Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 179446 January 10, 2011
LOADMASTERS CUSTOMS SERVICES, INC., Petitioner,
vs.
GLODEL BROKERAGE CORPORATION and R&B INSURANCE CORPORATION, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court assailing the August 24, 2007
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 82822, entitled "R&B Insurance Corporation v. Glodel
Brokerage Corporation and Loadmasters Customs Services, Inc.," which held petitioner Loadmasters Customs Services,
Inc. (Loadmasters) liable to respondent Glodel Brokerage Corporation (Glodel) in the amount of ₱1,896,789.62
representing the insurance indemnity which R&B Insurance Corporation (R&B Insurance) paid to the insured-consignee,
Columbia Wire and Cable Corporation (Columbia).
THE FACTS:
On August 28, 2001, R&B Insurance issued Marine Policy No. MN-00105/2001 in favor of Columbia to insure the
shipment of 132 bundles of electric copper cathodes against All Risks. On August 28, 2001, the cargoes were shipped
on board the vessel "Richard Rey" from Isabela, Leyte, to Pier 10, North Harbor, Manila. They arrived on the same date.
Columbia engaged the services of Glodel for the release and withdrawal of the cargoes from the pier and the subsequent
delivery to its warehouses/plants. Glodel, in turn, engaged the services of Loadmasters for the use of its delivery trucks
to transport the cargoes to Columbia’s warehouses/plants in Bulacan and Valenzuela City.
The goods were loaded on board twelve (12) trucks owned by Loadmasters, driven by its employed drivers and
accompanied by its employed truck helpers. Six (6) truckloads of copper cathodes were to be delivered to Balagtas,
Bulacan, while the other six (6) truckloads were destined for Lawang Bato, Valenzuela City. The cargoes in six
truckloads for Lawang Bato were duly delivered in Columbia’s warehouses there. Of the six (6) trucks en route to
Balagtas, Bulacan, however, only five (5) reached the destination. One (1) truck, loaded with 11 bundles or 232 pieces of
copper cathodes, failed to deliver its cargo.
Later on, the said truck, an Isuzu with Plate No. NSD-117, was recovered but without the copper cathodes. Because of
this incident, Columbia filed with R&B Insurance a claim for insurance indemnity in the amount of ₱1,903,335.39. After
the requisite investigation and adjustment, R&B Insurance paid Columbia the amount of ₱1,896,789.62 as insurance
indemnity.
R&B Insurance, thereafter, filed a complaint for damages against both Loadmasters and Glodel before the Regional Trial
Court, Branch 14, Manila (RTC), docketed as Civil Case No. 02-103040. It sought reimbursement of the amount it had
paid to Columbia for the loss of the subject cargo. It claimed that it had been subrogated "to the right of the consignee to
recover from the party/parties who may be held legally liable for the loss."2
On November 19, 2003, the RTC rendered a decision3 holding Glodel liable for damages for the loss of the subject cargo
and dismissing Loadmasters’ counterclaim for damages and attorney’s fees against R&B Insurance. The dispositive
portion of the decision reads:
WHEREFORE, all premises considered, the plaintiff having established by preponderance of evidence its claims against
defendant Glodel Brokerage Corporation, judgment is hereby rendered ordering the latter:
1. To pay plaintiff R&B Insurance Corporation the sum of ₱1,896,789.62 as actual and compensatory damages, with
interest from the date of complaint until fully paid;
2. To pay plaintiff R&B Insurance Corporation the amount equivalent to 10% of the principal amount recovered as and for
attorney’s fees plus ₱1,500.00 per appearance in Court;
3. To pay plaintiff R&B Insurance Corporation the sum of ₱22,427.18 as litigation expenses.
WHEREAS, the defendant Loadmasters Customs Services, Inc.’s counterclaim for damages and attorney’s fees against
plaintiff are hereby dismissed.
With costs against defendant Glodel Brokerage Corporation.
SO ORDERED.4
Both R&B Insurance and Glodel appealed the RTC decision to the CA.
On August 24, 2007, the CA rendered the assailed decision which reads in part:
Considering that appellee is an agent of appellant Glodel, whatever liability the latter owes to appellant R&B Insurance
Corporation as insurance indemnity must likewise be the amount it shall be paid by appellee Loadmasters.
WHEREFORE, the foregoing considered, the appeal is PARTLY GRANTED in that the appellee Loadmasters is likewise
held liable to appellant Glodel in the amount of ₱1,896,789.62 representing the insurance indemnity appellant Glodel has
been held liable to appellant R&B Insurance Corporation.
Appellant Glodel’s appeal to absolve it from any liability is herein DISMISSED.
SO ORDERED.5
Hence, Loadmasters filed the present petition for review on certiorari before this Court presenting the following
ISSUES
1. Can Petitioner Loadmasters be held liable to Respondent Glodel in spite of the fact that the latter respondent
Glodel did not file a cross-claim against it (Loadmasters)?
2. Under the set of facts established and undisputed in the case, can petitioner Loadmasters be legally considered
as an Agent of respondent Glodel?6
To totally exculpate itself from responsibility for the lost goods, Loadmasters argues that it cannot be considered an agent
of Glodel because it never represented the latter in its dealings with the consignee. At any rate, it further contends that
Glodel has no recourse against it for its (Glodel’s) failure to file a cross-claim pursuant to Section 2, Rule 9 of the 1997
Rules of Civil Procedure.
Glodel, in its Comment,7 counters that Loadmasters is liable to it under its cross-claim because the latter was grossly
negligent in the transportation of the subject cargo. With respect to Loadmasters’ claim that it is already estopped from
filing a cross-claim, Glodel insists that it can still do so even for the first time on appeal because there is no rule that
provides otherwise. Finally, Glodel argues that its relationship with Loadmasters is that of Charter wherein the transporter
(Loadmasters) is only hired for the specific job of delivering the merchandise. Thus, the diligence required in this case is
merely ordinary diligence or that of a good father of the family, not the extraordinary diligence required of common carriers.
R&B Insurance, for its part, claims that Glodel is deemed to have interposed a cross-claim against Loadmasters because
it was not prevented from presenting evidence to prove its position even without amending its Answer. As to the relationship
between Loadmasters and Glodel, it contends that a contract of agency existed between the two corporations.8
Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he
who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities.9
Doubtless, R&B Insurance is subrogated to the rights of the insured to the extent of the amount it paid the consignee under
the marine insurance, as provided under Article 2207 of the Civil Code, which reads:
ART. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to
the rights of the insured against the wrong-doer or the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss or injury.
As subrogee of the rights and interest of the consignee, R&B Insurance has the right to seek reimbursement from either
Loadmasters or Glodel or both for breach of contract and/or tort.
The issue now is who, between Glodel and Loadmasters, is liable to pay R&B Insurance for the amount of the indemnity it
paid Columbia.
At the outset, it is well to resolve the issue of whether Loadmasters and Glodel are common carriers to determine their
liability for the loss of the subject cargo. Under Article 1732 of the Civil Code, common carriers are persons, corporations,
firms, or associations engaged in the business of carrying or transporting passenger or goods, or both by land, water or
air for compensation, offering their services to the public.
Based on the aforecited definition, Loadmasters is a common carrier because it is engaged in the business of transporting
goods by land, through its trucking service. It is a common carrier as distinguished from a private carrier wherein the
carriage is generally undertaken by special agreement and it does not hold itself out to carry goods for the general public.10
The distinction is significant in the sense that "the rights and obligations of the parties to a contract of private carriage are
governed principally by their stipulations, not by the law on common carriers."11
In the present case, there is no indication that the undertaking in the contract between Loadmasters and Glodel was private
in character. There is no showing that Loadmasters solely and exclusively rendered services to Glodel.
In fact, Loadmasters admitted that it is a common carrier.12
In the same vein, Glodel is also considered a common carrier within the context of Article 1732. In its Memorandum,13 it
states that it "is a corporation duly organized and existing under the laws of the Republic of the Philippines and is engaged
in the business of customs brokering." It cannot be considered otherwise because as held by this Court in Schmitz
Transport & Brokerage Corporation v. Transport Venture, Inc.,14 a customs broker is also regarded as a common carrier,
the transportation of goods being an integral part of its business.
Loadmasters and Glodel, being both common carriers, are mandated from the nature of their business and for reasons of
public policy, to observe the extraordinary diligence in the vigilance over the goods transported by them according to all
the circumstances of such case, as required by Article 1733 of the Civil Code. When the Court speaks of extraordinary
diligence, it is that extreme measure of care and caution which persons of unusual prudence and circumspection observe
for securing and preserving their own property or rights.15 This exacting standard imposed on common carriers in a contract
of carriage of goods is intended to tilt the scales in favor of the shipper who is at the mercy of the common carrier once the
goods have been lodged for shipment.16 Thus, in case of loss of the goods, the common carrier is presumed to have been
at fault or to have acted negligently.17 This presumption of fault or negligence, however, may be rebutted by proof that the
common carrier has observed extraordinary diligence over the goods.
With respect to the time frame of this extraordinary responsibility, the Civil Code provides that the exercise of extraordinary
diligence lasts from the time the goods are unconditionally placed in the possession of, and received by, the carrier for
transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who
has a right to receive them.18
Premises considered, the Court is of the view that both Loadmasters and Glodel are jointly and severally liable to R & B
Insurance for the loss of the subject cargo. Under Article 2194 of the New Civil Code, "the responsibility of two or more
persons who are liable for a quasi-delict is solidary."
Loadmasters’ claim that it was never privy to the contract entered into by Glodel with the consignee Columbia or R&B
Insurance as subrogee, is not a valid defense. It may not have a direct contractual relation with Columbia, but it is liable
for tort under the provisions of Article 2176 of the Civil Code on quasi-delicts which expressly provide:
ART. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for
the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.
Pertinent is the ruling enunciated in the case of Mindanao Terminal and Brokerage Service, Inc. v. Phoenix Assurance
Company of New York,/McGee & Co., Inc.19 where this Court held that a tort may arise despite the absence of a contractual
relationship, to wit:
We agree with the Court of Appeals that the complaint filed by Phoenix and McGee against Mindanao Terminal, from which
the present case has arisen, states a cause of action. The present action is based on quasi-delict, arising from the
negligent and careless loading and stowing of the cargoes belonging to Del Monte Produce. Even assuming that both
Phoenix and McGee have only been subrogated in the rights of Del Monte Produce, who is not a party to the contract of
service between Mindanao Terminal and Del Monte, still the insurance carriers may have a cause of action in light of the
Court’s consistent ruling that the act that breaks the contract may be also a tort. In fine, a liability for tort may arise even
under a contract, where tort is that which breaches the contract. In the present case, Phoenix and McGee are not suing
for damages for injuries arising from the breach of the contract of service but from the alleged negligent manner
by which Mindanao Terminal handled the cargoes belonging to Del Monte Produce. Despite the absence of contractual
relationship between Del Monte Produce and Mindanao Terminal, the allegation of negligence on the part of the defendant
should be sufficient to establish a cause of action arising from quasi-delict. [Emphases supplied]
In connection therewith, Article 2180 provides:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions, but also for
those of persons for whom one is responsible.
xxxx
Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of
their assigned tasks, even though the former are not engaged in any business or industry.
It is not disputed that the subject cargo was lost while in the custody of Loadmasters whose employees (truck driver and
helper) were instrumental in the hijacking or robbery of the shipment. As employer, Loadmasters should be made
answerable for the damages caused by its employees who acted within the scope of their assigned task of delivering the
goods safely to the warehouse.
Whenever an employee’s negligence causes damage or injury to another, there instantly arises a presumption juris tantum
that the employer failed to exercise diligentissimi patris families in the selection (culpa in eligiendo) or supervision (culpa
in vigilando) of its employees.20 To avoid liability for a quasi-delict committed by its employee, an employer must overcome
the presumption by presenting convincing proof that he exercised the care and diligence of a good father of a family in the
selection and supervision of his employee.21 In this regard, Loadmasters failed.
Glodel is also liable because of its failure to exercise extraordinary diligence. It failed to ensure that Loadmasters would
fully comply with the undertaking to safely transport the subject cargo to the designated destination. It should have been
more prudent in entrusting the goods to Loadmasters by taking precautionary measures, such as providing escorts to
accompany the trucks in delivering the cargoes. Glodel should, therefore, be held liable with Loadmasters. Its defense of
force majeure is unavailing.
