but by reason of the occupancy of informal settlers on
the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded
that petitioner is not entitled to the refund of building permit and related fees, as well
as real property tax it paid under protest.

Petitioner filed a motion for reconsideration which was denied by the CA.

Hence, this petition raising the following grounds:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A

QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND
THE APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS
DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS NECESSITATING THE HONORABLE COURT’S EXERCISE OF
ITS POWER OF SUPERVISION CONSIDERING THAT:

I. IN REVERSING THE TRIAL COURT’S DECISION DATED 21 SEPTEMBER 2007,

THE COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF
EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL
FOUNDATIONS BY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE
AUTHORITY OF THE COURT OF APPEALS TO DO.

A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND

EFFECT. HENCE, THE COURT OF APPEALS ERRED WHEN IT
RULED IN THE QUESTIONED DECISION THAT NON-STOCK, NON-
PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.

B. THE COURT OF APPEALS’ APPLICATION OF THE PRINCIPLE OF

EJUSDEM GENERIS IN RULING IN THE QUESTIONED DECISION
THAT THE TERM "OTHER CHARGES IMPOSED BY THE
GOVERNMENT" UNDER SECTION 8 OF RA 6055 DOES NOT
INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR
CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED
 ASSUMPTION THAT THE TAXES, IMPORT DUTIES AND
ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL
FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE
PURPOSES.

C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER

RELATED FEES AND/OR CHARGES ARE NOT INCLUDED IN THE
TERM "OTHER CHARGES IMPOSED BY THE GOVERNMENT"
UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A
TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE
PRIVILEGE OF EXEMPTION.

II. THE COURT OF APPEALS’ DENIAL OF PETITIONER AUF’S EXEMPTION FROM

REAL PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND
QUESTIONED RESOLUTION IS CONTRARY TO APPLICABLE LAW AND
JURISPRUDENCE.18

Petitioner stresses that the tax exemption granted to educational stock corporations
which have converted into non-profit foundations was broadened to include any other
charges imposed by the Government as one of the incentives for such conversion.
These incentives necessarily included exemption from payment of building permit and
related fees as otherwise there would have been no incentives for educational
foundations if the privilege were only limited to exemption from taxation, which is
already provided under the Constitution.

Petitioner further contends that this Court has consistently held in several cases that
the primary purpose of the exaction determines its nature. Thus, a charge of a fixed
sum which bears no relation to the cost of inspection and which is payable into the
general revenue of the state is a tax rather than an exercise of the police power. The
standard set by law in the determination of the amount that may be imposed as license
fees is such that is commensurate with the cost of regulation, inspection and licensing.
But in this case, the amount representing the building permit and related fees and/or
charges is such an exorbitant amount as to warrant a valid imposition; such amount
exceeds the probable cost of regulation. Even with the alleged criteria submitted by
the respondents (e.g., character of occupancy or use of building/structure, cost of
construction, floor area and height), and the construction by petitioner of an 11-storey
building, the costs of inspection will not amount to P645,906.84, presumably for the
salary of inspectors or employees, the expenses of transportation for inspection and
the preparation and reproduction of documents. Petitioner thus concludes that the
disputed fees are substantially and mainly for purposes of revenue rather than
regulation, so that even these fees cannot be deemed "charges" mentioned in Sec. 8
of R.A. No. 6055, they should properly be treated as tax from which petitioner is
exempt.

In their Comment, respondents maintain that petitioner is not exempt from the
payment of building permit and related fees since the only exemptions provided in
the National Building Code are public buildings and traditional indigenous family
dwellings. Inclusio unius est exclusio alterius. Because the law did not include
petitioner’s buildings from those structures exempt from the payment of building
permit fee, it is therefore subject to the regulatory fees imposed under the National
Building Code.

Respondents assert that the CA correctly distinguished a building permit fee from
those "other charges" mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner
itself, charges refer to pecuniary liability, as rents, and fees against persons or
property. Respondents point out that a building permit is classified under the term
"fee." A fee is generally imposed to cover the cost of regulation as activity or privilege
and is essentially derived from the exercise of police power; on the other hand,
impositions for services rendered by the local government units or for conveniences
furnished, are referred to as "service charges".

Respondents also disagreed with petitioner’s contention that the fees imposed and
collected are exorbitant and exceeded the probable expenses of regulation. These
fees are based on computations and assessments made by the responsible officials
of the City Engineer’s Office in accordance with the Schedule of Fees and criteria
provided in the National Building Code. The bases of assessment cited by petitioner
(e.g. salary of employees, expenses of transportation and preparation and
reproduction of documents) refer to charges and fees on business and occupation
under Sec. 147 of the Local Government Code, which do not apply to building permit
fees. The parameters set by the National Building Code can be considered as
complying with the reasonable cost of regulation in the assessment and collection of
building permit fees. Respondents likewise contend that the presumption of regularity
in the performance of official duty applies in this case. Petitioner should have
presented evidence to prove its allegations that the amounts collected are exorbitant
or unreasonable.

For resolution are the following issues: (1) whether petitioner is exempt from the
payment of building permit and related fees imposed under the National Building
Code; and (2) whether the parcel of land owned by petitioner which has been
assessed for real property tax is likewise exempt.

R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which
converted to non-stock, non-profit educational foundations. Section 8 of said law
provides:
SECTION 8. The Foundation shall be exempt from the payment of all taxes, import
duties, assessments, and other charges imposed by the Government onall income
derived from or property, real or personal, used exclusively for the educational
activities of the Foundation.(Emphasis supplied.)

On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting
the National Building Code of the Philippines. The said Code requires every person,
firm or corporation, including any agency or instrumentality of the government to
obtain a building permit for any construction, alteration or repair of any building or
structure.19 Building permit refers to "a document issued by the Building Official x x x
to an owner/applicant to proceed with the construction, installation, addition,
alteration, renovation, conversion, repair, moving, demolition or other work activity of
a specific project/building/structure or portions thereof after the accompanying
principal plans, specifications and other pertinent documents with the duly notarized
application are found satisfactory and substantially conforming with the National
Building Code of the Philippines x x x and its Implementing Rules and Regulations
(IRR)."20 Building permit fees refers to the basic permit fee and other charges imposed
under the National Building Code.

Exempted from the payment of building permit fees are: (1) public buildings and (2)
traditional indigenous family dwellings.21 Not being expressly included in the
enumeration of structures to which the building permit fees do not apply, petitioner’s
claim for exemption rests solely on its interpretation of the term "other charges
imposed by the National Government" in the tax exemption clause of R.A. No. 6055.

A "charge" is broadly defined as the "price of, or rate for, something," while the word
"fee" pertains to a "charge fixed by law for services of public officers or for use of a
privilege under control of government."22 As used in the Local Government Code of
1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents or fees against
persons or property, while fee means a charge fixed by law or ordinance for the
regulation or inspection of a business or activity.23

That "charges" in its ordinary meaning appears to be a general term which could cover
a specific "fee" does not support petitioner’s position that building permit fees are
among those "other charges" from which it was expressly exempted. Note that the
"other charges" mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words
"imposed by the Government on all x x x property used exclusively for the educational
activities of the foundation." Building permit fees are not impositions on property but
on the activity subject of government regulation. While it may be argued that the fees
relate to particular properties, i.e., buildings and structures, they are actually imposed
on certain activities the owner may conduct either to build such structures or to repair,
alter, renovate or demolish the same. This is evident from the following provisions of
the National Building Code:
Section 102. Declaration of Policy

It is hereby declared to be the policy of the State to safeguard life, health, property,
and public welfare, consistent with theprinciples of sound environmental management
and control; and tothis end, make it the purpose of this Code to provide for allbuildings
and structures, a framework of minimum standards and requirements to regulate and
control their location, site, design quality of materials, construction, use, occupancy,
and maintenance.

Section 103. Scope and Application

(a) The provisions of this Code shall apply to the design,location, sitting, construction,
alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof,
and addition to public and private buildings andstructures, except traditional
indigenous family dwellingsas defined herein.

xxxx

Section 301. Building Permits

No person, firm or corporation, including any agency orinstrumentality of the

government shall erect, construct, alter, repair, move, convert or demolish any
building or structure or causethe same to be done without first obtaining a building
permittherefor from the Building Official assigned in the place where thesubject
building is located or the building work is to be done. (Italics supplied.)

That a building permit fee is a regulatory imposition is highlighted by the fact that in
processing an application for a building permit, the Building Official shall see to it that
the applicant satisfies and conforms with approved standard requirements on zoning
and land use, lines and grades, structural design, sanitary and sewerage,
environmental health, electrical and mechanical safety as well as with other rules and
regulations implementing the National Building Code.24 Thus, ancillary permits such
as electrical permit, sanitary permit and zoning clearance must also be secured and
the corresponding fees paid before a building permit may be issued. And as can be
gleaned from the implementing rules and regulations of the National Building Code,
clearances from various government authorities exercising and enforcing regulatory
functions affecting buildings/structures, like local government units, may be further
required before a building permit may be issued.25

Since building permit fees are not charges on property, they are not impositions from
which petitioner is exempt.
As to petitioner’s argument that the building permit fees collected by respondents are
in reality taxes because the primary purpose is to raise revenues for the local
government unit, the same does not hold water.