At this juncture, the Court clarifies that there exists no principal-agent relationship between Glodel and Loadmasters, as
erroneously found by the CA. Article 1868 of the Civil Code provides: "By the contract of agency a person binds himself to
render some service or to do something in representation or on behalf of another, with the consent or authority of the
latter." The elements of a contract of agency are: (1) consent, express or implied, of the parties to establish the relationship;
(2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not
for himself; (4) the agent acts within the scope of his authority.22
Accordingly, there can be no contract of agency between the parties. Loadmasters never represented Glodel. Neither was
it ever authorized to make such representation. It is a settled rule that the basis for agency is representation, that is, the
agent acts for and on behalf of the principal on matters within the scope of his authority and said acts have the same legal
effect as if they were personally executed by the principal. On the part of the principal, there must be an actual intention to
appoint or an intention naturally inferable from his words or actions, while on the part of the agent, there must be an
intention to accept the appointment and act on it.23 Such mutual intent is not obtaining in this case.
What then is the extent of the respective liabilities of Loadmasters and Glodel? Each wrongdoer is liable for the total
damage suffered by R&B Insurance. Where there are several causes for the resulting damages, a party is not relieved
from liability, even partially. It is sufficient that the negligence of a party is an efficient cause without which the damage
would not have resulted. It is no defense to one of the concurrent tortfeasors that the damage would not have resulted
from his negligence alone, without the negligence or wrongful acts of the other concurrent tortfeasor. As stated in the case
of Far Eastern Shipping v. Court of Appeals,24
X x x. Where several causes producing an injury are concurrent and each is an efficient cause without which the injury
would not have happened, the injury may be attributed to all or any of the causes and recovery may be had against any or
all of the responsible persons although under the circumstances of the case, it may appear that one of them was more
culpable, and that the duty owed by them to the injured person was not the same. No actor's negligence ceases to be a
proximate cause merely because it does not exceed the negligence of other actors. Each wrongdoer is responsible for the
entire result and is liable as though his acts were the sole cause of the injury.
There is no contribution between joint tortfeasors whose liability is solidary since both of them are liable for the total
damage. Where the concurrent or successive negligent acts or omissions of two or more persons, although acting
independently, are in combination the direct and proximate cause of a single injury to a third person, it is impossible to
determine in what proportion each contributed to the injury and either of them is responsible for the whole injury. Where
their concurring negligence resulted in injury or damage to a third party, they become joint tortfeasors and are solidarily
liable for the resulting damage under Article 2194 of the Civil Code. [Emphasis supplied]
The Court now resolves the issue of whether Glodel can collect from Loadmasters, it having failed to file a cross-claim
against the latter.1avvphi1
Undoubtedly, Glodel has a definite cause of action against Loadmasters for breach of contract of service as the latter is
primarily liable for the loss of the subject cargo. In this case, however, it cannot succeed in seeking judicial sanction against
Loadmasters because the records disclose that it did not properly interpose a cross-claim against the latter. Glodel did not
even pray that Loadmasters be liable for any and all claims that it may be adjudged liable in favor of R&B Insurance. Under
the Rules, a compulsory counterclaim, or a cross-claim, not set up shall be barred.25 Thus, a cross-claim cannot be set up
for the first time on appeal.
For the consequence, Glodel has no one to blame but itself. The Court cannot come to its aid on equitable grounds. "Equity,
which has been aptly described as ‘a justice outside legality,’ is applied only in the absence of, and never against, statutory
law or judicial rules of procedure."26 The Court cannot be a lawyer and take the cudgels for a party who has been at fault
or negligent.
WHEREFORE, the petition is PARTIALLY GRANTED. The August 24, 2007 Decision of the Court of Appeals is MODIFIED
to read as follows:
WHEREFORE, judgment is rendered declaring petitioner Loadmasters Customs Services, Inc. and respondent Glodel
Brokerage Corporation jointly and severally liable to respondent R&B Insurance Corporation for the insurance indemnity
it paid to consignee Columbia Wire & Cable Corporation and ordering both parties to pay, jointly and severally, R&B
Insurance Corporation a] the amount of ₱1,896,789.62 representing the insurance indemnity; b] the amount equivalent to
ten (10%) percent thereof for attorney’s fees; and c] the amount of ₱22,427.18 for litigation expenses.
The cross-claim belatedly prayed for by respondent Glodel Brokerage Corporation against petitioner Loadmasters
Customs Services, Inc. is DENIED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed and Acting Members
of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO,
RAUL C. FLORES, in their capacities as appointed and Acting Members of the BOARD OF ASSESSMENT
APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila, respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of Assessment
Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of
Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax Assessment
Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and assessments made by
the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta. Cruz
Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were paying
monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature
enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units
or of lands on which another's dwelling is located, where such rentals do not exceed three hundred pesos (P300.00) a
month but allowing an increase in rent by not more than 10% thereafter. The said Act also suspended paragraph (1) of
Article 1673 of the Civil Code for two years from its effectivity thereby disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359
by making absolute the prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the
aforementioned provision of the Civil Code, excepting leases with a definite period. Consequently, the Reyeses,
petitioners herein, were precluded from raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject properties based on the schedule of market
values duly reviewed by the Secretary of Finance. The revision, as expected, entailed an increase in the corresponding
tax rates prompting petitioners to file a Memorandum of Disagreement with the Board of Tax Assessment Appeals. They
averred that the reassessments made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income derived from their properties. They
argued that the income approach should have been used in determining the land values instead of the comparable sales
approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals, however,
considered the assessments valid, holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete evidence which could overcome the
presumptive regularity of the classification and assessments appear to be in accordance with the base schedule of
market values and of the base schedule of building unit values, as approved by the Secretary of Finance, the cases
should be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They submitted, among others, the
summary of the yearly rentals to show the income derived from the properties. Respondent City Assessor, on the other
hand, submitted three (3) deeds of sale showing the different market values of the real property situated in the same
vicinity where the subject properties of petitioners are located. To better appreciate the locational and physical features
of the land, the Board of Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners nor their authorized
representatives were present during the said ocular inspection despite proper notices served them. It was found that
certain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which
reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered by Tax Declaration
Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the appealed Decision is
modified by allowing a 20% reduction in their respective market values and applying therein the assessment level of 30%
to arrive at the corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD IN FIXING
THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners maintain
that the "Income Approach" method would have been more realistic for in disregarding the effect of the restrictions
imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the City of Manila unlawfully
and unjustifiably set increased new assessed values at levels so high and successive that the resulting annual real
estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under
P.D. 20. Hence, petitioners protested against the levels of the values assigned to their properties as revised and
increased on the ground that they were arbitrarily excessive, unwarranted, inequitable, confiscatory and unconstitutional
(Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income approach
is used in determining land values in some vicinities, it maintains that when income is affected by some sort of price
control, the same is rejected in the consideration and study of land values as in the case of properties affected by the
Rent Control Law for they do not project the true market value in the open market (Rollo, p. 21). Thus, respondents opted
instead for the "Comparable Sales Approach" on the ground that the value estimate of the properties predicated upon
prices paid in actual, market transactions would be a uniform and a more credible standards to use especially in case of
mass appraisal of properties (Ibid.). Otherwise stated, public respondents would have this Court completely ignore the
effects of the restrictions of P.D. No. 20 on the market value of properties within its coverage. In any event, it is
unquestionable that both the "Comparable Sales Approach" and the "Income Approach" are generally acceptable
methods of appraisal for taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988
Edition). However, it is conceded that the propriety of one as against the other would of course depend on several
factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44
Phil. 383), it has been stressed that the assessors, in finding the value of the property, have to consider all the
circumstances and elements of value and must exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform, but
must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be
taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation required in the
1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the need to examine
closely and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its rate
goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its
plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both
the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate
cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the
power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away
by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to destroy while this Court sits. So it is
in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in
the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That would be a
clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the
government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in
reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the
liabilities imposed (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental Principle to
guide the appraisal and assessment of real property for taxation purposes is that the property must be "appraised at its
current and fair market value."
By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market
value of properties not so covered. The former has naturally a much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties under the
"comparable sales approach" were presented by the public respondents, namely: (1) that the sale must represent a
bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be comparable
property (Rollo, p. 27). Nothing can justify or support their view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were hardly any willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis for the conclusion that these properties were comparable with other
residential properties not burdened by P.D. 20. Neither can the given circumstances be nonchalantly dismissed by public
respondents as imposed under distressed conditions clearly implying that the same were merely temporary in character.
At this point in time, the falsity of such premises cannot be more convincingly demonstrated by the fact that the law has
existed for around twenty (20) years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However,
such collection should be made in accordance with law as any arbitrariness will negate the very reason for government
itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxations, which is the promotion of the common good, may be achieved (Commissioner of Internal
Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice
should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and
eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would amount to only P10.00 per sq.
meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public respondents are
REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals of Manila and the City Assessor of
Manila are ordered to make a new assessment by the income approach method to guarantee a fairer and more realistic
basis of computation (Rollo, p. 71).
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE
JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’ Associations, Inc.
is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding
taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price
or fair market value of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but
not on other business enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs
2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).4 If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax
shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition of
the [MCIT] in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term ‘gross
income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods
sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present
location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the
goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing
the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed under Sec.
27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three
(3) immediately succeeding taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in
the Philippines and habitually engaged in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of. – Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or
pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following
schedule –
Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations.
Exempt
With a selling price of five hundred thousand pesos (₱500,000.00) or less.
1.5%
With a selling price of more than five hundred thousand pesos (₱500,000.00) but not more than two million pesos
(₱2,000,000.00).
3.0%
With selling price of more than two million pesos (₱2,000,000.00)
5.0%
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of
the property received in exchange, as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the
periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid
to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid
to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations.
Exempt
Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business.

With a selling price of Five Hundred Thousand Pesos (₱500,000.00) or less.

1.5%
With a selling price of more than Five Hundred Thousand Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
3.0%
With a selling price of more than two Million Pesos (₱2,000,000.00).
5.0%
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of
the property received in exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the
selling price), the tax shall be deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale,
transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to
the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be recorded
by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and
conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular
real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions
thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very
lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling
for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for
the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down
their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations
have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not 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.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute.11 On the other
hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the
individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations as
a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened
into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or
the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question
once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not
allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged.16 In Holy Spirit Homeowners Association, Inc.
v. Defensor,17 we held that the association had legal standing because its members stood to be injured by the
enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual
members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited
or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation
to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved.19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance
of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this
petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in
their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax
Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance,
tax manipulation in the country and for administrative convenience. … This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It
is therefore fair for the government to require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income
or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT].
Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if
the corporation has been losing for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of
tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For
sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a
cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures,
the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.25 This grace period allows a new business to stabilize first and make its ventures
viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the
committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of
gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those
are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of
the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary
and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as
defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures,
such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital
because gross income, unlike net income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the
legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public purpose
on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where
it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that
the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to
its constituency who are to pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like
any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be invoked
to invalidate, in appropriate cases, a revenue measure39 when it amounts to a confiscation of property.40 But in the same
case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an
unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income
denotes a flow of wealth during a definite period of time.45 Income is gain derived and severed from capital.46 For income
to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions.
Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate
commerce or violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate
but a broader tax base.51 Since our income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws.52 Although our MCIT is not exactly the same
as the AMT, the policy behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining
a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum
amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax.56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present
empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory.
The Court cannot strike down a law as unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights.59 The party alleging the law’s unconstitutionality has the burden
to demonstrate the supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being
imposed and collected even when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis
supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.
This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.
But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well
be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable
income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under Section
57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax
on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned
with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections
2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of
discretion amounting to lack of jurisdiction" and "patently in contravention of law"62 because they ignore such distinctions.
Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of
the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable
period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as
Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and
implement.64 It is well-settled that an administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.66 The withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve
the government’s cash flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention
of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary,
i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable
and the tax is creditable against the income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate
Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from
net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entity’s net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation
to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income
tax payable by the taxpayer at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate
that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay
the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or
tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:
FWT
 CWT

a) The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income
tax due from the payee on the said income.
a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on
said income.
b)The liability for payment of the tax rests primarily on the payor as a withholding agent.
b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due
on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.
c) The payee is not required to file an income tax return for the particular income.73
c) The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended.74
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that
ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of
RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary
assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital
gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s
act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence
of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to
petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section
57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to
passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may promulgate,
upon the recommendation of the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed
or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld
by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section
58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-
two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
(Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not:
…if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not
passive income…76
It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental income,
shares of stock in a corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical
persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of
Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former
covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in
57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-
98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does
not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable
method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary and
CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts78 in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its
members of their property without due process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is
not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More
importantly, the due process requirement applies to the power to tax.79 The CWT does not impose new taxes nor does it
increase taxes.80 It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund.81 This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the
CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and capital expenses money earmarked
for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded
from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being
levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly
imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it
incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable classifications for purposes of taxation.87 Inequalities which result
from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.88 The real estate
industry is, by itself, a class and can be validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT,
is not their production processes but the prices of their goods sold and the number of transactions involved. The income
from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the
parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g.
heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the
CWT.89 As already discussed, the Secretary may adopt any reasonable method to carry out its functions.90 Under
Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax
has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT
is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as
Section 58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected
by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfer
has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this provision by the
Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23794 February 17, 1968
ORMOC SUGAR COMPANY, INC., plaintiff-appellant,
vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS as
Mayor of Ormoc City and ORMOC CITY, defendants-appellees.
Ponce Enrile, Siguion Reyna, Montecillo & Belo and Teehankee, Carreon & Tañada for plaintiff-appellant.
Ramon O. de Veyra for defendants-appellees.
BENGZON, J.P., J.:
On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of 1964, imposing "on
any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City a municipal tax
equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries." 2
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for P7,087.50
and on April 20, 1964 for P5,000, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service of a
copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer, Municipal Board and
Mayor, alleging that the afore-stated ordinance is unconstitutional for being violative of the equal protection clause (Sec.
1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1]), Art. VI, Constitution), aside from being an
export tax forbidden under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither a
production nor a license tax which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act
2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs duty,
fee or charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is on both the sale and export
of sugar.
Answering, the defendants asserted that the tax ordinance was within defendant city's power to enact under the
Local Autonomy Act and that the same did not violate the afore-cited constitutional limitations. After pre-trial and
submission of the case on memoranda, the Court of First Instance, on August 6, 1964, rendered a decision that upheld
the constitutionality of the ordinance and declared the taxing power of defendant chartered city broadened by the Local
Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant alleges the same
statutory and constitutional violations in the aforesaid taxing ordinance mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all productions of
centrifugal sugar milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a municipal tax equivalent to one per
centum (1%) per export sale to the United States of America and other foreign countries." Though referred to as a tax on
the export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the
only time the tax applies is when the sugar produced is exported.
Appellant questions the authority of the defendant Municipal Board to levy such an export tax, in view of Section
2287 of the Revised Administrative Code which denies from municipal councils the power to impose an export tax.
Section 2287 in part states: "It shall not be in the power of the municipal council to impose a tax in any form whatever,
upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or
export tax upon such goods in the guise of an unreasonable charge for wharfage use of bridges or otherwise, shall be
void."
Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave chartered cities,
municipalities and municipal districts authority to levy for public purposes just and uniform taxes, licenses or fees. Anent
the inconsistency between Section 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264, this
Court, in Nin Bay Mining Co. v. Municipality of Roxas 4 held the former to have been repealed by the latter. And
expressing Our awareness of the transcendental effects that municipal export or import taxes or licenses will have on the
national economy, due to Section 2 of Republic Act 2264, We stated that there was no other alternative until Congress
acts to provide remedial measures to forestall any unfavorable results.
The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically
the equal protection clause and rule of uniformity of taxation, were infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws."
(Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause applies only to persons or things
identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is
reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the
purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only
centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing
ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the
classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should
not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for
the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily collected
(Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a sufficient basis to
preclude arbitrariness, the same being then presumed constitutional until declared otherwise.
 WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is declared
unconstitutional and the defendants-appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid under
protest. No costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23645 October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R. VALENCIA, in his capacity as
Secretary of Public Works and Communications, and DOMINGO GOPEZ, in his capacity as Acting Postmaster of
San Fernando, Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and Solicitor Dominador L.
Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act 2631,2 which provides
as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for the period from August
nineteen to September thirty every year the printing and issue of semi-postal stamps of different denominations with face
value showing the regular postage charge plus the additional amount of five centavos for the said purpose, and during the
said period, no mail matter shall be accepted in the mails unless it bears such semi-postal stamps: Provided, That no such
additional charge of five centavos shall be imposed on newspapers. The additional proceeds realized from the sale of the
semi-postal stamps shall constitute a special fund and be deposited with the National Treasury to be expended by the
Philippine Tuberculosis Society in carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4) administrative orders
numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these administrative
orders were issued with the approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to September 30, 1957, for lack
of time. However, two denominations of such stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will soon
be released for use by the public on their mails to be posted during the same period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year starting in 1958, no mail matter of whatever class, and
whether domestic or foreign, posted at any Philippine Post Office and addressed for delivery in this country or abroad,
shall be accepted for mailing unless it bears at least one such semi-postal stamp showing the additional value of five
centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions of postage meters, each
piece of such mail shall bear at least one such semi-postal stamp if posted during the period above stated starting with the
year 1958, in addition to being charged the usual postage prescribed by existing regulations. In the case of business reply
envelopes and cards mailed during said period, such stamp should be collected from the addressees at the time of delivery.
Mails entitled to franking privilege like those from the office of the President, members of Congress, and other offices to
which such privilege has been granted, shall each also bear one such semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or post-office mail boxes without the required
semi-postal stamp, shall be returned to the sender, if known, with a notation calling for the affixing of such stamp. If the
sender is unknown, the mail matter shall be treated as nonmailable and forwarded to the Dead Letter Office for proper
disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking privilege which are not exempted from
the payment of the five centavos intended for the Philippine Tuberculosis Society, such extra charge may be collected in
cash, for which official receipt (General Form No. 13, A) shall be issued, instead of affixing the semi-postal stamp in the
manner hereinafter indicated:
1. Second-class mail. — Aside from the postage at the second-class rate, the extra charge of five centavos for the
Philippine Tuberculosis Society shall be collected on each separately-addressed piece of second-class mail matter, and
the total sum thus collected shall be entered in the same official receipt to be issued for the postage at the second-class
rate. In making such entry, the total number of pieces of second-class mail posted shall be stated, thus: "Total charge for
TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered separate from the postage in both of the official
receipt and the Record of Collections.
2. First-class and third-class mail permits. — Mails to be posted without postage affixed under permits issued by this
Bureau shall each be charged the usual postage, in addition to the five-centavo extra charge intended for said society. The
total extra charge thus received shall be entered in the same official receipt to be issued for the postage collected, as in
subparagraph 1.
3. Metered mail. — For each piece of mail matter impressed by postage meter under metered mail permit issued by this
Bureau, the extra charge of five centavos for said society shall be collected in cash and an official receipt issued for the
total sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. — Upon delivery of business reply cards and envelopes to holders of business
reply permits, the five-centavo charge intended for said society shall be collected in cash on each reply card or envelope
delivered, in addition to the required postage which may also be paid in cash. An official receipt shall be issued for the total
postage and total extra charge received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. — Government agencies, officials, and other persons entitled to the franking privilege
under existing laws may pay in cash such extra charge intended for said society, instead of affixing the semi-postal stamps
to their mails, provided that such mails are presented at the post-office window, where the five-centavo extra charge for
said society shall be collected on each piece of such mail matter. In such case, an official receipt shall be issued for the
total sum thus collected, in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office window shall be affixed with the
necessary semi-postal stamps. If found in mail boxes without such stamps, they shall be treated in the same way as herein
provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and Instrumentalities
Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as amended, exempts "copies of periodical
publications received for mailing under any class of mail matter, including newspapers and magazines admitted as second-
class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San
Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street, Singalong,
Manila did not bear the special anti-TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of First Instance of Pampanga, to
test the constitutionality of the statute, as well as the implementing administrative orders issued, contending that it
violates the equal protection clause of the Constitution as well as the rule of uniformity and equality of taxation. The lower
court declared the statute and the orders unconstitutional; hence this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention that declaratory relief is
unavailing because this suit was filed after the petitioner had committed a breach of the statute. While conceding that the
mailing by the petitioner of a letter without the additional anti-TB stamp was a violation of Republic Act 1635, as
amended, the trial court nevertheless refused to dismiss the action on the ground that under section 6 of Rule 64 of the
Rules of Court, "If before the final termination of the case a breach or violation of ... a statute ... should take place, the
action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before breach or violation" of the
statute has been committed. Rule 64, section 1 so provides. Section 6 of the same rule, which allows the court to treat an
action for declaratory relief as an ordinary action, applies only if the breach or violation occurs after the filing of the action
but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing of this action, then
indeed the remedy of declaratory relief cannot be availed of, much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not constitute a breach of the
statute because the statute appears to be addressed only to postal authorities. The statute, it is true, in terms provides
that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamps." It does not follow, however,
that only postal authorities can be guilty of violating it by accepting mails without the payment of the anti-TB stamp. It is
obvious that they can be guilty of violating the statute only if there are people who use the mails without paying for the
additional anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so in the matter of the anti-TB
stamp the mere attempt to use the mails without the stamp constitutes a violation of the statute. It is not required that the
mail be accepted by postal authorities. That requirement is relevant only for the purpose of fixing the liability of postal
officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this suit was filed not only with
respect to the letter which he mailed on September 15, 1963, but also with regard to any other mail that he might send in
the future. Thus, in his complaint, the petitioner prayed that due course be given to "other mails without the semi-postal
stamps which he may deliver for mailing ... if any, during the period covered by Republic Act 1635, as amended, as well
as other mails hereafter to be sent by or to other mailers which bear the required postage, without collection of additional
charge of five centavos prescribed by the same Republic Act." As one whose mail was returned, the petitioner is
certainly interested in a ruling on the validity of the statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More specifically the claim is
made that it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population
and that even among postal patrons the statute discriminatorily grants exemption to newspapers while Administrative
Order 9 of the respondent Postmaster General grants a similar exemption to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid upon the
exercise of a privilege, namely, the privilege of using the mails. As such the objections levelled against it must be viewed
in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation and to grant
exemptions.4 This power has aptly been described as "of wide range and flexibility."5 Indeed, it is said that in the field of
taxation, more than in other areas, the legislature possesses the greatest freedom in classification.6 The reason for this is
that traditionally, classification has been a device for fitting tax programs to local needs and usages in order to achieve
an equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the petitioner asserts is that statutory
classification of mail users must bear some reasonable relationship to the end sought to be attained, and that absent
such relationship the selection of mail users is constitutionally impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made by the legislation and its
purpose is undoubtedly true in some contexts, it has no application to a measure whose sole purpose is to raise revenue
... So long as the classification imposed is based upon some standard capable of reasonable comprehension, be that
standard based upon ability to produce revenue or some other legitimate distinction, equal protection of the law has been
afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v.
Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the clearest demonstration that it
sanctions invidious discrimination, which is all that the Constitution forbids. The remedy for unwise legislation must be
sought in the legislature. Now, the classification of mail users is not without any reason. It is based on ability to pay, let
alone the enjoyment of a privilege, and on administrative convinience. In the allocation of the tax burden, Congress must
have concluded that the contribution to the anti-TB fund can be assured by those whose who can afford the use of the
mails.
 The classification is likewise based on considerations of administrative convenience. For it is now a settled principle of
law that "consideration of practical administrative convenience and cost in the administration of tax laws afford adequate
ground for imposing a tax on a well recognized and defined class."9 In the case of the anti-TB stamps, undoubtedly, the
single most important and influential consideration that led the legislature to select mail users as subjects of the tax is the
relative ease and convenienceof collecting the tax through the post offices. The small amount of five centavos does not
justify the great expense and inconvenience of collecting through the regular means of collection. On the other hand, by
placing the duty of collection on postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a class. Mail users were already a
class by themselves even before the enactment of the statue and all that the legislature did was merely to select their
class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction that
exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law; to disregard [them]
and concentrate on some abstract identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant exemption must likewise be conceded as a
necessary corollary. Tax exemptions are too common in the law; they have never been thought of as raising issues
under the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted from the levy the law and
administrative officials have sanctioned an invidious discrimination offensive to the Constitution. The application of the
lower courts theory would require all mail users to be taxed, a conclusion that is hardly tenable in the light of differences
in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of the tax in order to foster what it
conceives to be a beneficent enterprise.11 This is the case of newspapers which, under the amendment introduced by
Republic Act 2631, are exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's sovereign immunity from taxation.
The State cannot be taxed without its consent and such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but a restatement of this well-
known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the exclusion of other
diseases which, it is said, are equally a menace to public health. But it is never a requirement of equal protection that all
evils of the same genus be eradicated or none at all.13 As this Court has had occasion to say, "if the law presumably hits
the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been
applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public purpose as no
special benefits accrue to mail users as taxpayers, and second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a
taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is
constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established
and safeguarded by the devotion of taxes to public purposes. Any other view would preclude the levying of taxes except
as they are used to compensate for the burden on those who pay them and would involve the abandonment of the most
fundamental principle of government — that it exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduated tax. A
tax need not be measured by the weight of the mail or the extent of the service rendered. We have said that
considerations of administrative convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating
equally on all persons within the class regardless of the amount involved.16 As Mr. Justice Holmes said in sustaining the
validity of a stamp act which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The inequality of the tax, so far as
actual values are concerned, is manifest. But, here again equality in this sense has to yield to practical considerations
and usage. There must be a fixed and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there
is equality. When the taxes on two sales are equal, the same number of shares is sold in each case; that is to say, the
same privilege is used to the same extent. Valuation is not the only thing to be considered. As was pointed out by the
court of appeals, the familiar stamp tax of 2 cents on checks, irrespective of income or earning capacity, and many
others, illustrate the necessity and practice of sometimes substituting count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the benefit of the
Philippine Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General points
out, the Society is not really the beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as a special fund and as such need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed, this is one of the grounds on which the lower court invalidated
Republic Act 1631, as amended, namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain classes of mail matters
(such as mail permits, metered mails, business reply cards, etc.), the five-centavo charge may be paid in cash instead of
the purchase of the anti-TB stamp. It further states that mails deposited during the period August 19 to September 30 of
each year in mail boxes without the stamp should be returned to the sender, if known, otherwise they should be treated
as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except through the sale of anti-TB
stamps, but such authority may be implied in so far as it may be necessary to prevent a failure of the undertaking. The
authority given to the Postmaster General to raise funds through the mails must be liberally construed, consistent with
the principle that where the end is required the appropriate means are given.19
 The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional charge but also
that of the regular postage. In the case of business reply cards, for instance, it is obvious that to require mailers to affix
the anti-TB stamp on their cards would be to make them pay much more because the cards likewise bear the amount of
the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not bear the anti-TB stamp, but a
declaration therein that "no mail matter shall be accepted in the mails unless it bears such semi-postal stamp" is a
declaration that such mail matter is nonmailable within the meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a restatement of the law for the guidance of postal officials and
employees. As for Administrative Order 9, we have already said that in listing the offices and entities of the Government
exempt from the payment of the stamp, the respondent Postmaster General merely observed an established principle,
namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without pronouncement as to costs.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 184145 December 11, 2013
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
DASH ENGINEERING PHILIPPINES, INC., Respondent.
DECISION
MENDOZA, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure,
assailing the July 17, 2008 Decision1 and the August 12, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc in
C.T.A. EB No. 357 (C.T.A. Case No. 7243) entitled "Commissioner of Internal Revenue v. Dash Engineering Philippines,
inc."
The Facts
Respondent Dash Engineering Philippines, Inc. (DEPJ) is a corporation duly registered with the Securities and Exchange
Commission, authorized to do business in the Philippines and listed with the Philippine Economic Zone Authority as an
ecozone IT export enterprise.3 It is also a VAT-registered entity engaged in the export sales of computer-aided
engineering and design.4
Respondent filed its monthly and quarterly value-added tax (VAT) returns for the period from January 1, 2003 to June 30,
2003.5 On August 9, 2004, it filed a claim for tax credit or refund in the amount of P 2,149,684.88 representing unutilized
input VAT attributable to its zero-rated sales.6 Because petitioner Commissioner of Internal Revenue (CIR) failed to act
upon the said claim, respondent was compelled to file a petition for review with the CTA on May 5, 2005.7
 On October 4, 2007, the Second Division of the CTA rendered its Decision8 partially granting respondent’s claim for
refund or issuance of a tax credit certificate in the reduced amount of P 1,147,683.78. On the matter of the timeliness of
the filing of the judicial claim, the Tax Court found that respondent’s claims for refund for the first and second quarters of
2003 were filed within the two-year prescriptive period which is counted from the date of filing of the return and payment
of the tax due. Because DEPI filed its amended quarterly VAT returns for the first and second quarters of 2003 on July
24, 2004, it had until July 24, 2006 to file its judicial claim. As such, its filing of a petition for review with the CTA on April
26, 20059 was within the prescriptive period.10 Petitioner moved for reconsideration but the same was denied in a
Resolution dated January 3, 2008.11
Aggrieved, petitioner elevated the case to the CTA En Banc, where it argued that respondent failed to show that (1) its
purchases of goods and services were made in the course of its trade and business, (2) the said purchases were
properly supported by VAT invoices and/or official receipts and other documents, and (3) that the claimed input VAT
payments were directly attributable to its zero-rated sales. Petitioner also averred that the petition for review was filed out
of time.12
The CTA En Banc in its Decision,13 dated July 17, 2008, upheld the decision of the CTA Second Division, ruling that the
judicial claim was filed on time because the use of the word "may" in Section 112(D) (now subparagraph C) of the
National Internal Revenue Code (NIRC) indicates that judicial recourse within thirty (30) days after the lapse of the 120-
day period is only directory and permissive and not mandatory and jurisdictional, as long as the petition was filed within
the two-year prescriptive period. The Tax Court further reiterated that the two-year prescriptive period applies to both the
administrative and judicial claims. Petitioner’s motion for reconsideration was denied in the August 12, 2008 Resolution
of the CTA.14
Hence, this petition.
The Issues
Petitioner raises the following grounds for the allowance of the petition:
I
The Court of Tax Appeals En Banc erred in holding that respondent’s judicial claim for refund was filed within
the prescriptive period provided under the Tax Code.
II
The Court of Tax Appeals En Banc erred in partially granting respondent’s claim for refund despite the failure of
the latter to substantiate its claim by sufficient documentary proof.15
The Court’s Ruling
As to the first issue, petitioner argues that the judicial claim was filed out of time because respondent failed to comply
with the 30-day period referred to in Section 112(D) (now subparagraph C) of the NIRC, citing the case of Commissioner
of Internal Revenue v. Aichi16 where the Court categorically held that compliance with the prescribed periods in Section
112 is mandatory and jurisdictional. Respondent filed its administrative claim for refund on August 9, 2004. The 120-day
period within which the CIR should act on the claim expired on December 7, 2004 without any action on the part of
petitioner. Thus, respondent only had 30 days from the lapse of the said period, or until January 6, 2005, to file a petition
for review with the CTA. The petition, however, was filed only on May 5, 2005.17 Petitioner further posits that the 30-day
period within which to file an appeal with the CTA is jurisdictional and failure to comply therewith would bar the appeal
and deprive the CTA of its jurisdiction to entertain the same.18
Conversely, respondent DEPI asserts that its petition was seasonably filed before the CTA in keeping with the two-year
prescriptive period provided for in Sections 204(c) and 229 of the NIRC.19 DEPI interprets Section 112, in relation to
Section 229, to mean that the 120-day period is the time given to the CIR to decide the case. The taxpayer, on the other
hand, has the option of either appealing to the CTA the denial by the CIR of the claim for refund within thirty (30) days
from receipt of such denial and within the two-year prescriptive period, or appealing an unacted claim to the CTA anytime
after the expiration of the 120-day period given to the CIR to resolve the administrative claim for as long as the judicial
claim is made within the two-year prescriptive period.20 Following respondent’s reasoning, its filing of the judicial claim on
April 26, 2005 was filed on time because it was made after the lapse of the 120-day period and within the two-year period
referred to in Section 229.
The petition is meritorious.
Sec. 229 is inapplicable; two-year period in
Sec. 112 refers only to administrative claims
Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. – The Commissioner may –
xxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim
for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund.
Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in any court for
the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment
of the tax or penalty regardless of any supervening cause that may arise after payment xxx. (Emphases supplied)
This Court has previously made a pronouncement as to the inapplicability of Section 229 of the NIRC to claims for excess
input VAT. In the recently decided case of Commissioner of Internal Revenue v. San Roque Power Corporation,21 the
Court made a lengthy disquisition on the nature of excess input VAT, clarifying that "input VAT is not ‘excessively’ collected
as understood under Section 229 because at the time the input VAT is collected the amount paid is correct and proper."22
Hence, respondent cannot advance its position by referring to Section 229 because Section 112 is the more specific and
appropriate provision of law for claims for excess input VAT.
Section 112(A) also provides for a two-year period for filing a claim for refund, to wit:
Sec. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales. – Any VATregistered person, whose sales are zero-rated or effectively
zerorated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance
of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input
tax, to the extent that such input tax has not been applied against output tax
xxx
As explained in San Roque, however, the two-year prescriptive period referred to in Section 112(A) applies only to the
filing of administrative claims with the CIR and not to the filing of judicial claims with the CTA. In other words, for as long
as the administrative claim is filed with the CIR within the two-year prescriptive period, the 30-day period given to the
taxpayer to file a judicial claim with the CTA need not fall in the same two-year period.
At any rate, respondent’s compliance with the two-year prescriptive period under Section 112(A) is not an issue. What is
being questioned in this case is DEPI’s failure to observe the requisite 120+30-day period as mandated by Section 112(C)
of the NIRC.
120+30 day period under Sec. 112 is mandatory and jurisdictional
Section 112(D) (now subparagraph C) of the NIRC provides that:
Sec. 112. Refunds or Tax Credits of Input Tax
xxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act
on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (emphasis supplied)
Petitioner is entirely correct in its assertion that compliance with the periods provided for in the abovequoted provision is
indeed mandatory and jurisdictional, as affirmed in this Court’s ruling in San Roque, where the Court En Banc settled the
controversy surrounding the application of the 120+30-day period provided for in Section 112 of the NIRC and reiterated
the Aichi doctrine that the 120+30-day period is mandatory and jurisdictional. Nonetheless, the Court took into account
the issuance by the Bureau of Internal Revenue (BIR) of BIR Ruling No. DA-489-03 which misled taxpayers by explicity
stating that taxpayers may file a petition for review with the CTA even before the expiration of the 120-day period given to
the CIR to decide the administrative claim for refund. Even though observance of the periods in Section 112 is
compulsory and failure to do so will deprive the CTA of jurisdiction to hear the case, such a strict application will be made
from the effectivity of the Tax Reform Act of 1997 on January 1, 1998 until the present, except for the period from
December 10, 2003 (the issuance of the erroneous BIR ruling) to October 6, 2010 (the promulgation of Aichi), during
which taxpayers need not wait for the lapse of the 120+30- day period before filing their judicial claim for refund.
The case at bench, however, does not involve the issue of premature filing of the petition for review with the CTA.
Rather, this petition seeks the denial of DEPI’s claim for refund for having been filed late or after the expiration of the 30-
day period from the denial by the CIR or failure of the CIR to make a decision within 120 days from the submission of the
documents in support of respondent’s administrative claim.
In San Roque, one of the respondents similarly filed its petition for review with the CTA well after the 120+30-day period.
In denying the taxpayer’s claim for refund, this Court explained that:
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing.1âwphi1 Philex did
not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA
within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of
the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by
jurisprudence before, during or after the Atlas case, Philex’s judicial claim will have to be rejected because of late filing.
Whether the two-year prescriptive period is counted from the date of payment of the output VAT following the Atlas
doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the
Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on
Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim.
Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s
failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to
appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not
a constitutional right. The exercise of such statutory privilege requires strict compliance with the conditions
attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the
consequences.23 (Emphases supplied)
Therefore, in accordance with San Roque, respondent's judicial claim for refund must be denied for having been filed
late. Although respondent filed its administrative claim with the BIR on August 9, 2004 before the expiration of the two-
year period in Section l 12(A), it undoubtedly failed to comply with the 120+ 30-day period in Section l l 2(D) (now
subparagraph C) which requires that upon the inaction of the CIR for 120 days after the submission of the documents in
support of the claim, the taxpayer has to file its judicial claim within 30 days after the lapse of the said period. The 120
days granted to the CIR to decide the case ended on December 7, 2004. Thus, DEPI had 30 days therefrom, or until
January 6, 2005, to file a petition for review with the CTA. Unfortunately, DEPI only sought judicial relief on May 5, 2005
when it belatedly filed its petition to the CT A, despite having had ample time to file the same, almost four months after
the period allowed by law. As a consequence of DEPI's late filing, the CTA did not properly acquire jurisdiction over the
claim.
The Court has held time and again that taxes are the lifeblood of the government and, consequently, tax laws must be
faithfully and strictly implemented as they are not intended to be liberally construed.24 Hence, We are left with no other
recourse but to deny respondent's judicial claim for refund for non-compliance with the provisions of Section 112 of the
NIRC.
WHEREFORE, the petition is GRANTED. The July 17, 2008 Decision and the August 12, 2008 Resolution of the CTA En
Banc in C.T.A. EB No. 357 (C.T.A. Case No. 7243) are hereby REVERSED and SET ASIDE. Respondent DEPI's judicial
claim for refund or tax credit through its petition for review before the CTA is DENIED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7988 January 19, 1916
THE YOUNG MEN'S CHRISTIAN ASSOCIATION OF MANILA, plaintiff-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Haussermann, Cohn and Fisher for appellant.
City Attorney Escaler for appellee.
MORELAND, J.:
The question at issue in this case is whether or not the building and grounds of the Young Men's Christian Association of
Manila are subject to taxation, under section 48 of the charter of the city of Manila quoted in the footnote [syllabus].
The city of Manila, contending that the property is taxable, assessed it and levied a tax thereon. It was paid under protest
and this action begun to recover it on the ground that the property was exempt from taxation under the charter of the city
of Manila. The decision was for the city and the association appealed.
The Young Men's Christian Association came to the Philippine with the army of occupation in 1898. When the large body
of troops in Manila was removed to permanent quarters at Fort William McKinley in February, 1905, an independent
association for Manila was organized under the direction of the Army and navy departments. Shortly after the organization
of the association the directors made a formal request to the international committee of the Young Men's Christian
Association in New York City for the assistance and cooperation of its foreign department. I response to this request Mr.
John R. Mott, general secretary of the foreign department, visited Manila in January 1907. After a conference with the
directors and interested friends it was decided to conduct a campaign to secure funds for an adequate and permanent
association. In the name of the international committee and friends in America Mr. Mott guaranteed P170,000 for the
construction of a building on condition that friend in the Philippines secure the site and adequately furnish the building. The
campaign for funds was begun here on February 15, 1907, and, by the 15th of March following, P83,000 was subscribed,
nearly one thousand different persons contributing. Thereupon the Young Men's Christian Association of Manila was
incorporated under the law of the Philippine Islands and received its character in June, 1907.
A site for the new building was selected on Calle Concepcion, Ermita, and the building contract was let on the 8th of
January following. The cornerstone was laid with appropriate ceremonies on July 10, 1908, and the building was formally
dedicated on October 20, 1909.
The building is composed of three parts. The main structure, located in the center, is three stories high and includes a
reception hall, social hall and game rooms, lecture room, library, reading room and rooming apartments. The small building
lying to the left of the principal structure, as one faces the front from Called Concepcion, is the kitchen and servant's
quarters. The large wing to the right is known as the athletic building, where the bowling alleys, swimming pool, locker
rooms and gymnasium-auditorium are located. The construction is of reinforced concrete with steel trussed roof covered
with interlocking red tiles.
The main or central portion of the building is 150 by 45 feet and stands 20 meters back from the sidewalk. An iron canopy,
suspended by brackets, projects over the driveway which lies in front and shelters the main entrance. A wide arched
doorway opens into a large reception room, on the left of which is the public office and the secretary's private office, while
on the right is the reading and writing rooms, and beyond that the library, each about 30 feet square. From the reception
room, on the left, a broad concrete stairway leads to the second floor.
Passing out of the rear of the reception hall one enters upon a veranda some 15 feet in width running the full length of the
main structure which looks out on the tennis courts and affords an excellent place for lounging, games and general social
purposes. To the left of the entrance hall and also opening upon the veranda are two large rooms of about the same size
as those on the right of the reception hall, the first being the billiard room and the other the restaurant. The athletic building
is entered from the rear veranda. It is a two story wing 68 by 85 feet. Passing from the veranda into the athletic hall one
finds first, on the left, the toilet room, and beyond this, to the rear, the shower baths and locker rooms. The swimming pool
is in the center of the athletic wing and is 60 by 19 feet in size, lined with cement. To the right of the swimming pool are
the bowling alleys. A wide stairways leads to the second floor. Above the swimming-pool and bowling alley is a large room
50 by 85 feet which is the gymnasium and also the auditorium when occasion requires. About one-third of the roof
converting the athletic wing is used as a roof garden.
The second and third floors of the main building are given over almost wholly to rooming apartments and baths. On the
second floor over the entrance hall is a members' parlor, from which a small balcony projects over the main entrance. The
remainder of the second floor and all to the third are composed of the living rooms. These apartments, of which there are
14 on the second and 20 on the third floor are approximately 18 by 14 feet each. They provide accommodations for 64
men.
The purposes of the association, as set forth in its charter and constitution, are:
To develop the Christian character and usefulness of its members, to improve the spiritual, intellectual, social and physical
condition of young men, and to acquire, hold, mortgage, and dispose of the necessary lands, buildings and personal
property for the use of said corporation exclusively for religious, charitable and educational purposes, and not for
investment or profit.
The purposes of this association shall be exclusively religious, charitable and educational, in developing the Christian
character and usefulness of its members and in improving the spiritual, mental, social and physical condition of young
men.
Speaking generally, the association claims exemption from taxation on the ground that it is a religious, charitable and
educational institution combined. That it has an educational department is not denied. It is undisputed that the aim of this
department is to furnish, at much less than cost, instruction in subjects that will greatly increase the mental efficiency and
wage-earning capacity of young men, prepare them in special lines of business and offer them special lines of study.
Attention is given to subjects included in civil service and consular examinations both here and in the United States. The
courses offer commercial subjects, as well as many others, and include stenography and typewriting, bookkeeping,
arithmetic, English composition, foreign languages, including elementary and advanced Spanish and Tagalog, special
courses in Philippine history, public speaking, surveying, horticulture, tropical dependencies, and the group of subjects
required for entrance into the consular services, such as political economy, American and modern history. Courses are
also offered in law, social, ethics, political economy and other subjects.
The institution has also its religious department. In that department there are, generally speaking, three main lines of work
— Bible study, religious meetings and special classes. Course are offered in the Life of Christ and the Old Testament and
in the larger social significance of the teachings of Jesus. Meetings are held on Sunday afternoons and several times
during the week and courses are offered in the study of missions, in the method of teaching the Bible and kindred subjects.
The atmosphere of the Young Men's Christian Association is distinctly religious and there is constant effort on the part of
the officials to create a religious spirit; and to that end there is continuous pressure to induce members to attend not only
the religious services of the association but also those of one or another of the churches of Manila. While the association
is nonsectarian, it is preeminently religious; and the fundamental basis and groundwork is the Christian religion. All of the
officials of the association are devoted Christians, members of a church, and have dedicated their lives to the spread of
the Christian principles and building of Christian character.
The institution also has charitable features. It makes no profit on any of its activities. The professors and instructors in all
departments serve without pay and freely give of their time and ability to further the purposes of the institution. The chief
secretary and his assistant receive no salary from the institution. Whatever they are paid comes from the United States. In
estimating the cost of instruction in the various departments, or of the other things for which pay is received, no account is
taken of the interest on the money invested in the grounds and building, of deterioration in value resulting from the lapse
of time, or of the fact that the professors and instructors and certain officials receive no pay. We have, then, a building and
grounds, professors and instructors, and certain institution officials, furnished free of charge, and which makes no profit
even on that basis. This, it would seem, would lend some color to the claim that the association takes on some of the
aspect of a charitable institution. While it appears that the association is not exclusively religious or charitable or
educational, it is demonstrated that it is a happy combination of all three, giving to its membership the religious opportunities
of the church, the educational opportunities of the school and the blessings of charity where needed without the recipient
feeling or even knowing that he is the object of charity.
It is claimed, however, that the institution is run as a business in that it keeps a lodging and boarding house. It may be
admitted that there are 64 persons occupying rooms in the main building as lodgers or roomers and that they take their
meals at the restaurant below. These facts, however, are far from constituting a business in ordinary acceptation of the
word. In the first place, no profit is realized by the association in any sense. In the second place, it is undoubted, as it is
undisputed, that the purpose of the association is not, primarily, to obtain the money which comes from the lodgers and
boarders. The real purpose is to keep the membership continually within the sphere of influence of the institution; and
thereby to prevent, as far as possible, the opportunities which vice president to young men in foreign countries who lack
home or other similar influences. We regard this feature of the institution not as a business or means of making money,
but, rather, as a very efficient means of maintaining the influence of the institution over its membership. As we held in the
case of the Columbia Club, religious and moral teachings do not always stop with the spoken word; but to be effective in
the highest degree they must follow the young man through as many moments of his life as possible. To this end the
feature of the Young Men's Christian Association to which objection is made lends itself with great effect; and we are,
accordingly, forced to regards this activity of the institution not as a business but as a method by which the institution
maintains its influence and conserves the benefits which its organization was designed to confer.
As we have seen in the description already given of the association building and grounds, no part is occupied for any but
institutional purposes. From end to end the building and grounds are devoted exclusively to the purposes stated in the
constitution of the association. The library and reading rooms, the game and lounging halls, the lecture rooms, the
auditorium, the baths, pools, devices for physical development, and the grounds, are all dedicated exclusively to the objects
and purpose of the association — the building of Christian character and the creation of moral sentiment and fiber in men.
It is the belief of the Young Men's Christian Association that a Christian man, a man of moral sentiment and firm moral
fiber, is yet a better man for being also all-round man — one who is sound not only according to Christian principles and
the highest moral conceptions, but physically and mentally; whose body and mind act in harmony and within the limits
which the rights of others set; who are gentleman in physical and mental struggles, as well as in religious service; who
have self-respect and self-restraint; who can hit hard and still kindly; who can lose without envy; who can congratulate his
conqueror with sincerity; who can vie without temper, contend without malice, concede without regret; who can win and
still be generous, — in short, one who fights hard but square. To the production of such men the association lends all its
efforts, husbands all its resources.
We are aware that there are many decisions holding that institutions of this character are not exempt from taxation; but,
on investigation, we find that the majority of them are based on statutes much narrower than the one under consider and
that in all probability the decisions would have been otherwise if the court had been passing on a statute similar to ours.
On the other hand, there are many decisions of the courts in the United States founded on statutes like the Philippine
statute which hold that associations of this class are exempt from taxation. We have examined all of the decisions, both
for and against, with care and deliberation, and we are convinced that the weight of authority sustains the positions we
take in this case.
There is no doubt about the correctness of the contention that an institution must devote itself exclusively to one or the
other of the purpose mentioned in the statute before it can be exempt from taxation; but the statute does not say that it
must be devoted exclusively to any one of the purposes therein mentioned. It may be a combination of two or three or
more of those purposes and still be entitled to exempt. The Young Men's Christian Association of Manila cannot be said
to be an institution used exclusively for religious purposes, or an institution used exclusively for charitable purposes, or an
institution devoted exclusively to educational purposes; but we believe it can be truthfully said that it is an institution used
exclusively for all three purposes, and that, as such, it is entitled to be exempted from taxation.
The judgment appealed from is reversed and the cause remanded with instructions to enter a judgment against the city of
Manila and in favor of the Young Men's Christian Association of Manila in the sum of P6,221.35. Without costs in this
instance. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma,
plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our
industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual
loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a
readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the
imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a
graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise —
a tax equivalent to the difference between the money value of the rental or consideration collected and the amount
representing 12 per centum of the assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known as the
'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the following purposes or to attain
any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position of the
Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the loss of
that market and the consequent necessity of meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof — the mill, the
landowner, the planter of the sugar cane, and the laborers in the factory and in the field — so that all might continue
profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions: Provided,
That the President of the Philippines may, until the adjourment of the next regular session of the National Assembly, make
the necessary disbursements from the fund herein created (1) for the establishment and operation of sugar experiment
station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories with
the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar cane more
adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the
buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-
products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of excess cane
lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and (2) for the
improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize the
necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary
amount or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency
or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to
recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the
Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the
aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be
constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a
pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that
the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and
factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our
government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection
and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find
that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police
power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components
to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L.
Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —
The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or
indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public
interests as to be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it
follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for
its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it
is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued
or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state
may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's
police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L.
Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it
appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now
in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected.
It may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution
to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed.
744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances
to which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace
all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to experimental
stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well
as to the improvements of living and working conditions in sugar mills or plantations, without any part of such money being
channeled directly to private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
 FIRST DIVISION
[G.R. NO. 159610 : June 12, 2008]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
CARPIO, J.:
The Case
This Petition for Review on Certiorari 1 assails the 13 August 2003 Decision2 of the Court of Appeals in CA-G.R. SP No.
70480. The Court of Appeals dismissed the appeal filed by the Commissioner of Internal Revenue (petitioner)
questioning the 15 April 2002 Decision3 of the Court of Tax Appeals (CTA) in CTA Case No. 6054 ordering petitioner to
issue, in favor of Central Luzon Drug Corporation (respondent), a tax credit certificate in the amount of P2,376,805.63,
arising from the alleged erroneous interpretation of the term "tax credit" used in Section 4(a) of Republic Act No. (RA)
7432.4
The Facts
Respondent is a domestic corporation engaged in the retail of medicines and other pharmaceutical products.5 In 1997, it
operated eight drugstores under the business name and style "Mercury Drug."6
Pursuant to the provisions of RA 7432 and Revenue Regulations No. (RR) 2-947 issued by the Bureau of Internal
Revenue (BIR), respondent granted 20% sales discount to qualified senior citizens on their purchases of medicines
covering the calendar year 1997. The sales discount granted to senior citizens totaled P2,798,508.00.
On 15 April 1998, respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil income tax liability due
to net loss incurred from business operations of P2,405,140.00.8 Respondent filed its 1997 Income Tax Return under
protest.9
On 19 March 1999, respondent filed with the petitioner a claim for refund or credit of overpaid income tax for the taxable
year 1997 in the amount of P2,660,829.00.10 Respondent alleged that the overpaid tax was the result of the wrongful
implementation of RA 7432. Respondent treated the 20% sales discount as a deduction from gross sales in compliance
with RR 2-94 instead of treating it as a tax credit as provided under Section 4(a) of RA 7432.
On 6 April 2000, respondent filed a Petition for Review with the CTA in order to toll the running of the two-year statutory
period within which to file a judicial claim. Respondent reasoned that RR 2-94, which is a mere implementing
administrative regulation, cannot modify, alter or amend the clear mandate of RA 7432. Consequently, Section 2(i) of RR
2-94 is without force and effect for being inconsistent with the law it seeks to implement.11
In his Answer, petitioner stated that the construction given to a statute by a specialized administrative agency like the
BIR is entitled to great respect and should be accorded great weight. When RA 7432 allowed senior citizens' discounts to
be claimed as tax credit, it was silent as to the mechanics of availing the same. For clarification, the BIR issued RR 2-94
and defined the term "tax credit" as a deduction from the establishment's gross income and not from its tax liability in
order to avoid an absurdity that is not intended by the law.12
The Ruling of the Court of Tax Appeals
On 15 April 2002, the CTA rendered a Decision ordering petitioner to issue a tax credit certificate in the amount of
P2,376,805.63 in favor of respondent.
The CTA stated that in a number of analogous cases, it has consistently ruled that the 20% senior citizens' discount
should be treated as tax credit instead of a mere deduction from gross income.13 In quoting its previous decisions, the
CTA ruled that RR 2-94 engraved a new meaning to the phrase "tax credit" as deductible from gross income which is a
deviation from the plain intendment of the law. An administrative regulation must not contravene but should conform to
the standards that the law prescribes.14
The CTA also ruled that respondent has properly substantiated its claim for tax credit by documentary evidence.
However, based on the examination conducted by the commissioned independent certified public accountant (CPA),
there were some material discrepancies due to missing cash slips, lack of senior citizen's ID number, failure to include
the cash slips in the summary report and vice versa. Therefore, between the Summary Report presented by respondent
and the audited amount presented by the independent CPA, the CTA deemed it proper to consider the lesser of two
amounts.
The re-computation of the overpaid income tax15 for the year 1997 is as follows:

Sales, Net
P176,742,607.00
Add: 20% Sales Discount to Senior Citizens
2,798,508.00
Sales, Gross
P179,541,115.00
Less: Cost of Sales
Merchandise inventory, beg.
P 20,905,489.00

Purchases
168,762,950.00

Merchandise inventory, end

-27,281,439.00
162,387,000.00
Gross Profit
P 17,154,115.00
Add: Miscellaneous income
402,124.00
Total Income
P 17,556,239.00
Less: Operating expenses
16,913,699.00
Net Income
P 642,540.00
Less: Income subjected to final tax (Interest Income16 )
249,172.00
Net Taxable Income
P 393,368.00
Income Tax Due (35%)
P 137,679.00
Less: Tax Credit (Cost of 20% discount as adjusted17 )
2,514,484.63
Income Tax Payable
(P 2,376,805.63)
Income Tax Actually Paid
: 0.00
Income Tax Refundable
(P 2,376,805.63)
Aggrieved by the CTA's decision, petitioner elevated the case before the Court of Appeals.
The Ruling of the Appellate Court
On 13 August 2003, the Court of Appeals affirmed the CTA's decision in toto.
The Court of Appeals disagreed with petitioner's contention that the CTA's decision applied a literal interpretation of the
law. It reasoned that under the verba legis rule, if the statute is clear, plain, and free from ambiguity, it must be given its
literal meaning and applied without interpretation. This principle rests on the presumption that the words used by the
legislature in a statute correctly express its intent and preclude the court from construing it differently.18
The Court of Appeals distinguished "tax credit" as an amount subtracted from a taxpayer's total tax liability to arrive at the
tax due while a "tax deduction" reduces the taxpayer's taxable income upon which the tax liability is computed. "A credit
differs from deduction in that the former is subtracted from tax while the latter is subtracted from income before the tax is
computed."19
The Court of Appeals found no legal basis to support petitioner's opinion that actual payment by the taxpayer or actual
receipt by the government of the tax sought to be credited or refunded is a condition sine qua non for the availment of tax
credit as enunciated in Section 22920 of the Tax Code. The Court of Appeals stressed that Section 229 of the Tax Code
pertains to illegally collected or erroneously paid taxes while RA 7432 is a special law which uses the method of tax
credit in the context of just compensation. Further, RA 7432 does not require prior tax payment as a condition for
claiming the cost of the sales discount as tax credit.
Hence, this petition.
The Issues
Petitioner raises two issues21 in this Petition:
1. Whether the appellate court erred in holding that respondent may claim the 20% senior citizens' sales discount as a
tax credit deductible from future income tax liabilities instead of a mere deduction from gross income or gross sales;
andcralawlibrary
2. Whether the appellate court erred in holding that respondent is entitled to a refund.
The Ruling of the Court
The petition lacks merit.
The issues presented are not novel. In two similar cases involving the same parties where respondent lodged its claim
for tax credit on the senior citizens' discount granted in 199522 and 1996,23 this Court has squarely ruled that the 20%
senior citizens' discount required by RA 7432 may be claimed as a tax credit and not merely a tax deduction from gross
sales or gross income. Under RA 7432, Congress granted the tax credit benefit to all covered establishments without
conditions. The net loss incurred in a taxable year does not preclude the grant of tax credit because by its nature, the tax
credit may still be deducted from a future, not a present, tax liability. However, the senior citizens' discount granted as a
tax credit cannot be refunded.
RA 7432 expressly allows private establishments
to claim the amount of discounts they grant to senior citizens
as tax credit.
Section 4(a) of RA 7432 states:
SECTION 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of transportation
services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines
anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis
supplied)cralawlibrary
However, RR 2-94 interpreted the tax credit provision of RA 7432 in this wise:
Sec. 2. DEFINITIONS. - For purposes of these regulations:
xxx
i. Tax Credit - refers to the amount representing 20% discount granted to a qualified senior citizen by all
establishments relative to their utilization of transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar
places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax
purposes. (Emphasis supplied).
xxx
Sec. 4. Recording/Bookkeeping Requirement for Private Establishments
xxx
The amount of 20% discount shall be deducted from the gross income for income tax purposes and from gross
sales of the business enterprise concerned for purposes of the VAT and other percentage taxes. (Emphasis
supplied)cralawlibrary
Tax credit is defined as a peso-for-peso reduction from a taxpayer's tax liability. It is a direct subtraction from the tax
payable to the government. On the other hand, RR 2-94 treated the amount of senior citizens' discount as a tax deduction
which is only a subtraction from gross income resulting to a lower taxable income. RR 2-94 treats the senior citizens'
discount in the same manner as the allowable deductions provided in Section 34, Chapter VII of the National Internal
Revenue Code. RR 2-94 affords merely a fractional reduction in the taxes payable to the government depending on the
applicable tax rate.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,24 the Court ruled that petitioner's definition in RR
2-94 of a tax credit is clearly erroneous. To deny the tax credit, despite the plain mandate of the law, is indefensible. In
Commissioner of Internal Revenue v. Central Luzon Drug Corporation, the Court declared, "When the law says that the
cost of the discount may be claimed as a tax credit, it means that the amount - when claimed ― shall be treated as a
reduction from any tax liability, plain and simple." The Court further stated that the law cannot be amended by a mere
regulation because "administrative agencies in issuing these regulations may not enlarge, alter or restrict the provisions of
the law it administers; it cannot engraft additional requirements not contemplated by the legislature." Hence, there being a
dichotomy in the law and the revenue regulation, the definition provided in Section 2(i) of RR 2-94 cannot be given effect.
The tax credit may still be deducted
from a future, not a present, tax liability.
In the petition filed before this Court, petitioner alleged that respondent incurred a net loss from its business operations in
1997; hence, it did not pay any income tax. Since no tax payment was made, it follows that no tax credit can also be
claimed because tax credits are usually applied against a tax liability.25
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,26 the Court stressed that prior payment of tax
liability is not a pre-condition before a taxable entity can avail of the tax credit. The Court declared, "Where there is no tax
liability or where a private establishment reports a net loss for the period, the tax credit can be availed of and carried over
to the next taxable year."27 It is irrefutable that under RA 7432, Congress has granted the tax credit benefit to all covered
establishments without conditions. Therefore, neither a tax liability nor a prior tax payment is required for the existence or
grant of a tax credit.28 The applicable law on this point is clear and without any qualifications.29
Hence, respondent is entitled to claim the amount of P2,376,805.63 as tax credit despite incurring net loss from business
operations for the taxable year 1997.
The senior citizens' discount may be claimed
as a tax credit and not a refund.
Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax credit. A tax credit can
only be utilized as payment for future internal revenue tax liabilities of the taxpayer while a tax refund, issued as a check
or a warrant, can be encashed. A tax refund can be availed of immediately while a tax credit can only be utilized if the
taxpayer has existing or future tax liabilities.
If the words of the law are clear, plain, and free of ambiguity, it must be given its literal meaning and applied without any
interpretation. Hence, the senior citizens' discount may be claimed as a tax credit and not as a refund.30
RA 9257 now specifically provides that all covered establishments
may claim the senior citizens' discount as tax deduction.
On 26 February 2004, RA 9257, otherwise known as the "Expanded Senior Citizens Act of 2003," was signed into law and
became effective on 21 March 2004.31
RA 9257 has amended RA 7432. Section 4(a) of RA 9257 reads:
"Sec. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of
senior citizens;
xxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net
cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended."
(Emphasis supplied)cralawlibrary
Contrary to the provision in RA 7432 where the senior citizens' discount granted by all covered establishments can be
claimed as tax credit, RA 9257 now specifically provides that this discount should be treated as tax deduction.
With the effectivity of RA 9257 on 21 March 2004, there is now a new tax treatment for senior citizens' discount granted by
all covered establishments. This discount should be considered as a deductible expense from gross income and no longer
as tax credit.32 The present case, however, covers the taxable year 1997 and is thus governed by the old law, RA 7432.
WHEREFORE, we DENY the petition. We AFFIRM the assailed Decision of the Court of Appeals dated 13 August 2003
in CA-G.R. SP No. 70480.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21183 September 27, 1968
VICTORIAS MILLING CO., INC., plaintiff-appellant,
vs.
THE MUNICIPALITY OF VICTORIAS, PROVINCE OF NEGROS OCCIDENTAL, defendant-appellant.
Hilado & Hilado for plaintiff-appellant.
The Provincial Fiscal of Negros Occidental for defendant-appellant.

SANCHEZ, J.:
This case calls into question the validity of Ordinance No. 1, series of 1956, of the Municipality of Victorias, Negros
Occidental.
The disputed ordinance was approved by the municipal Council of Victorias on September 22, 1956 by way of an
amendment to two municipal ordinances separately imposing license taxes on operators of sugar centrals 1 and sugar
refineries. 2 The changes were: with respect to sugar centrals, by increasing the rates of license taxes; and as to sugar
refineries, by increasing the rates of license taxes as well as the range of graduated schedule of annual output capacity.
Ordinance No. 1 3 is labeled "An Ordinance Amending Ordinance No. 25, Series of 1953 and Ordinance No. 18, Series of
1947 on Sugar Central by Increasing the Rates on Sugar Refinery Mill by Increasing the Range of Graduated Schedule
on Capacity Annual Output Respectively". It was, as the ordinance itself states, enacted pursuant to the taxing power
conferred by Commonwealth Act 472. By Section 1 of the Ordinance: "Any person, corporation or other forms of
companies, operating sugar central or engage[d] in the manufacture of centrifugal sugar shall be required to pay the
following annual municipal license tax, payable quarterly, to wit: . . ." Section 1 referred to prescribes a wide range of
schedule. It starts with a sugar central with mill having an annual output capacity of not less than 50,000 piculs of
centrifugal sugar, in which case an annual municipal license tax of P1,000.00 is provided. Depending upon the annual
output capacity the schedule of taxes continues with P2,000.00 progressively upward in twelve other grades until an
output capacity of 1,500,001 piculs or more shall have been reached. For this, the annual tax is P40,000.00. The tax on
sugar refineries is likewise calibrated with similar rates. It also starts with P1,000.00 for a refinery with mill having an
annual output capacity of not less than 25,000 bags of 100 lbs. of refined sugar. Then, it continues with the second
bracket of from 25,001 bags to 75,000 bags of 100 lbs. Here, the municipal license tax is P1,500.00. Then follow the
other rates in the graduated scale with the ceiling placed at a capacity of 1,750,001 bags or more. The annual municipal
license tax for the last mentioned output capacity is P40,000.00.
Of importance are the provisions of Section 1(m) relating to sugar centrals and Section 2(m) covering sugar refineries
with specific reference to the maximum annual license tax, viz:
Section No. 1 — Any person, corporation or other forms of Companies, operating Sugar Central or engage[d] in the
manufacture of centrifugal sugar shall be required to pay the following annual municipal license tax, payable quarterly, to
wit:
xxx xxx xxx
(m) Sugar Central with mill having a capacity of producing an annual output of from 1,500,001 piculs or more shall be
required to pay an annual municipal license tax of — P40,000.00.
Section No. 2 — Any person, corporation or other forms of Companies shall be required to pay an annual municipal
license tax for the operation of Sugar Refinery Mill at the following rates:
xxx xxx xxx
(m) Sugar Refinery with mill having a capacity of producing an annual output of from 1,750,001 bags of 100 lbs. or more
shall be required to pay an annual municipal license tax of — P40,000.00.
For, the production of plaintiff Victorias Milling Co., Inc. in both its sugar central and its sugar refinery located in the
Municipality of Victorias comes within these items in the schedule.
Plaintiff filed suit below 4 to ask for judgment declaring Ordinance No. 1, series of 1956, null and void; ordering the refund
of all license taxes paid and to be paid under protest; directing the officials of Victorias and the Province of Negros
Occidental to observe, during the pendency of the action, the provisions of section 357 of the Revised Manual of
Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 edition, 5 regarding the treatment of license taxes
paid under protest by virtue of a disputed ordinance; and other reliefs. 6
The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts fixed in Provincial Circular 12-A issued
by the Finance Department on February 27, 1940; (b) it is discriminatory since it singles out plaintiff which is the only
operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality; (c) it constitutes double
taxation; and (d) the national government has preempted the field of taxation with respect to sugar centrals or refineries.
Upon the complaint as supplemented and amended, and the answer thereto, and following hearing on the merits, the
trial court rendered its judgment. After declaring that "[t]here is no doubt that" the ordinance in question refers to license
taxes or fees," and that "[i]t is settled that a license tax should be limited to the cost of licensing, regulating and
surveillance," 7 the trial court ruled that said license taxes in dispute are unreasonable, 8 and held that: "If the defendant
has the power to tax the plaintiff for purposes of revenue, it may do so by proper municipal legislation, but not in the
guise of a license tax." 9 The court added: "The Court is not, however, prepared to order the refund of all the license taxes
paid by the plaintiff under protest and amounting, up to the second quarter of 1960, to P280,000.00, considering that the
plaintiff appears to have agreed to the payment of the license taxes at the rates fixed prior to Ordinance No. 1, series of
1956; that the defendant had evidently not complied with the provisions of Section 357 of the Revised Manual of
Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 Edition, as the plaintiff herein seeks an order
enjoining the defendant and its appropriate officials to carry out said provisions; that the financial position of the
defendant would surely be disrupted if ordered to refund, while the plaintiff may perhaps easily forego or forget what it
had already parted with". 10 It disposes of the suit in the following manner:
WHEREFORE, judgment is rendered (a) declaring that Ordinance No. 1, series of 1956, of the municipality of Victorias,
Negros Occidental, is invalid; (b) ordering all officials of the defendant to observe the provisions of Section 357 of the
Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 Edition, with particular
reference to any license taxes paid by the plaintiff under said Ordinance No. 1, series of 1956, after notice of this
decision; and (c) ordering the defendant to refund to the plaintiff any and all such license taxes paid under protest after
notice of this decision. 11
Both plaintiff and defendant appealed direct to this Court. Plaintiff questions that portion of the decision denying the
refund of the license taxes paid under protest in the amount of P280,000 covering the period from the first quarter of
1957 to the second quarter of 1960; and balked at the court's order limiting refund to "any and all such license taxes paid
under protest after notice of this decision." Defendant, upon the other hand, challenges the correctness of the court's
decision invalidating Ordinance No. 1, series of 1956.
The questions raised in the appeals will be discussed in their proper sequence.
1. We first grapple with the threshold question: Was Ordinance No. 1, series of 1956, passed by defendant's municipal
council as a regulatory enactment or as a revenue measure?
The trial court says, and plaintiff seconds, that the amounts set forth in the ordinance in question did exceed the cost of
licensing, regulating and surveillance, and that defendant cannot impose a tax — for revenue — in the guise of a police
or a regulatory measure. Our finding, however, is the other way.1awphîl.nèt
The ordinance itself recites that its source of taxing power emanates from Commonwealth Act 472, Section 1 of which
reads:
Section 1. A municipal council or municipal district council shall have authority to impose municipal license taxes upon
persons engaged in any occupation or business, or exercising privileges in the municipality or municipal district, by
requiring them to secure licenses at rates fixed by the municipal council, or municipal district council, and to collect fees
and charges for services rendered by the municipality or municipal district and shall otherwise have power to levy for
public local purposes, and for school purposes, including teachers' salaries, just and uniform taxes other than percentage
taxes and taxes on specified articles.
Under the statute just quoted and pertinent jurisprudence, a municipality is authorized to impose three kinds of licenses:
(1) license for regulation of useful occupations or enterprises; (2) license for restriction or regulation of non-useful
occupations or enterprises; and (3) license for revenue. 12 The first two easily fall within the broad police power granted
under the general welfare clause. 13 The third class, however, is for revenue purposes. It is not a license fee, properly
speaking, and yet it is generally so termed. It rests on the taxing power. That taxing power must be expressly conferred
by statute upon the municipality. 14 It is so granted under Commonwealth Act 472.
To be recalled at this point is that Ordinance No. 1, series of 1956, is but an amendment of Ordinance No. 18, series of
1947, in reference to refineries, and Ordinance No. 25, series of 1953, covering sugar centrals. Ordinance No. 18
imposes "municipal taxes on persons, firms or corporations operating refinery mills in this municipality." 15 Ordinance No.
25 speaks of municipal taxes "relative to the output of the sugar centrals." 16
What are these taxes for? Resolution No. 60 of the municipal council of Victorias, 17 adopted also on September 22, 1956
in conjunction with Ordinance No. 1, series of 1956, furnishes a ready answer. It reads in part:
WHEREAS, the Municipal Treasurer informed the Municipal Council of the revenue of the Municipality and the heavy
obligations which confront it because of the implementation of Minimum Wage Law on the salaries and wages it pays to
its municipal employees and laborers thus greatly draining the Municipal Treasury;
WHEREAS, this local administration is committed to the plan of ameliorating the deplorable situation existing in the
barrios, sitios and rural areas by giving them essential and necessary facilities calculated to improve conditions thereat
thru improvements of roads and feeder roads;
WHEREAS, one of the causes of the municipality's financial difficulty is low rates of municipal taxes imposed by some of
the ordinances enacted by the local legislative body;
WHEREAS, [in] . . . the ordinances known as Ordinance No. 25, Series of 1953, dealing on the operation of Sugar
Central, and Ordinance No. 18, Series of 1947, which exclusively deals with the operation of Sugar Refinery Mill, the
rates so given are rates suggested and determined by the Provincial Circular No. 12-A, dated February 27, 1940 issued
by the Department of Finance as regards to Sugar Centrals;
WHEREAS, the Municipal Council has come to the conclusion that the rates provided for in such ordinances are no
longer adequate if made in keeping with the present high cost of living;
WHEREAS, the Municipal Council has also taken cognizance of the fact that the price of sugar per picul today is more
than twice its pre-war average price; . . . . 18
Given the purposes just mentioned, we find no warrant in logic to give our assent to the view that the ordinance in
question is solely for regulatory purpose. Plain is the meaning conveyed. The ordinance is for raising money. To say
otherwise is to misread the purpose of the ordinance.1awphîl.nèt
We should not hang so heavy a meaning on the use of the term "municipal license tax". This does not necessarily
connote the idea that the tax is imposed — as the lower court would want it — to mean a revenue measure in the guise
of a license tax. For really, this runs counter to the declared purpose to make money.
Besides, the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to designate
impositions exacted for the exercise of various privileges." 19 It does not refer solely to a license for regulation. In many
instances, it refers to "revenue-raising exactions on privileges or activities." 20 On the other hand, license fees are
commonly called taxes. But, legally speaking, the latter are "for the purpose of raising revenues," in contrast to the
former which are imposed "in the exercise of police power for purposes of regulation." 21
We accordingly say that the designation given by the municipal authorities does not decide whether the imposition is
properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. 22 Thus, "[w]hen no police inspection, supervision, or regulation is
provided, nor any standard set for the applicant 23 to establish, or that he agrees to attain or maintain, but any and all
persons engaged in the business designated, without qualification or hindrance, may come, and a license on payment of
the stipulated sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is strong that the power
of taxation, and not the police power, is being exercised." 24
Precisely because of these considerations the present imposition must be treated as a levy for revenue purposes. A
quick glance at the big amount of maximum annual tax set forth in the ordinance, P40,000.00 for sugar centrals, and
P40,000.00 for sugar refineries, will readily convince one that the tax is really a revenue tax. And then, we read in the
ordinance nothing which would as much as indicate that the tax imposed is merely for police inspection, supervision or
regulation.
Our view that the tax imposed by the ordinance is for revenue purposes finds support in judicial pronouncements which
have gained foothold in this jurisdiction. In Standard Vacuum vs. Antigua, 25 this Court had occasion to pass upon a
similar ordinance. In categorical terms, we there stated: "We are satisfied that the graduated license tax imposed by the
ordinance in question is an occupation tax, imposed not under the police or regulatory power of the municipality but by
virtue of its taxing power for purposes of revenue, and is in accordance with the last part of Section 1 of Commonwealth
Act No. 472. It is, therefore, valid." 26
The present case is not to be analogized with Panaligan vs. City of Tacloban cited in the decision below. 27 For there, the
inspection fee sought to be collected — upon every head of specified animals to be transported out of the City of
Tacloban (P2.00 per hog, P10.00 per cow and 20.00 per carabao) — was in reality an export tax specifically withheld
from municipal taxing power under Section 2287 of the Revised Administrative Code.
So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, 28 Lacson vs. City of Bacolod, 29 and Santos
vs. Municipal Government of Caloocan, 30 used by plaintiff as references, are entirely inopposite. In Pacific Commercial,
the tax involved — on frozen meat — was nullified because tax measures on cold stores were not then within the
legislative grant to the City of Manila. In Lacson, the City of Bacolod taxed every admission ticket sold in the
moviehouses. And justification for this imposition was moored to the general welfare clause of the city charter. This Court
held the ordinance ultra vires for the reason that the authority to tax cannot be derived from the general welfare clause.
In Santos, the taxes in controversy were internal organs fees, meat inspection fees and corral fees, separate from the
slaughter or slaughterhouse fees. In annulling the taxes there questioned, this Court declared: "[W]hen the Council
ordained the payment of internal organs fees, meat inspection fees and corral fees, aside from the slaughter or
slaughterhouse fees, it overstepped the limits of its statutory grant [Sec. 1, C.A. 655]. Only one fee was allowed by that
law to be charged and that was slaughter or slaughterhouse fees."
In the cases cited then, the tax ordinances did not find plain and clear statutory prop. Such infirmity is not present here.
We, accordingly, rule that Ordinance No. 1, series of 1956, of the Municipality of Victorias, was promulgated not in the
exercise of the municipality's regulatory power but as a revenue measure — a tax on occupation or business. The
authority to impose such tax is backed by the express grant of power in Section 1 of Commonwealth Act 472.
2. Not that the disputed ordinance lacks the imprimatur of the Secretary of Finance required in paragraph 2, Section 4, of
Commonwealth Act 472. This legal provision necessitates such approval "[w]henever the rate of fixed municipal license
taxes on businesses not excepted in this Act or otherwise covered by the preceding paragraph and subject to the fixed
annual tax imposed in section one hundred eighty-two of the National Internal Revenue Law, is in excess of fifty pesos
per annum; . . . ."
The ordinance here challenged was recommended by the Provincial Board of Negros Occidental in its resolution (No.
1864) of October 26, 1956. 31 And, the Undersecretary of Finance in his letter to the municipal council of Victorias on
December 18, 1956 approved said ordinance. But considering that it is amendatory in nature, that approval was coupled
with the mandate that the ordinance "should take effect at the beginning of the ensuing calendar year [1957] pursuant to
Section 2309 of the Revised Administrative Code." 32
3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance in question because the national
government "had preempted it from entering the field of taxation of sugar centrals and sugar refineries." 33 Plaintiff seeks
refuge in Section 189 of the National Internal Revenue Code which subjects proprietors or operators of sugar centrals or
sugar refineries to percentage tax.
The implausibility of this position is at once apparent. We are not dealing here with percentage tax. Rather, we are
concerned with a tax specifically for operators of sugar centrals and sugar refineries. The rates imposed are based on
the maximum annual output capacity. Which is not a percentage. Because it is not a share. Nor is it a tax based on the
amount of the proceeds realized out of the sale of sugar, centrifugal or refined. 34
What can be said at most is that the national government has preempted the field of percentage taxation. Section 1 of
Commonwealth Act 472, while granting municipalities power to levy taxes, expressly removes from them the power to
exact "percentage taxes".
It is correct to say that preemption in the matter of taxation simply refers to an instance where the national government
elects to tax a particular area, impliedly withholding from the local government the delegated power to tax the same field.
This doctrine primarily rests upon the intention of Congress. 35 Conversely, should Congress allow municipal corporations
to cover fields of taxation it already occupies, then the doctrine of preemption will not apply.
In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically allows municipal councils to tax
persons engaged in "the same businesses or occupation" on which "fixed internal revenue privilege taxes" are "regularly
imposed by the National Government." With certain exceptions specified in Section 3 of the same statute. Our case does
not fall within the exceptions. It would therefore be futile to argue that Congress exclusively reserved to the national
government the right to impose the disputed taxes.
We rule that there is no preemption.
4. Petitioner advances the theory that the ordinance is excessive.
An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry.
Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or
confiscatory. 36 A rule which has gained acceptance is that factors relevant to such an inquiry are the municipal
conditions as a whole and the nature of the business made subject to imposition. 37
Plaintiff has however not sufficiently proven that, taking these factors together, the license taxes are unreasonable. The
presumption of validity subsists. For, plaintiff has limited itself to insisting that the amounts levied exceed the cost of
regulation and that the municipality has adequate funds for the alleged purposes as evidenced by the municipality's cash
surplus for the fiscal year ending 1956.
The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue ordinance. For,
"if the charge exceeds the expense of issuance of a license and costs of regulation, it is a tax." 38 And if it is, and it is
validly imposed, as in this case, "the rule that license fees for regulation must bear a reasonable relation to the expense
of the regulation has no application." 39
And then, a cash surplus alone cannot stop a municipality from enacting a revenue ordinance increasing license taxes in
anticipation of municipal needs. Discretion to determine the amount of revenue required for the needs of the municipality
is lodged with the municipal authorities. Again, judicial intervention steps in only when there is a flagrant, oppressive and
excessive abuse of power by said municipal authorities. 40
Not that defendant municipality was without reason. On February 27, 1940, the Secretary of Finance, later President,
Manuel A. Roxas, issued Provincial Circular 12-A. In that circular, the then Finance Secretary stated that his
"Department has reached the conclusion that a tax on the basis of one centavo for every picul of annual output capacity
of sugar centrals ... would be just and reasonable." At that time, the price of sugar was around P6.00 per picul. Sixteen
years later — 1956 — when Ordinance No. 1 was approved, the market quotation for export sugar ranged from P12.00
to P15.00 per picul. 41 And yet, since then the rate per output capacity of a sugar central in Ordinance No. 1 was merely
from one centavo to two centavos. There is a statement in the municipality's brief 42 that thereafter the price of sugar had
never gone below P16.00 per picul; instead it had gone up.
The reasonableness of the ordinance may not be disputed. It is not confiscatory.
There was misapprehension in the decision below in its statement that the increase of rates for refineries was 2,000%.
We should not overlook the fact that the original maximum rate covering refineries in Ordinance No. 18, series of 1947,
was P2,000.00; but that was only for a refinery with an output capacity of 90,000 or more sacks. Under Section 2(c) of
Ordinance No. 1, series of 1956, where the refineries have an output capacity of from 75,001 bags to 100,000 bags, the
tax remains at P2,000.00. From here on, the ordinance provides for ten more scales for the graduation of the tax
depending upon the output capacity (P3,000.00, P4,000.00, P5,000.00, P10,000.00, P15,000.00, P20,000.00,
P25,000.00, P30,000.00, P35,000.00 and P40,000.00). But it is only where a refinery has an output capacity of
1,750,001 or more bags that the present ordinance imposes a tax of P40,000.00. The happenstance that plaintiff's
refinery is in the last bracket calling upon it to pay P40,000.00 per annum does not make the ordinance in question
unreasonable.
Neither may we tag the ordinance with excessiveness if we consider the capital invested by plaintiff in both its sugar
central and sugar refinery and its annual income from both. Plaintiff's capital investment in the sugar central and sugar
refinery is more or less P26,000,000.00. 43 And here are its annual net income: for the year 1956 — P3,852,910; for the
year 1957 — P3,854,520; for the year 1958 — P7,230,493; for the year 1959 — P5,951,187; and for the year 1960 —
P7,809,250. 44 If these figures mean anything at all, they show that the ordinance in question is neither confiscatory nor
unjust and unreasonable.
5. Upon the averment that in the Municipality of Victorias plaintiff is the only operator of a sugar central and sugar
refinery, plaintiff now presses its argument that Ordinance No. 1, series of 1956, is discriminatory. The ordinance does
not single out Victorias as the only object of the ordinance. Said ordinance is made to apply to any sugar central or sugar
refinery which may happen to operate in the municipality. So it is, that the fact that plaintiff is actually the sole operator of
a sugar central and a sugar refinery does not make the ordinance discriminatory. Argument along the same lines was
rejected in Shell Co. of P.I., Ltd. vs. Vaño, 45 this Court holding that the circumstance "that there is no other person in the
locality who exercises" the occupation designated as installation manager "does not make the ordinance discriminatory
and hostile, inasmuch as it is and will be applicable to any person or firm who exercises such calling or occupation." And
in Ormoc Sugar Company, Inc. vs. Municipal Board of Ormoc City, 46 declaratory relief was sought to test the validity of a
municipal ordinance which provides a city tax of twenty centavos per picul of centrifugal sugar and one per centum on
the gross sale of its derivatives and by-products "produced by the Ormoc Sugar Company, Incorporated, or by any other
sugar mill in Ormoc City." Mr. Justice Enrique Fernando, delivering the opinion of this Court, declared that the ordinance
did not suffer "from a constitutional or statutory infirmity." And yet, in Ormoc, it is to be observed that Section 1 of the
ordinance spelled out Ormoc Sugar Company, Incorporated specifically by name. Not even the name of plaintiff herein
was ever mentioned in the ordinance now disputed.
No discrimination exists.
6. As infirm is plaintiff's stand that its business is not confined to the Municipality of Victorias. It suffices that plantiff
engages in a business or occupation subject to an exaction by the municipality — within the territorial boundaries of that
municipality. Plaintiff's sugar central and sugar refinery are located within the Municipality of Victorias. In this central and
refinery, plaintiff manufactures centrifugal sugar and refined sugar, respectively.
But plaintiff insists that plaintiff's sugar milling and refining operations are not wholly performed within the territorial limits
of Victorias. According to plaintiff, transportation of canes from plantation to the mill site, operation and maintenance of
telephone system, inspection of crop progress and other related activities, are conducted not only in defendant's
municipality but also in the municipalities of Cadiz, Manapla, Sagay and Saravia as well. 47 We fail to see the relevance
of these facts. Because, if we follow plaintiff's ratiocination, neither Victorias nor any of the municipalities just adverted to
would be able to impose the tax. One thing certain, of course, is that the tax is imposed upon the business of operating a
sugar central and a sugar refinery. And the situs of that business is precisely the Municipality of Victorias.
7. Plaintiff finally impleads double taxation. Its reason is that in computing the amount of taxes to be paid by the sugar
refinery the cost of the raw sugar coming from the sugar central is not deducted; ergo, plaintiff is taxed twice on the raw
sugar.
Double taxation has been otherwise described as "direct duplicate taxation." 48 For double taxation to exist, "the same
property must be taxed twice, when it should be taxed but once." 49 Double taxation has also been "defined as taxing the
same person twice by the same jurisdiction for the same thing." 50 As stated in Manila Motor Company, Inc. vs. Ciudad
de Manila, 51 there is double taxation "cuando la misma propiedad se sujeta a dos impuestos por la misma entidad o
Gobierno, para el mismo fin y durante el mismo periodo de tiempo."
With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double taxation does not
inspire assent. First. The two taxes cover two different objects. Section 1 of the ordinance taxes a person operating
sugar centrals or engaged in the manufacture of centrifugal sugar. While under Section 2, those taxed are the operators
of sugar refinery mills. One occupation or business is different from the other. Second. The disputed taxes are imposed
on occupation or business. Both taxes are not on sugar. The amount thereof depends on the annual output capacity of
the mills concerned, regardless of the actual sugar milled. Plaintiff's argument perhaps could make out a point if the
object of taxation here were the sugar it produces, not the business of producing it.
There is no double taxation.
For the reasons given —
The judgment under review is hereby reversed; and
Judgment is hereby rendered: (a) declaring valid and subsisting Ordinance No. 1, series of 1956, of the Municipality of
Victorias, Province of Negros Occidental; and (b) dismissing plaintiff's complaint as supplemented and amended. Costs
against plaintiff. So ordered.