A charge of a fixed sum which bears no relation at all to the cost of inspection and
regulation may be held to be a tax rather than an exercise of the police power.26 In
this case, the Secretary of Public Works and Highways who is mandated to prescribe
and fix the amount of fees and other charges that the Building Official shall collect in
connection with the performance of regulatory functions,27 has promulgated and
issued the Implementing Rules and Regulations28 which provide for the bases of
assessment of such fees, as follows:

1. Character of occupancy or use of building

2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)

3. Floor area

4. Height

Petitioner failed to demonstrate that the above bases of assessment were arbitrarily
determined or unrelated to the activity being regulated. Neither has petitioner adduced
evidence to show that the rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation and inspection.

In Chevron Philippines, Inc. v. Bases Conversion Development Authority,29 this Court

explained:

In distinguishing tax and regulation as a form of police power, the determining factor
is the purpose of the implemented measure. If the purpose is primarily to raise
revenue, then it will be deemed a tax even though the measure results in some form
of regulation. On the other hand, if the purpose is primarily to regulate, then it is
deemed a regulation and an exercise of the police power of the state, even though
incidentally, revenue is generated. Thus, in Gerochi v. Department of Energy, the
Court stated:

"The conservative and pivotal distinction between these two (2) powers rests in the
purpose for which the charge is made. If generation of revenue is the primary purpose
and regulation is merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is incidentally raised does not make the
imposition a tax."30 (Emphasis supplied.)
Concededly, in the case of building permit fees imposed by the National Government
under the National Building Code, revenue is incidentally generated for the benefit of
local government units. Thus:

Section 208. Fees

Every Building Official shall keep a permanent record and accurate account of all fees
and other charges fixed and authorized by the Secretary to be collected and received
under this Code.

Subject to existing budgetary, accounting and auditing rules and regulations, the
Building Official is hereby authorized to retain not more than twenty percent of his
collection for the operating expenses of his office.

The remaining eighty percent shall be deposited with the provincial, city or municipal
treasurer and shall accrue to the General Fund of the province, city or municipality
concerned.

Petitioner’s reliance on Sec. 193 of the Local Government Code of 1991 is likewise
misplaced. Said provision states:

SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided

in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied.)

Considering that exemption from payment of regulatory fees was not among those
"incentives" granted to petitioner under R.A. No. 6055, there is no such incentive that
is retained under the Local Government Code of 1991. Consequently, no reversible
error was committed by the CA in ruling that petitioner is liable to pay the subject
building permit and related fees.

Now, on petitioner’s claim that it is exempted from the payment of real property tax
assessed against its real property presently occupied by informal settlers.

Section 28(3), Article VI of the 1987 Constitution provides:

xxxx

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly and exclusively used for religious, charitable or educational purposes shall be
exempt from taxation.

x x x x (Emphasis supplied.)

Section 234(b) of the Local Government Code of 1991 implements the foregoing
constitutional provision by declaring that --

SECTION 234. Exemptions from Real Property Tax.– The following are exempted
from payment of the real property tax:

xxxx

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;

x x x x (Emphasis supplied.)

In Lung Center of the Philippines v. Quezon City,31 this Court held that only portions
of the hospital actually, directly and exclusively used for charitable purposes are
exempt from real property taxes, while those portions leased to private entities and
individuals are not exempt from such taxes. We explained the condition for the tax
exemption privilege of charitable and educational institutions, as follows:

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled
to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof,
that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred
from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude;
as enjoying a privilege exclusively." If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purposes but is subject to
taxation. The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitutions and the law.
Solely is synonymous with exclusively.1âwphi1

What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to
the purposes for which the charitable institution is organized. It is not the use of the
income from the real property that is determinative of whether the property is used for
tax-exempt purposes.32 (Emphasis and underscoring supplied.)
Petitioner failed to discharge its burden to prove that its real property is actually,
directly and exclusively used for educational purposes. While there is no allegation or
proof that petitioner leases the land to its present occupants, still there is no
compliance with the constitutional and statutory requirement that said real property is
actually, directly and exclusively used for educational purposes. The respondents
correctly assessed the land for real property taxes for the taxable period during which
the land is not being devoted solely to petitioner’s educational activities. Accordingly,
the CA did not err in ruling that petitioner is likewise not entitled to a refund of the real
property tax it paid under protest.

WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and
Resolution dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591
are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice

WE CONCUR: