G.R. No.

L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.

BENGZON, J.P., J.:

The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compañia de Seguros, La Union y El
Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a portion of the premiums on
insurance it has originally underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent portion of the risks insured. Said
reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by
the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability

simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks
ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered
from the original assured were to be paid for by the foreign reinsurers. The foreign
reinsurers further agreed, in consideration for managing or administering their affairs in
the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to
5% of the reinsurance premiums. Conflicts and/or differences between the parties
under the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty
Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or
pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of
Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on
the ceded reinsurance premiums, thus:

1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
 Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that
reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines
are not subject to withholding tax. Its protest was denied and it appealed to the Court
of Tax Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive
portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine

Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum
of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus
the statutory delinquency penalties thereon. With costs against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on the
reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here.

The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the
Philippines. The liability of the foreign reinsurers commenced simultaneously with the
liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers.
Entries made in such register bound the foreign resinsurers, localizing in the
Philippines the actual cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by
Section 259 of the Tax Code for the privilege of doing insurance business in the
Philippines were payable by the foreign reinsurers when the same were not
recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty
Co., Inc. an amount equivalent to 5% of the ceded premiums, in consideration for
administration and management by the latter of the affairs of the former in the
Philippines in regard to their reinsurance activities here. Disputes and differences
between the parties were subject to arbitration in the City of Manila. All the reinsurance
contracts, except that with Swiss Reinsurance Company, were signed by Philippine
Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same specifically provided
that its provision shall be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. 1 The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such
undertaking, as explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence, are subject
to corporate income tax.

The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An activity may occur outside the
place of business. Section 24 of the Tax Code does not require a foreign corporation to
engage in business in the Philippines in subjecting its income to tax. It suffices that the
activity creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within
the Philippines but it does not require that other kinds of income should not be
considered likewise.1äwphï1.ñët

The power to tax is an attribute of sovereignty. It is a power emanating from necessity.

It is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance
premiums in question were afforded protection by the government and the recipient
foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.

Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax,
but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its
agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that this question has already
been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the
amount actually remitted to the foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954,
no withholding tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. — In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. — All persons, corporations and general copartnerships

(compañias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income
of such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize
such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated
in determining the amount to be withheld. According, in computing the withholding tax
due on the reinsurance premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of
P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid
within 30 days from the date this judgement becomes final, there shall be collected a
surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month from
the date of delinquency to the date of payment, provided that the maximum amount
that may be collected as interest shall not exceed the amount corresponding to a
period of three (3) years. With costs againsts petitioner.

G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-

appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate
of Thomas Hanley, deceased, brought this action in the Court of First Instance of
Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal
Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance
tax on the estate of the deceased, and for the collection of interst thereon at the rate of
6 per cent per annum, computed from September 15, 1932, the date when the
aforesaid tax was [paid under protest. The defendant set up a counterclaim for
P1,191.27 alleged to be interest due on the tax in question and which was not included
in the original assessment. From the decision of the Court of First Instance of
Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim,
both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga,
Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and personal
properties. On june 14, 1922, proceedings for the probate of his will and the settlement
and distribution of his estate were begun in the Court of First Instance of Zamboanga.
The will was admitted to probate. Said will provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or
otherwise disposed of for a period of ten (10) years after my death, and that the same
be handled and managed by the executors, and proceeds thereof to be given to my
nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon,
Ireland, and that he be directed that the same be used only for the education of my
brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above
mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my
nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of
ther estate to appoint a trustee to administer the real properties which, under the will,
were to pass to Matthew Hanley ten years after the two executors named in the will,
was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond
on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and
the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal
Revenue, alleging that the estate left by the deceased at the time of his death
consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a
deduction of P480.81, assessed against the estate an inheritance tax in the amount of
P1,434.24 which, together with the penalties for deliquency in payment consisting of a
1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge
of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant
filed a motion in the testamentary proceedings pending before the Court of First
Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff
herein, be ordered to pay to the Government the said sum of P2,052.74. The motion
was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly
refunded suit would be brought for its recovery. The defendant overruled the plaintiff's
protest and refused to refund the said amount hausted, plaintiff went to court with the
result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his
instituted heir, Matthew Hanley, from the moment of the death of the former, and that
from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due
on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate
upon the death of the testator, and not, as it should have been held, upon the value
thereof at the expiration of the period of ten years after which, according to the
testator's will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the
estate subject to said tax, the amounts allowed by the court as compensation to the
"trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new
trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the
following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of
P1,191.27, representing part of the interest at the rate of 1 per cent per month from
April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance
tax assessed by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a)
When does the inheritance tax accrue and when must it be satisfied? (b) Should the
inheritance tax be computed on the basis of the value of the estate at the time of the
testator's death, or on its value ten years later? (c) In determining the net value of the
estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What
law governs the case at bar? Should the provisions of Act No. 3606 favorable to the
tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of
the inheritance tax? If so, should the additional interest claimed by the defendant in his
appeal be paid by the estate? Other points of incidental importance, raised by the
parties in their briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same.
Section 1536 as amended, of the Administrative Code, imposes the tax upon "every
transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in
anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission
or the transfer or devolution of property of a decedent, made effective by his death. (61
C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed
to, receive, or take property by or under a will or the intestacy law, or deed, grant, or
gift to become operative at or after death. Acording to article 657 of the Civil Code, "the
rights to the succession of a person are transmitted from the moment of his death." "In
other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the
property of the deceased ancestor. The property belongs to the heirs at the moment of
the death of the ancestor as completely as if the ancestor had executed and delivered
to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See
also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13;
Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs.
Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First
Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff,
however, asserts that while article 657 of the Civil Code is applicable to testate as well
as intestate succession, it operates only in so far as forced heirs are concerned. But
the language of article 657 of the Civil Code is broad and makes no distinction
between different classes of heirs. That article does not speak of forced heirs; it does
not even use the word "heir". It speaks of the rights of succession and the transmission
thereof from the moment of death. The provision of section 625 of the Code of Civil
Procedure regarding the authentication and probate of a will as a necessary condition
to effect transmission of property does not affect the general rule laid down in article
657 of the Civil Code. The authentication of a will implies its due execution but once
probated and allowed the transmission is effective as of the death of the testator in
accordance with article 657 of the Civil Code. Whatever may be the time when actual
transmission of the inheritance takes place, succession takes place in any event at the
moment of the decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually receive such inheritance.
"Poco importa", says Manresa commenting on article 657 of the Civil Code, "que
desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion
de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la
adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989,
que debe considerarse como complemento del presente." (5 Manresa, 305; see also,
art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the
inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow
that the obligation to pay the tax arose as of the date. The time for the payment on
inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as
amended by Act No. 3031, in relation to section 1543 of the same Code. The two
sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall
not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is
greater than that paid by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into
possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor;
but if judicial testamentary or intestate proceedings shall be instituted prior to the
expiration of said period, the payment shall be made by the executor or administrator
before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of
twelve per centum per annum shall be added as part of the tax; and to the tax and
interest due and unpaid within ten days after the date of notice and demand thereof by
the collector, there shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector

of Internal Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of
section 1543, should read "fideicommissary" or "cestui que trust". There was an
obvious mistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section
1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee.
Under the subsection, the tax should have been paid before the delivery of the
properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real
properties are concerned, did not and could not legally pass to the instituted heir,
Matthew Hanley, until after the expiration of ten years from the death of the testator on
May 27, 1922 and, that the inheritance tax should be based on the value of the estate
in 1932, or ten years after the testator's death. The plaintiff introduced evidence
tending to show that in 1932 the real properties in question had a reasonable value of
only P5,787. This amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an inheritance tax
which, excluding deductions, interest and surcharge, would amount only to about
P169.52.

If death is the generating source from which the power of the estate to impose
inheritance taxes takes its being and if, upon the death of the decedent, succession
takes place and the right of the estate to tax vests instantly, the tax should be
measured by the vlaue of the estate as it stood at the time of the decedent's death,
regardless of any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and
Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20
Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax
accrues at the moment of death, and hence is ordinarily measured as to any
beneficiary by the value at that time of such property as passes to him. Subsequent
appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and
Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation
is postponed until the estate vests in possession or the contingency is settled. This rule
was formerly followed in New York and has been adopted in Illinois, Minnesota,
Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means
entirely satisfactory either to the estate or to those interested in the property (26 R. C.
L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon
examination of cases and authorities that New York has varied and now requires the
immediate appraisal of the postponed estate at its clear market value and the payment
forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt,
172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769;
Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E.,
958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs.
Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.)
California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by
inheritance is taxable at the time of the predecessor's death, notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary,
and the tax measured by the value of the property transmitted at that time regardless
of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in
arriving at the net value of the estate on which the inheritance tax is to be computed
(sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the
trial court allowed a deduction of only P480.81. This sum represents the expenses and
disbursements of the executors until March 10, 1924, among which were their fees and
the proven debts of the deceased. The plaintiff contends that the compensation and
fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL,
NN, OO), should also be deducted under section 1539 of the Revised Administrative
Code which provides, in part, as follows: "In order to determine the net sum which must
bear the tax, when an inheritance is concerned, there shall be deducted, in case of a
resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney
vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that
the compensation due him may lawfully be deducted in arriving at the net value of the
estate subject to tax. There is no statute in the Philippines which requires trustees'
commissions to be deducted in determining the net value of the estate subject to
inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been
created, it does not appear that the testator intended that the duties of his executors
and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893;
175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in
paragraph 5 of his will, the testator expressed the desire that his real estate be handled
and managed by his executors until the expiration of the period of ten years therein
provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in
State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was
said: ". . . The compensation of a trustee, earned, not in the administration of the
estate, but in the management thereof for the benefit of the legatees or devises, does
not come properly within the class or reason for exempting administration expenses. . .
. Service rendered in that behalf have no reference to closing the estate for the
purpose of a distribution thereof to those entitled to it, and are not required or essential
to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of
that here before the court, are created for the the benefit of those to whom the property
ultimately passes, are of voluntary creation, and intended for the preservation of the
estate. No sound reason is given to support the contention that such expenses should
be taken into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of
Thomas Hanley under the provisions of section 1544 of the Revised Administrative
Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on
January 1, 1930. It, therefore, was not the law in force when the testator died on May
27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act
No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time
of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p.
3461). The taxpayer can not foresee and ought not to be required to guess the
outcome of pending measures. Of course, a tax statute may be made retroactive in its
operation. Liability for taxes under retroactive legislation has been "one of the incidents
of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.)
But legislative intent that a tax statute should operate retroactively should be perfectly
clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings
Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish,
247 U. S., 221.) "A statute should be considered as prospective in its operation,
whether it enacts, amends, or repeals an inheritance tax, unless the language of the
statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C.
J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the
Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the
Revised Administrative Code, applicable to all estates the inheritance taxes due from
which have not been paid, Act No. 3606 itself contains no provisions indicating
legislative intent to give it retroactive effect. No such effect can begiven the statute by
this court.

The defendant Collector of Internal Revenue maintains, however, that certain

provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No.
3031, that said provisions are penal in nature and, therefore, should operate
retroactively in conformity with the provisions of article 22 of the Revised Penal Code.
This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under
Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on
both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is
allowed twenty days from notice and demand by rthe Collector of Internal Revenue
within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense

committed against the state which, under the Constitution, the Executive has the power
to pardon. In common use, however, this sense has been enlarged to include within
the term "penal statutes" all status which command or prohibit certain acts, and
establish penalties for their violation, and even those which, without expressly
prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110).
Revenue laws, generally, which impose taxes collected by the means ordinarily
resorted to for the collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs.
Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed.,
910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25
Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar,
and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive
effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time
and the tax may be paid within another given time. As stated by this court, "the mere
failure to pay one's tax does not render one delinqent until and unless the entire period
has eplased within which the taxpayer is authorized by law to make such payment
without being subjected to the payment of penalties for fasilure to pay his taxes within
the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax
before the delivery of the decedent's property to the trustee. Stated otherwise, the
defendant contends that delivery to the trustee was delivery to the cestui que trust, the
beneficiery in this case, within the meaning of the first paragraph of subsection (b) of
section 1544 of the Revised Administrative Code. This contention is well taken and is
sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in
conformity with the wishes of the testator as expressed in his will. It is true that the
word "trust" is not mentioned or used in the will but the intention to create one is clear.
No particular or technical words are required to create a testamentary trust (69 C. J., p.
711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In
fact, the use of these two words is not conclusive on the question that a trust is created
(69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his
intention so to do by using language sufficient to separate the legal from the equitable
estate, and with sufficient certainty designate the beneficiaries, their interest in the
ttrust, the purpose or object of the trust, and the property or subject matter thereof.
Stated otherwise, to constitute a valid testamentary trust there must be a concurrence
of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a
certain or ascertain object; statutes in some jurisdictions expressly or in effect so
providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to
create a trust. He ordered in his will that certain of his properties be kept together
undisposed during a fixed period, for a stated purpose. The probate court certainly
exercised sound judgment in appointment a trustee to carry into effect the provisions of
the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in
him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the
estate of the deceased was placed in trust did not remove it from the operation of our
inheritance tax laws or exempt it from the payment of the inheritance tax. The
corresponding inheritance tax should have been paid on or before March 10, 1924, to
escape the penalties of the laws. This is so for the reason already stated that the
delivery of the estate to the trustee was in esse delivery of the same estate to
the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent
for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law.
ed., 1086). When Moore accepted the trust and took possesson of the trust estate he
thereby admitted that the estate belonged not to him but to his cestui que
trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not
acquire any beneficial interest in the estate. He took such legal estate only as the
proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon
the fulfillment of the testator's wishes. The estate then vested absolutely in the
beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have
reached. Were we to hold that the payment of the tax could be postponed or delayed
by the creation of a trust of the type at hand, the result would be plainly disastrous.
Testators may provide, as Thomas Hanley has provided, that their estates be not
delivered to their beneficiaries until after the lapse of a certain period of time. In the
case at bar, the period is ten years. In other cases, the trust may last for fifty years, or
for a longer period which does not offend the rule against petuities. The collection of
the tax would then be left to the will of a private individual. The mere suggestion of this
result is a sufficient warning against the accpetance of the essential to the very
exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022;
Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7
Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S.,
194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge,
11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the government but upon the
necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For
this reason, no one is allowed to object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S.,
264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by
construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S.,
124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so
loose a construction as to permit evasions on merely fanciful and insubstantial
distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth,
2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of
Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300;
Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs.
Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax evasion.
Construed this way, the statute, without resulting in injustice to the taxpayer, becomes
fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system.
Thus, no court is allowed to grant injunction to restrain the collection of any internal
revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil.,
252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion
to demonstrate trenchment adherence to this policy of the law. It held that "the fact that
on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they
were prevented from praying their internal revenue taxes on time and by mutual
agreement closed their homes and stores and remained therein, does not authorize
the Collector of Internal Revenue to extend the time prescribed for the payment of the
taxes or to accept them without the additional penalty of twenty five per cent."
(Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . .
that the modes adopted to enforce the taxes levied should be interfered with as little as
possible. Any delay in the proceedings of the officers, upon whom the duty is
developed of collecting the taxes, may derange the operations of government, and
thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20
Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment
of inheritance tax and, therefore, liable for the payment of interest and surcharge
provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore
became trustee. The interest due should be computed from that date and it is error on
the part of the defendant to compute it one month later. The provisions cases is
mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of
Internal Revenuen or this court may remit or decrease such interest, no matter how
heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and
demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per
centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue upon Moore in a
communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of
the tax and interest was November 30, 1931. November 30 being an official holiday,
the tenth day fell on December 1, 1931. As the tax and interest due were not paid on
that date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error
assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the
estate of Thomas Hanley inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and
personal properties worth P1,465, or a total of P29,385. Deducting from this amount
the sum of P480.81, representing allowable deductions under secftion 1539 of the
Revised Administrative Code, we have P28,904.19 as the net value of the estate
subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised
Administrative Code, should be imposed at the rate of one per centum upon the first
ten thousand pesos and two per centum upon the amount by which the share exceed
thirty thousand pesos, plus an additional two hundred per centum. One per centum of
ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to
these two sums an additional two hundred per centum, or P965.16, we have as
primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section
1544 of the Revised Administrative Code. First should be added P1,465.31 which
stands for interest at the rate of twelve per centum per annum from March 10, 1924,
the date of delinquency, to September 15, 1932, the date of payment under protest, a
period covering 8 years, 6 months and 5 days. To the tax and interest thus computed
should be added the sum of P724.88, representing a surhcarge of 25 per cent on both
the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh.
29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is
legally due from the estate. This last sum is P390.42 more than the amount demanded
by the defendant in his counterclaim. But, as we cannot give the defendant more than
what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the
amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff
in both instances. So ordered.

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications,
and DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by
Republic Act 2631,2 which provides as follows:

To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to September thirty every year the printing
and issue of semi-postal stamps of different denominations with face value showing
the regular postage charge plus the additional amount of five centavos for the said
purpose, and during the said period, no mail matter shall be accepted in the mails
unless it bears such semi-postal stamps: Provided, That no such additional charge of
five centavos shall be imposed on newspapers. The additional proceeds realized from
the sale of the semi-postal stamps shall constitute a special fund and be deposited with
the National Treasury to be expended by the Philippine Tuberculosis Society in
carrying out its noble work to prevent and eradicate tuberculosis.

The respondent Postmaster General, in implementation of the law, thereafter issued

four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9
(August 28, 1958), and 10 (July 15, 1960). All these administrative orders were issued
with the approval of the respondent Secretary of Public Works and Communications.

The pertinent portions of Adm. Order 3 read as follows:

Such semi-postal stamps could not be made available during the period from August
19 to September 30, 1957, for lack of time. However, two denominations of such
stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will soon be
released for use by the public on their mails to be posted during the same period
starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September 30 each year starting in 1958, no mail
matter of whatever class, and whether domestic or foreign, posted at any Philippine
Post Office and addressed for delivery in this country or abroad, shall be accepted for
mailing unless it bears at least one such semi-postal stamp showing the additional
value of five centavos intended for the Philippine Tuberculosis Society.

In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one such
semi-postal stamp if posted during the period above stated starting with the year 1958,
in addition to being charged the usual postage prescribed by existing regulations. In
the case of business reply envelopes and cards mailed during said period, such stamp
should be collected from the addressees at the time of delivery. Mails entitled to
franking privilege like those from the office of the President, members of Congress,
and other offices to which such privilege has been granted, shall each also bear one
such semi-postal stamp if posted during the said period.

Mails posted during the said period starting in 1958, which are found in street or post-
office mail boxes without the required semi-postal stamp, shall be returned to the
sender, if known, with a notation calling for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as nonmailable and forwarded to the Dead
Letter Office for proper disposition.

Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:

In the case of the following categories of mail matter and mails entitled to franking
privilege which are not exempted from the payment of the five centavos intended for
the Philippine Tuberculosis Society, such extra charge may be collected in cash, for
which official receipt (General Form No. 13, A) shall be issued, instead of affixing the
semi-postal stamp in the manner hereinafter indicated:

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.

G.R. No. 172509 February 4, 2015

CHINA BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, CJ:

This Rule 45 Petition1 requires this Court to address the question of prescription of the
government's right to collect taxes. Petitioner China Banking Corporation (CBC) assails
the Decision2 and Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA En
Banc Case No. 109. The CTA En Banc affirmed the Decision4 in CTA Case No. 6379
of the CTA Second Division, which had also affirmed the validity of Assessment No.
FAS-5-82/85-89-000586 and FAS-5-86-89-00587. The Assessment required petitioner
CBC to pay the amount of ₱11,383,165.50, plus increments accruing thereto, as
deficiency documentary stamp tax (DST) for the taxable years 1982 to 1986.

FACTS

Petitioner CBC is a universal bank duly organized and existing under the laws of the
Philippines. For the taxable years 1982 to 1986, CBC was engaged in transactions
involving sales of foreign exchange to the Central Bank of the Philippines (now Bangko
Sentral ng Pilipinas), commonly known as SWAP transactions.5 Petitioner did not file
tax returns or pay tax on the SWAP transactions for those taxable years.

On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal
Revenue (BIR) finding CBC liable for deficiency DST on the sales of foreign bills of
exchangeto the Central Bank. The deficiency DST was computed as follows:

Deficiency Documentary Stamp Tax

Amount
For the years 1982 to 1985 ₱8,280,696.00
For calendar year 1986 ₱2,481,975.60
Add : Surcharge ₱620,493.90 ₱3,102.469.50

₱11 ,383,165.50
6

On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to
the BIR. CBC raised the following defenses: (1) double taxation, as the bank had
previously paidthe DST on all its transactions involving sales of foreign bills of
exchange to the Central Bank; (2) absence of liability, as the liability for the DST in a
sale of foreign exchange through telegraphic transfers to the Central Bank falls on the
buyer ―in this case, the Central Bank; (3) due process violation, as the bank’s records
were never formally examined by the BIR examiners; (4) validity of the assessment, as
it did not include the factual basis therefore; (5) exemption, as neither the taxexempt
entity nor the other party was liable for the payment of DST before the effectivity of
Presidential Decree Nos. (PD) 1177 and 1931 for the years 1982 to 1986.7 In the
protest, the taxpayer requested a reinvestigation so as to substantiate its assertions. 8

On 6 December 2001, more than 12 years after the filing of the protest, the
Commissioner of Internal Revenue (CIR) rendered a decision reiterating the deficiency
DST assessment and ordered the payment thereof plus increments within 30 days
from receipt of the Decision.9

On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002,
the CIR filed an Answer with a demand for CBC to pay the assessed DST. 10

On 23 February 2005, and after trial on the merits, the CTA Second Division denied
the Petition of CBC. The CTA ruled that a SWAP arrangement should be treated as a
telegraphic transfer subject to documentary stamp tax.11
On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was
denied in a Resolution dated 14 July 2005.

On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court,
however, dismissed the Petition for Review in a Decision dated 1 December 2005.
CBC filed a Motion for Reconsideration on 21 December 2005, but it was deniedin a 20
March 2006 Resolution.

The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the
arguments it raised at the CTA level and invoking for the first time the argument of
prescription. Petitioner CBC states that the government has three years from 19 April
1989, the date the former received the assessment of the CIR, to collect the tax. Within
that time frame, however, neither a warrant of distraint or levy was issued, nor a
collection case filed in court.

On 17 October 2006, respondentCIR submitted its Comment in compliance with the

Court’s Resolution dated 26 June 2006.12 The Comment did not have any discussion
on the question of prescription.

On 21 February 2007, the Court issued a Resolution directing the parties to file their
respective Memoranda. Petitioner CBC filed its Memorandum13 on 26 April 2007. The
CIR, on the other hand, filed on 17 April 2007 a Manifestation stating thatit was
adopting the allegations and authorities in its Comment in lieu of the required
Memorandum.14

ISSUE

Given the facts and the arguments raised in this case, the resolution of this case
hinges on this issue: whether the right of the BIR to collect the assessed DST from
CBC isbarred by prescription.15

RULING OF THE COURT

We grant the Petition on the ground thatthe right of the BIR to collect the assessed
DST is barred by the statute of limitations.

Prescription Has Set In.

To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency
DST on 19 April 1989, whenthe applicable rule was Section 319(c) of the National
Internal Revenue Code of 1977, as amended.16 In that provision, the time limit for the
government to collect the assessed tax is set at three years, to be reckoned from the
date when the BIR mails/releases/sends the assessment notice to the taxpayer.
Further, Section 319(c) states that the assessed tax must be collected by distraint or
levy and/or court proceeding withinthe three-year period.

With these rules in mind, we shall now determine whether the claim of the BIR is
barred by time. In this case, the records do not show when the assessment notice was
mailed, released or sent to CBC. Nevertheless, the latest possible date that the BIR
could have released, mailed orsent the assessment notice was on the same date that
CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning
date, the BIR had three years to collect the assessed DST. However, the records of
this case show that there was neither a warrant of distraint or levy servedon CBC's
properties nor a collection case filed in court by the BIR within the three-year period.
The attempt of the BIR to collect the tax through its Answer with a demand for CBC to
pay the assessed DST in the CTA on 11 March 2002 did not comply with Section
319(c) ofthe 1977 Tax Code, as amended. The demand was made almost thirteen
years from the date from which the prescriptive period is to be reckoned. Thus, the
attempt to collect the tax was made way beyond the three-year prescriptive period.

The BIR’s Answer in the case filed before the CTA could not, by any means, have
qualified as a collection case as required by law. Under the rule prevailing at the time
the BIR filed itsAnswer, the regular courts, and not the CTA, had jurisdiction over
judicialactions for collection of internal revenue taxes. It was only on 23 April 2004,
when Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was
expanded to include, among others, original jurisdiction over collection cases in which
the principal amount involved is one million pesos or more. Consequently, the claim of
the CIR for deficiency DST from petitioner is forever lost, as it is now barred by time.
This Court has no other option but to dismiss the present case.

The running of the statute of limitations was not suspended by the request for
reinvestigation.

The fact that the taxpayer in this case may have requested a reinvestigation did not toll
the running of the three-year prescriptive period. Section 320 of the 1977 Tax Code
states:

Sec. 320. Suspension of running of statute.—The running of the statute of limitations

provided in Sections 318 or 319 on the making of assessment and the beginning of
distraint or levy or a proceeding in court for collection, in respect of any deficiency,
shall be suspended for the period during which the Commissioner is prohibited from
making the assessment or beginning distraint or levy or a proceeding in court and for
sixty days thereafter; when the taxpayer requests for a re-investigation which is
granted by the Commissioner;when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or collected:
Provided, That if the taxpayer informs the Commissioner of any change in address, the
running of the statute of limitations will not be suspended; when the warrant of distraint
and levy is duly served upon the taxpayer, his authorized representative, or a member
of his household with sufficient discretion, and no property could be located; and when
the taxpayer is out of the Philippines. (Emphasis supplied)

The provision is clear. A request for reinvestigation alone will not suspend the statute
of limitations. Two things must concur: there must be a request for reinvestigation and
the CIR must have granted it. BPI v. Commissioner of Internal Revenue18 emphasized
this rule by stating:

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested

for a thorough reinvestigation of the assessment against him and placed at the
disposal of the Collector of Internal Revenue all the [evidence] he had for such
purpose; yet, the Collector ignored the request, and the records and documents were
not at all examined. Considering the given facts, this Court pronounced that—

x x x. The act of requesting a reinvestigation alone does not suspend the period. The
request should first be granted, in order to effect suspension. (Collector v. Suyoc
Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector
gaveappellee until April 1, 1949, within which to submit his evidence, which the latter
did one day before. There were no impediments on the part of the Collector to file the
collection case from April 1, 1949 x x x.
In Republic of the Philippines v. Acebedo, this Court similarly found that —

. . . [T]he defendant, after receiving the assessment notice of September 24, 1949,
asked for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There is no
evidence that this request was considered or acted upon. In fact, on October 23, 1950
the then Collector of Internal Revenue issued a warrant of distraint andlevy for the full
amount of the assessment (Exh. "D"), but there was follow-up of this warrant.
Consequently, the request for reinvestigation did not suspend the running of the period
for filing an action for collection. (Emphasis in the original)

The Court went on to declare thatthe burden of proof that the request for
reinvestigation had been actually granted shall be on the CIR. Such grant may be
expressed in its communications with the taxpayer or implied from the action of the
CIR orhis authorized representative in response to the request for reinvestigation.

There is nothing in the records of this case which indicates, expressly or impliedly, that
the CIR had granted the request for reinvestigation filed by BPI. What is reflected in the
records is the piercing silence and inaction of the CIR on the request for
reinvestigation, as he considered BPI's letters of protest to be.

In the present case, there is no showing from the records that the CIR ever granted the
request for reinvestigation filed by CBC. That being the case, it cannot be said that the
running of the three-year prescriptive period was effectively suspended.

Failure to raise prescription at the administrative level/lower court as a defense is of no

moment.

When the pleadings or the evidence on record show that the claim is barred by
prescription, the court must dismiss the claim even if prescription is not raised as a
defense.

We note that petitioner has raised the issue of prescription for the first time only before
this Court.While we are mindful of the established rule of remedial law that the defense
of prescription must be raised at the trial court that has also been applied for tax
cases.19 Thus, as a rule, the failure to raise the defense of prescription at the
administrative level prevents the taxpayer from raising it at the appeal stage.

This rule, however, is not absolute.

The facts of the present case are substantially identical to those in the 2014 case,
Bank of the Philippine Islands (BPI) v. Commissioner of Internal Revenue.20 In that
case, petitioner received an assessment notice from the BIR for deficiency DST based
on petitioner’s SWAP transactions for the year 1985 on 16 June 1989. On 23 June
1989, BPI, through its counsel, filed a protest requesting the reinvestigation and/or
reconsideration of the assessment for lack of legal or factual bases. Almost ten years
later, the CIR, in a letter dated 4 August 1998, deniedthe protest. On 4 January 1999,
BPI filed a Petition for Review with the CTA. On 23 February 1999,the CIR filed an
Answer with a demand for BPI to pay the assessed DST. It was only when the case
ultimately reached this Court that the issue of prescription was brought up.
Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax
due to prescription. Basing its ruling on Section 1, Rule 9 of the Rules of Court and on
jurisprudence, the Court held as follows:
In a Resolution dated 5 August 2013, the Court, through the Third Division, found that
the assailed tax assessment may be invalidated because the statute of limitations on
the collection of the alleged deficiency DST had already expired, conformably with
Section 1, Rule 9 of the Rules of Court and the Bank of the Philippine Islands v.
Commissioner of Internal Revenue decision. However, to afford due process, the Court
required both BPI and CIR to submit their respective comments on the issue of
prescription.

Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues
that the issue of prescription cannot be raised for the first time on appeal. The CIR
further alleges that even assuming that the issue of prescription can be raised, the
protest letter interrupted the prescriptive period to collect the assessed DST, unlike in
the Bank of the Philippine Islands case. x x x x

We deny the right of the BIR to collect the assessed DST on the ground of prescription.
Section 1, Rule 9 of the Rules of Court expressly provides that:

Section 1. Defenses and objections not pleaded. - Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived. However,
when it appears from the pleadings or the evidence on record that the court has no
jurisdiction over the subject matter, that there is another action pending between the
same parties for the same cause, or that the action is barred by prior judgment or by
the statute of limitations, the court shall dismiss the claim.

If the pleadings or the evidence on record show that the claim is barred by prescription,
the court is mandated to dismiss the claim even if prescription is not raised as a
defense.In Heirs of Valientes v. Ramas,we ruled that the CA may motu propriodismiss
the case on the ground of prescription despite failure to raise this ground on appeal.
The court is imbued with sufficient discretion to review matters, not otherwise assigned
as errors on appeal, if it finds that their consideration is necessary in arriving at a
complete and just resolution of the case. More so, when the provisions on prescription
were enacted to benefit and protect taxpayers from investigation after a reasonable
period of time.

Thus, we proceed to determine whether the period to collect the assessed DST for the
year 1985 has prescribed.

To determine prescription, what is essential only is that the facts demonstrating the
lapse of the prescriptive period were sufficiently and satisfactorily apparent on the
record either in the allegations of the plaintiff’s complaint, or otherwise established by
the evidence. Under the then applicable Section 319(c) [now, 222(c)] of the National
Internal Revenue Code (NIRC) of 1977, as amended, any internal revenue tax which
has been assessed within the period of limitation may be collected by distraint or levy,
and/or court proceeding within three years following the assessment of the tax. The
assessment of the tax is deemed made and the three-year period for collection of the
assessed tax begins to run on the date the assessment notice had been released,
mailed or sent by the BIR to the taxpayer.

In the present case, although there was no allegation as to when the assessment
notice had been released, mailed or sent to BPI, still, the latest date that the BIR could
have released, mailed or sent the assessment notice was on the date BPI received the
same on 16 June 1989. Counting the three-year prescriptive period from 16 June
1989, the BIR had until 15 June 1992 to collect the assessed DST.But despite the
lapse of 15 June 1992, the evidence established that there was no warrant of distraint
or levy served on BPI’s properties, or any judicial proceedings initiated by the BIR.

The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA
on 23 February 1999, which was several years beyond the three-year prescriptive
period. However, the BIR’s answer in the CTA was not the collection case
contemplated by the law. Before 2004 or the year Republic Act No. 9282 took effect,
the judicial action to collect internal revenue taxes fell under the jurisdiction of the
regular trial courts, and not the CTA. Evidently, prescription has set in to bar the
collection of the assessed DST. (Emphasis supplied)

BPI thus provides an exception to the rule against raising the defense of prescription
for the first timeon appeal: the exception arises when the pleadings or the evidence on
record show that the claim is barred by prescription.

In this case, the fact that the claim of the government is time-barred is a matter of
record. As can be seen from the previous discussion on the determination of the
prescription of the right of the government to claim deficiency DST, the conclusion that
prescription has set in was arrived at using the evidence on record. The date of receipt
of the assessment notice was not disputed, and the date of the attempt to collect was
determined by merely checking the records as to when the Answer of the CIR
containing the demand to pay the tax was filed.

Estoppel or waiver prevents the government from invoking the rule against raising the
issue of prescription for the first time on appeal.

In this case, petitioner may have raised the question of prescription only on appeal to
this Court. The BIR could have crushed the defense by the mere invocation of the rule
against setting up the defense of prescription only at the appeal stage. The
government, however, failed to do so. On the contrary, the BIR was silent despite
having the opportunity to invoke the bar against the issue of prescription. It is worthy of
note that the Court ordered the BIR to file a Comment. The government, however, did
not offer any argument in its Comment about the issue of prescription, even if petitioner
raised it in the latter’s Petition. It merely fell silent on the issue. It was given another
opportunity to meetthe challenge when this Court ordered both parties to file their
respective memoranda. The CIR, however, merely filed a Manifestation thatit would no
longer be filing a Memorandum and, in lieu thereof,it would be merely adopting the
arguments raised in its Comment. Its silence spoke loudly of its intent to waive its right
to object to the argument of prescription.

We are mindful of the rule in taxation that estoppeldoes not prevent the government
from collecting taxes; it is not bound by the mistake or negligence of its agents. The
rule isbased on the political law concept "the king can do no wrong,"21 which likens a
state to a king: it does not commit mistakes, and it does not sleep on its rights. The
analogy fosters inequality between the taxpayer and the government, with the balance
tilting in favor of the latter. This concept finds justification in the theory and reality that
government is necessary, and it must therefore collect taxes if it is to survive. Thus, the
mistake or negligence of government officials should not bind the state, lest it bring
harm to the government and ultimately the people, in whom sovereignty resides.22

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

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

CONCLUSION

Inasmuch as the government's claim for deficiency DST is barred by prescription, it is

no longer necessary to dwell on the validity of the assessment.

WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision
dated 1 December 2005 and its Resolution dated 20 March 2006 in CTA EB Case No.
109 are hereby REVERSED and SET ASIDE. A new ruling is entered DENYING
respondent's claim for deficiency DST in the amount of ₱11,383, 165.50.

SO ORDERED.

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.

PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the
Central Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L.
Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City
Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax
Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose
Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros Reyes v.
City Assessor of Manila" upholding the classification and assessments made by the
City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land
situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said tenants were paying monthly rentals not
exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the
National Legislature enacted Republic Act No. 6359 prohibiting for one year from its
effectivity, an increase in monthly rentals of dwelling units or of lands on which
another's dwelling is located, where such rentals do not exceed three hundred pesos
(P300.00) a month but allowing an increase in rent by not more than 10% thereafter.
The said Act also suspended paragraph (1) of Article 1673 of the Civil Code for two
years from its effectivity thereby disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree
No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly
rentals below P300.00 and by indefinitely suspending the aforementioned provision of
the Civil Code, excepting leases with a definite period. Consequently, the Reyeses,
petitioners herein, were precluded from raising the rentals and from ejecting the
tenants. In 1973, respondent City Assessor of Manila re-classified and reassessed the
value of the subject properties based on the schedule of market values duly reviewed
by the Secretary of Finance. The revision, as expected, entailed an increase in the
corresponding tax rates prompting petitioners to file a Memorandum of Disagreement
with the Board of Tax Assessment Appeals. They averred that the reassessments
made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which
the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals,
however, considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete
evidence which could overcome the presumptive regularity of the classification and
assessments appear to be in accordance with the base schedule of market values and
of the base schedule of building unit values, as approved by the Secretary of Finance,
the cases should be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals.1âwphi1 They

submitted, among others, the summary of the yearly rentals to show the income
derived from the properties. Respondent City Assessor, on the other hand, submitted
three (3) deeds of sale showing the different market values of the real property situated
in the same vicinity where the subject properties of petitioners are located. To better
appreciate the locational and physical features of the land, the Board of Hearing
Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the
owners nor their authorized representatives were present during the said ocular
inspection despite proper notices served them. It was found that certain parcels of land
were below street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the
lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and
PD-3824 is affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1)
PD-266, the appealed Decision is modified by allowing a 20% reduction in their
respective market values and applying therein the assessment level of 30% to arrive at
the corresponding assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES

APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties
in question. Petitioners maintain that the "Income Approach" method would have been
more realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on
the market value of the properties affected, respondent Assessor of the City of Manila
unlawfully and unjustifiably set increased new assessed values at levels so high and
successive that the resulting annual real estate taxes would admittedly exceed the sum
total of the yearly rentals paid or payable by the dweller tenants under P.D. 20. Hence,
petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted,
inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its
decision that the income approach is used in determining land values in some
vicinities, it maintains that when income is affected by some sort of price control, the
same is rejected in the consideration and study of land values as in the case of
properties affected by the Rent Control Law for they do not project the true market
value in the open market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of the properties
predicated upon prices paid in actual, market transactions would be a uniform and a
more credible standards to use especially in case of mass appraisal of properties
(Ibid.). Otherwise stated, public respondents would have this Court completely ignore
the effects of the restrictions of P.D. No. 20 on the market value of properties within its
coverage. In any event, it is unquestionable that both the "Comparable Sales
Approach" and the "Income Approach" are generally acceptable methods of appraisal
for taxation purposes (The Law on Transfer and Business Taxation by Hector S. De
Leon, 1988 Edition). However, it is conceded that the propriety of one as against the
other would of course depend on several factors. Hence, as early as 1923 in the case
of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it
has been stressed that the assessors, in finding the value of the property, have to
consider all the circumstances and elements of value and must exercise a prudent
discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation
must not only be uniform, but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of
property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34
Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive
aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the
Philippines", p. 221, Second Edition). Thus, the need to examine closely and determine
the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the
person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the
powers of government. But for all its plenitude the power to tax is not unconfined as
there are restrictions. Adversely effecting as it does property rights, both the due
process and equal protection clauses of the Constitution may properly be invoked to
invalidate in appropriate cases a revenue measure. If it were otherwise, there would be
truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the
power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not
the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v.
Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can
be shown to amount to confiscation of property. That would be a clear abuse of power
(Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions
not being different both in the privileges conferred and the liabilities imposed (Ibid., p.
662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that
the first Fundamental Principle to guide the appraisal and assessment of real property
for taxation purposes is that the property must be "appraised at its current and fair
market value."

By no strength of the imagination can the market value of properties covered by P.D.
No. 20 be equated with the market value of properties not so covered. The former has
naturally a much lesser market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by the
public respondents, namely: (1) that the sale must represent a bonafide arm's length
transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of
judicial notice that for properties covered by P.D. 20 especially during the time in
question, there were hardly any willing buyers. As a general rule, there were no takers
so that there can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither can the
given circumstances be nonchalantly dismissed by public respondents as imposed
under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more
convincingly demonstrated by the fact that the law has existed for around twenty (20)
years with no end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, such collection should be made in accordance with
law as any arbitrariness will negate the very reason for government itself It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158
SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20)
under the principle of social justice should not now be penalized by the same
government by the imposition of excessive taxes petitioners can ill afford and
eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach

would amount to only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of
public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of
Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a
new assessment by the income approach method to guarantee a fairer and more
realistic basis of computation (Rollo, p. 71).

SO ORDERED.

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and
instill health consciousness among them.

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the
needs of the underprivileged sick, elderly, disabled, women, and children. The State
shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its health care programs pay
an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by its duly licensed physicians, specialists and
other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent

petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of ₱224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on

petitioner’s health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As

respondent did not act on the protest, petitioner filed a petition for review in the Court
of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force
and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioner’s health care agreement
was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care
agreement was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered petitioner to desist from collecting the
same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000,
pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully
paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this
case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s
decision. We held that petitioner’s health care agreement during the pertinent period
was in the nature of non-life insurance which is a contract of indemnity, citing Blue
Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We
also ruled that petitioner’s contention that it is a health maintenance organization
(HMO) and not an insurance company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their plans are treated as
insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction
of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed
only on a company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CA’s disposition that health care services are not in the nature of an
insurance business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is
clear, especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they
are not those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance,
health insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned
in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now
rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a
tax amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully
paying the amount of ₱5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following
medical services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family

planning counseling, consultation and advices on diet, exercise and other healthy
habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,

fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled
member.10

Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with
such health care practitioners regarding payment schemes, financing and other
procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those
directly employed by it11 or whose services are contracted by it.12 Petitioner also
provides hospital services such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general nursing care.13 If and when a
member avails of the benefits under the agreement, petitioner pays the participating
physicians and other health care providers for the services rendered, at pre-agreed
rates.14

To avail of petitioner’s health care programs, the individual members are required to
sign and execute a standard health care agreement embodying the terms and
conditions for the provision of the health care services. The same agreement contains
the various health care services that can be engaged by the enrolled member, i.e.,
preventive, diagnostic and curative medical services. Except for the curative aspect of
the medical service offered, the enrolled member may actually make use of the health
care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and
not an insurer because its agreements are treated as insurance contracts and the DST
is not a tax on the business but an excise on the privilege, opportunity or facility used
in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the business
it is engaged in, that is, to determine whether it is an HMO or an insurance company,
as this distinction is indispensable in turn to the issue of whether or not it is liable for
DST on its health care agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all
policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employer’s liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of any
office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued
by any province, city, municipality, or other public body or organization, and on all
obligations guaranteeing the title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such person, company or corporation,
there shall be collected a documentary stamp tax of fifty centavos (₱0.50) on each four
pesos (₱4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or

part of a statute shall be considered surplusage or superfluous, meaningless, void and
insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory.17 This principle is
expressed in the maxim Ut magis valeat quam pereat, that is, we choose the
interpretation which gives effect to the whole of the statute – its every word.18

From the language of Section 185, it is evident that two requisites must concur before
the DST can apply, namely: (1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker should be transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance
Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a fixed prepaid
premium."19 The payments do not vary with the extent, frequency or type of services
provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance
during the pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized

as constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from
the making of insurance contracts, agreements or transactions or that no separate or
direct consideration is received therefore, shall not be deemed conclusive to show that
the making thereof does not constitute the doing or transacting of an insurance
business.

Various courts in the United States, whose jurisprudence has a persuasive effect on
our decisions,21 have determined that HMOs are not in the insurance business. One
test that they have applied is whether the assumption of risk and indemnification of
loss (which are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to its business. If
these are the principal objectives, the business is that of insurance. But if they are
merely incidental and service is the principal purpose, then the business is not
insurance.

Applying the "principal object and purpose test,"22 there is significant American case
law supporting the argument that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of
Appeals of the District of Columbia Circuit held that Group Health Association should
not be considered as engaged in insurance activities since it was created primarily for
the distribution of health care services rather than the assumption of insurance risk.

xxx Although Group Health’s activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The
functions of such an organization are not identical with those of insurance or
indemnity companies. The latter are concerned primarily, if not exclusively, with risk
and the consequences of its descent, not with service, or its extension in kind, quantity
or distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with
getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary
purpose is to reduce the cost rather than the risk of medical care; to broaden the
service to the individual in kind and quantity; to enlarge the number receiving it;
to regularize it as an everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting against the financial loss
caused by extraordinary and unusual occurrences, such as death, disaster at
sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily discomforts as well as the more serious
and unusual illness. To summarize, the distinctive features of the cooperative are
the rendering of service, its extension, the bringing of physician and patient
together, the preventive features, the regularization of service as well as
payment, the substantial reduction in cost by quantity purchasing in short,
getting the medical job done and paid for; not, except incidentally to these
features, the indemnification for cost after the services is rendered. Except the
last, these are not distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in this
way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.

That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct. This is especially true when the contract is for the sale of
goods or services on contingency. But obviously it was not the purpose of the
insurance statutes to regulate all arrangements for assumption or distribution of risk.
That view would cause them to engulf practically all contracts, particularly conditional
sales and contingent service agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on whether that
or something else to which it is related in the particular plan is its principal
object purpose.24 (Emphasis supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather
than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk or
peril is not the sole test to be applied in determining its status. The question,
more broadly, is whether, looking at the plan of operation as a whole, ‘service’
rather than ‘indemnity’ is its principal object and purpose. Certainly the objects
and purposes of the corporation organized and maintained by the California physicians
have a wide scope in the field of social service. Probably there is no more impelling
need than that of adequate medical care on a voluntary, low-cost basis for
persons of small income. The medical profession unitedly is endeavoring to
meet that need. Unquestionably this is ‘service’ of a high order and not
‘indemnity.’26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of
New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to

provide physicians who will render services to subscribers on a prepaid basis. Hence,
if there are no physicians participating in the medical service corporation’s plan,
not only will the subscribers be deprived of the protection which they might
reasonably have expected would be provided, but the corporation will, in effect,
be doing business solely as a health and accident indemnity insurer without
having qualified as such and rendering itself subject to the more stringent financial
requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service
corporation in return for which the health service corporation agrees to make
payment directly to the participating provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.29 In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly more than what the member
has prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.

By the same token, any indemnification resulting from the payment for services
rendered in case of emergency by non-participating health providers would still be
incidental to petitioner’s purpose of providing and arranging for health care services
and does not transform it into an insurer. To fulfill its obligations to its members under
the agreements, petitioner is required to set up a system and the facilities for the
delivery of such medical services. This indubitably shows that indemnification is not its
sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic

medical services intended to keep members from developing medical conditions or
diseases.30 As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to
minimize the possibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary, to provide the health and
medical services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with

respect to its curative medical services), but these are incidental to the principal
activity of providing them medical care. The "insurance-like" aspect of petitioner’s
business is miniscule compared to its noninsurance activities. Therefore, since it
substantially provides health care services rather than insurance services, it cannot be
considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the
above-quoted U.S. cases, we are not saying that petitioner’s operations are identical in
every respect to those of the HMOs or health providers which were parties to those
cases. What we are stating is that, for the purpose of determining what "doing an
insurance business" means, we have to scrutinize the operations of the business as a
whole and not its mere components. This is of course only prudent and appropriate,
taking into account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular
HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry.
This is evident from the fact that it is not supervised by the Insurance Commission but
by the Department of Health.33 In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business. This determination of the commissioner must be accorded great weight. It is
well-settled that the interpretation of an administrative agency which is tasked to
implement a statute is accorded great respect and ordinarily controls the interpretation
of laws by the courts. The reason behind this rule was explained in Nestle Philippines,
Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of
a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to the accumulation
of experience and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,35 the Court stressed that executive officials are presumed
to have familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious and
competent expert opinion thereon. The courts give much weight to the government
agency officials charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that they frequently are
the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under

Section 185 Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of
the nature of indemnity for loss, damage, or liability…." In our decision dated June 12,
2008, we ruled that petitioner’s health care agreements are contracts of indemnity and
are therefore insurance contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies its
member for hospital, medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the monetary
expense or liability a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of so-
called "out-patient services" (including physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and family planning counseling) is the
contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by
petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the
costs of the services even if they are significantly and substantially more than what the
member has "prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar risk, that is, among
all the other members of the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all
policies of insurance or bonds or obligations of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association or company or
corporation transacting the business of accident, fidelity, employer’s liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority.38 This is because taxation is a
destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the
government.39 Hence, tax laws may not be extended by implication beyond the clear
import of their language, nor their operation enlarged so as to embrace matters not
specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the interpretation of a tax provision.
Instead, they dealt with the liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against the HMO. For this
reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement

whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. An insurance contract exists
where the following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses

among a large group of persons bearing a similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements?
They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that,
even if a contract contains all the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the
parties in making the contract may negate the existence of an insurance
contract. For example, a law firm which enters into contracts with clients whereby in
consideration of periodical payments, it promises to represent such clients in all suits
for or against them, is not engaged in the insurance business. Its contracts are simply
for the purpose of rendering personal services. On the other hand, a contract by which
a corporation, in consideration of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for malpractice is one of insurance,
and the corporation will be deemed as engaged in the business of insurance. Unlike
the lawyer’s retainer contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage resulting from the
defense of actions for malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in
petitioner’s agreements. To begin with, there is no loss, damage or liability on the part
of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange for
the hospital, medical and professional services rendered by the petitioner’s physician
or affiliated physician to him. In case of availment by a member of the benefits under
the agreement, petitioner does not reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the petitioner who pays the participating
physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary
liability on the part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or claim has already been incurred. There is no
indemnity precisely because the member merely avails of medical services to be paid
or already paid in advance at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination
and consultations, vaccine administration as well as family planning counseling, even
in the absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who

receives care from a non-participating physician or hospital. However, this is only a
very minor part of the list of services available. The assumption of the expense by
petitioner is not confined to the happening of a contingency but includes incidents even
in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program,

Inc.,43 although the health care contracts called for the defendant to partially reimburse
a subscriber for treatment received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that "the primary activity of
the defendant (was) the provision of podiatric services to subscribers in consideration
of prepayment for such services."44 Since indemnity of the insured was not the focal
point of the agreement but the extension of medical services to the member at an
affordable cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily

true that risk alone is sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of financial risk. Consequently,
there is a need to distinguish prepaid service contracts (like those of petitioner) from
the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide

health services: the risk that it might fail to earn a reasonable return on its investment.
But it is not the risk of the type peculiar only to insurance companies. Insurance risk,
also known as actuarial risk, is the risk that the cost of insurance claims might be
higher than the premiums paid. The amount of premium is calculated on the basis of
assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its

members can be construed as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not qualify as an insurance contract because petitioner’s
objective is to provide medical services at reduced cost, not to distribute risk like an
insurer.

In sum, an examination of petitioner’s agreements with its members leads us to

conclude that it is not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of

HMOs

Furthermore, militating in convincing fashion against the imposition of DST on

petitioner’s health care agreements under Section 185 of the NIRC of 1997 is the
provision’s legislative history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise
known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997
is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or persons who shall
make, sign, or issue the same, on and after January first, nineteen hundred and five,
the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of
indemnity for loss, damage, or liability made or renewed by any person,
association, company, or corporation transacting the business of accident,
fidelity, employer’s liability, plate glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of insurance (except life, marine, inland, and
fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to internal revenue. The aforecited
pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced
as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon
its amendment on March 10, 1917, the pertinent DST provision became Section 1449
(l) of Act No. 2711, otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the
NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an
amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but
the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again
increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC
of 1977 was renumbered as Section 198. And under Section 23 of EO47 273 dated July
25, 1987, it was again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or

the NIRC of 1997), the subject legal provision was retained as the present Section 185.
In 2004, amendments to the DST provisions were introduced by RA 924348 but Section
185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was
later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare).
However, there are those who claim that Health Maintenance, Inc. is the HMO industry
pioneer, having set foot in the Philippines as early as 1965 and having been formally
incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36
registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs
on the other) that when the law imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various amendments to the DST law
were enacted, they were already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the intent of the legislature to
impose DST on health care agreements, it could have done so in clear and categorical
terms. It had many opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to impose it on
them. As a matter of fact, petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it
would be safe to say that health care agreements were never, at any time, recognized
as insurance contracts or deemed engaged in the business of insurance within the
context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power that it was once opined
that "the power to tax involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to ₱376 million53 is
way beyond its net worth of ₱259 million.54 Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the government to throttle private business.
On the contrary, the government ought to encourage private enterprise.55 Petitioner,
just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the
"hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of

existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nation’s thrust
towards a better economy which will ultimately benefit the majority of our people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic60 when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid ₱5,127,149.08 representing 5% of its
net worth as of the year ended December 31, 2005 and complied with all requirements
of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from
payment of taxes as well as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended, arising from the failure to
pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in
2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner. This admission, however, is
not meant to preclude a revocation of the amnesty granted in case it is found to have
been granted under circumstances amounting to tax fraud under Section 10 of said
amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no other conclusion to draw than that
petitioner’s liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this
Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a
health care agreement of Philamcare Health Systems is not an insurance contract for
purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner
argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on
the merits; hence, the Court should apply the CA ruling there that a health care
agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final.67 When a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are deemed sustained.68 But
what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not
binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous
case, CIR v. Baier-Nickel71 involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject
matters as they were concerned with the taxable income of different taxable years. 72

Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court
and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case (which
is not even binding precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioner’s health care
agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the same
on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.
It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the furtherance of the goal of providing
a more efficient and inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer advantages over the pay-
for-service system (wherein individuals are charged a fee each time they receive
medical services), including the ability to control costs. They protect their members
from exposure to the high cost of hospitalization and other medical expenses brought
about by a fluctuating economy. Accordingly, they play an important role in society as
partners of the State in achieving its constitutional mandate of providing its citizens
with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.74 Its imposition will elevate the cost of health care services. This will in turn
necessitate an increase in the membership fees, resulting in either placing health
services beyond the reach of the ordinary wage earner or driving the industry to the
ground. At the end of the day, neither side wins, considering the indispensability of the
services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting
the said tax.

No costs.

SO ORDERED.

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.

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.

G.R. No. 99886 March 31, 1993

JOHN H. OSMEÑA, petitioner,

vs.
OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in
his capacity as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as
Head of the Office of Energy Affairs; REX V. TANTIONGCO, and the ENERGY
REGULATORY BOARD, respondents.

NARVASA, C.J.:

The petitioner seeks the corrective,1 prohibitive and coercive remedies provided by
Rule 65 of the Rules of Court,2 upon the following posited grounds, viz.:3

1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of
Energy (now, the Office of Energy Affairs), created pursuant to § 8, paragraph 1, of
P.D. No. 1956, as amended, "said creation of a trust fund being contrary to Section 29
(3), Article VI of the . . Constitution;4

2) the unconstitutionality of § 8, paragraph 1 (c) of P.D. No. 1956, as amended by

Executive Order No. 137, for "being an undue and invalid delegation of legislative
power . . to the Energy Regulatory Board;"5

3) the illegality of the reimbursements to oil companies, paid out of the Oil Price
Stabilization Fund,6 because it contravenes § 8, paragraph 2 (2) of
P. D. 1956, as amended; and

4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a
rollback of the pump prices and petroleum products to the levels prevailing prior to the
said Order.

It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D.
1956 creating a Special Account in the General Fund, designated as the Oil Price
Stabilization Fund (OPSF). The OPSF was designed to reimburse oil companies for
cost increases in crude oil and imported petroleum products resulting from exchange
rate adjustments and from increases in the world market prices of crude oil.

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O.
1024,7 and ordered released from the National Treasury to the Ministry of Energy. The
same Executive Order also authorized the investment of the fund in government
securities, with the earnings from such placements accruing to the fund.

President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order
No. 137 on February 27, 1987, expanding the grounds for reimbursement to oil
companies for possible cost underrecovery incurred as a result of the reduction of
domestic prices of petroleum products, the amount of the underrecovery being left for
determination by the Ministry of Finance.

Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a
"Terminal Fund Balance deficit" of some P12.877 billion;8 that to abate the worsening
deficit, "the Energy Regulatory Board . . issued an Order on December 10, 1990,
approving the increase in pump prices of petroleum products," and at the rate of
recoupment, the OPSF deficit should have been fully covered in a span of six (6)
months, but this notwithstanding, the respondents — Oscar Orbos, in his capacity as
Executive Secretary; Jesus Estanislao, in his capacity as Secretary of Finance;
Wenceslao de la Paz, in his capacity as Head of the Office of Energy Affairs; Chairman
Rex V. Tantiongco and the Energy Regulatory Board — "are poised to accept, process
and pay claims not authorized under P.D. 1956."9

The petition further avers that the creation of the trust fund violates §
29(3), Article VI of the Constitution, reading as follows:

(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as
amended, must be treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust
fund,' and that "if a special tax is collected for a specific purpose, the revenue
generated therefrom shall 'be treated as a special fund' to be used only for the purpose
indicated, and not channeled to another government objective." 10 Petitioner further
points out that since "a 'special fund' consists of monies collected through the taxing
power of a State, such amounts belong to the State, although the use thereof is limited
to the special purpose/objective for which it was created." 11

He also contends that the "delegation of legislative authority" to the ERB violates § 28
(2). Article VI of the Constitution, viz.:

(2) The Congress may, by law, authorize the President to fix, within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government;

and, inasmuch as the delegation relates to the exercise of the power of taxation, "the
limits, limitations and restrictions must be quantitative, that is, the law must not only
specify how to tax, who (shall) be taxed (and) what the tax is for, but also impose a
specific limit on how much to tax." 12
The petitioner does not suggest that a "trust account" is illegal per se, but maintains
that the monies collected, which form part of the OPSF, should be maintained in
a special account of the general fund for the reason that the Constitution so provides,
and because they are, supposedly, taxes levied for a special purpose. He assumes
that the Fund is formed from a tax undoubtedly because a portion thereof is taken from
collections of ad valorem taxes and the increases thereon.

It thus appears that the challenge posed by the petitioner is premised primarily on the
view that the powers granted to the ERB under P.D. 1956, as amended, partake of the
nature of the taxation power of the State. The Solicitor General observes that the
"argument rests on the assumption that the OPSF is a form of revenue measure
drawing from a special tax to be expended for a special purpose." 13 The petitioner's
perceptions are, in the Court's view, not quite correct.

To address this critical misgiving in the position of the petitioner on these issues, the
Court recalls its holding in Valmonte v. Energy Regulatory Board, et al. 14 —

The foregoing arguments suggest the presence of misconceptions about the nature
and functions of the OPSF. The OPSF is a "Trust Account" which was established "for
the purpose of minimizing the frequent price changes brought about by exchange rate
adjustment and/or changes in world market prices of crude oil and imported petroleum
products." 15 Under P.D. No. 1956, as amended by Executive Order No. 137 dated 27
February 1987, this Trust Account may be funded from any of the following sources:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on
petroleum products subject to tax under this Decree arising from exchange rate
adjustment, as may be determined by the Minister of Finance in consultation with the
Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy:

c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the Board
of Energy requiring payment of persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the peso
costs computed using the reference foreign exchange rate as fixed by the Board of
Energy.

xxx xxx xxx

The fact that the world market prices of oil, measured by the spot market in Rotterdam,
vary from day to day is of judicial notice. Freight rates for hauling crude oil and
petroleum products from sources of supply to the Philippines may also vary from time
to time. The exchange rate of the peso vis-a-vis the U.S. dollar and other convertible
foreign currencies also changes from day to day. These fluctuations in world market
prices and in tanker rates and foreign exchange rates would in a completely free
market translate into corresponding adjustments in domestic prices of oil and
petroleum products with sympathetic frequency. But domestic prices which vary from
day to day or even only from week to week would result in a chaotic market with
unpredictable effects upon the country's economy in general. The OPSF was
established precisely to protect local consumers from the adverse consequences that
such frequent oil price adjustments may have upon the economy. Thus, the OPSF
serves as a pocket, as it were, into which a portion of the purchase price of oil and
petroleum products paid by consumers as well as some tax revenues are inputted and
from which amounts are drawn from time to time to reimburse oil companies, when
appropriate situations arise, for increases in, as well as underrecovery of, costs of
crude importation. The OPSF is thus a buffer mechanism through which the domestic
consumer prices of oil and petroleum products are stabilized, instead of fluctuating
every so often, and oil companies are allowed to recover those portions of their costs
which they would not otherwise recover given the level of domestic prices existing at
any given time. To the extent that some tax revenues are also put into it, the OPSF is
in effect a device through which the domestic prices of petroleum products are
subsidized in part. It appears to the Court that the establishment and maintenance of
the OPSF is well within that pervasive and non-waivable power and responsibility of
the government to secure the physical and economic survival and well-being of the
community, that comprehensive sovereign authority we designate as the police power
of the State. The stabilization, and subsidy of domestic prices of petroleum products
and fuel oil — clearly critical in importance considering, among other things, the
continuing high level of dependence of the country on imported crude oil — are
appropriately regarded as public purposes.

Also of relevance is this Court's ruling in relation to the sugar stabilization fund the
nature of which is not far different from the OPSF. In Gaston v. Republic Planters
Bank, 16 this Court upheld the legality of the sugar stabilization fees and explained their
nature and character, viz.:

The stabilization fees collected are in the nature of a tax, which is within the power of
the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil.
148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied with
a regulatory purpose, to provide a means for the stabilization of the sugar industry. The
levy is primarily in the exercise of the police power of the State (Lutz v.
Araneta, supra).

xxx xxx xxx

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose — that of "financing the growth and development
of the sugar industry and all its components, stabilization of the domestic market
including the foreign market." The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them state funds, even though they are held
for a special purpose (Lawrence v. American Surety Co. 263 Mich. 586, 249 ALR 535,
cited in 42 Am Jur Sec. 2, p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the language of the
statute, "administered in trust" for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance if any, is to be transferred to the general funds of
the Government. That is the essence of the trust intended (SEE 1987 Constitution,
Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(1). 17

The character of the Stabilization Fund as a special kind of fund is emphasized by the
fact that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987) Constitution, Article VI, Sec. 29 (3), lifted from the
1935 Constitution, Article VI, Sec. 23(1). (Emphasis supplied).
Hence, it seems clear that while the funds collected may be referred to as taxes, they
are exacted in the exercise of the police power of the State. Moreover, that the OPSF
is a special fund is plain from the special treatment given it by E.O. 137. It is
segregated from the general fund; and while it is placed in what the law refers to as a
"trust liability account," the fund nonetheless remains subject to the scrutiny and review
of the COA. The Court is satisfied that these measures comply with the constitutional
description of a "special fund." Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of legislative power, the Court finds that
the provision conferring the authority upon the ERB to impose additional amounts on
petroleum products provides a sufficient standard by which the authority must be
exercised. In addition to the general policy of the law to protect the local consumer by
stabilizing and subsidizing domestic pump rates, § 8(c) of P.D. 1956 18 expressly
authorizes the ERB to impose additional amounts to augment the resources of the
Fund.

What petitioner would wish is the fixing of some definite, quantitative restriction, or "a
specific limit on how much to tax." 19 The Court is cited to this requirement by the
petitioner on the premise that what is involved here is the power of taxation; but as
already discussed, this is not the case. What is here involved is not so much the power
of taxation as police power. Although the provision authorizing the ERB to impose
additional amounts could be construed to refer to the power of taxation, it cannot be
overlooked that the overriding consideration is to enable the delegate to act with
expediency in carrying out the objectives of the law which are embraced by the police
power of the State.

The interplay and constant fluctuation of the various factors involved in the
determination of the price of oil and petroleum products, and the frequently shifting
need to either augment or exhaust the Fund, do not conveniently permit the setting of
fixed or rigid parameters in the law as proposed by the petitioner. To do so would
render the ERB unable to respond effectively so as to mitigate or avoid the undesirable
consequences of such fluidity. As such, the standard as it is expressed, suffices to
guide the delegate in the exercise of the delegated power, taking account of the
circumstances under which it is to be exercised.

For a valid delegation of power, it is essential that the law delegating the power must
be (1) complete in itself, that is it must set forth the policy to be executed by the
delegate and (2) it must fix a standard — limits of which
are sufficiently determinate or determinable — to which the delegate must conform. 20

. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there
must be a standard, which implies at the very least that the legislature itself determines
matters of principle and lays down fundamental policy. Otherwise, the charge of
complete abdication may be hard to repel. A standard thus defines legislative policy,
marks its limits, maps out its boundaries and specifies the public agency to apply it. It
indicates the circumstances under which the legislative command is to be effected. It is
the criterion by which the legislative purpose may be carried out. Thereafter, the
executive or administrative office designated may in pursuance of the above guidelines
promulgate supplemental rules and regulations. The standard may either be express or
implied. If the former, the non-delegation objection is easily met. The standard though
does not have to be spelled out specifically. It could be implied from the policy and
purpose of the act considered as a whole. 21

It would seem that from the above-quoted ruling, the petition for prohibition should fail.
The standard, as the Court has already stated, may even be implied. In that light, there
can be no ground upon which to sustain the petition, inasmuch as the challenged law
sets forth a determinable standard which guides the exercise of the power granted to
the ERB. By the same token, the proper exercise of the delegated power may be
tested with ease. It seems obvious that what the law intended was to permit the
additional imposts for as long as there exists a need to protect the general public and
the petroleum industry from the adverse consequences of pump rate fluctuations.
"Where the standards set up for the guidance of an administrative officer and the
action taken are in fact recorded in the orders of such officer, so that Congress, the
courts and the public are assured that the orders in the judgment of such officer
conform to the legislative standard, there is no failure in the performance of the
legislative functions." 22

This Court thus finds no serious impediment to sustaining the validity of the legislation;
the express purpose for which the imposts are permitted and the general objectives
and purposes of the fund are readily discernible, and they constitute a sufficient
standard upon which the delegation of power may be justified.

In relation to the third question — respecting the illegality of the reimbursements to oil
companies, paid out of the Oil Price Stabilization Fund, because allegedly in
contravention of § 8, paragraph 2 (2) of P.D. 1956, amended 23 — the Court finds for
the petitioner.

The petition assails the payment of certain items or accounts in favor of the petroleum
companies (i.e., inventory losses, financing charges, fuel oil sales to the National
Power Corporation, etc.) because not authorized by law. Petitioner contends that
"these claims are not embraced in the enumeration in § 8 of P.D. 1956 . . since none of
them was incurred 'as a result of the reduction of domestic prices of petroleum
products,'" 24 and since these items are reimbursements for which the OPSF should
not have responded, the amount of the P12.877 billion deficit "should be reduced by
P5,277.2 million." 25 It is argued "that under the principle of ejusdem generis . . . the
term 'other factors' (as used in § 8 of P.D. 1956) . . can only include such 'other factors'
which necessarily result in the reduction of domestic prices of petroleum products." 26

The Solicitor General, for his part, contends that "(t)o place said (term) within the
restrictive confines of the rule of ejusdem generis would reduce (E.O. 137) to a
meaningless provision."

This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et

al., 27 passed upon the application of ejusdem generis to paragraph 2 of § 8 of P.D.
1956, viz.:

The rule of ejusdem generis states that "[w]here words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words
are not to be construed in their widest extent, but are held to be as applying only to
persons or things of the same kind or class as those specifically mentioned." 28 A
reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore,
subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What
should be considered for purposes of determining the "other factors" in subparagraph
(iii) is the first sentence of paragraph (2) of the Section which explicitly allows the cost
underrecovery only if such were incurred as a result of the reduction of domestic prices
of petroleum products.
The Court thus holds, that the reimbursement of financing charges is not authorized by
paragraph 2 of § 8 of P.D. 1956, for the reason that they were not incurred as a result
of the reduction of domestic prices of petroleum products. Under the same provision,
however, the payment of inventory losses is upheld as valid, being clearly a result of
domestic price reduction, when oil companies incur a cost underrecovery for yet unsold
stocks of oil in inventory acquired at a higher price.

Reimbursement for cost underrecovery from the sales of oil to the National Power
Corporation is equally permissible, not as coming within the provisions of P.D. 1956,
but in virtue of other laws and regulations as held in Caltex 29 and which have been
pointed to by the Solicitor General. At any rate, doubts about the propriety of such
reimbursements have been dispelled by the enactment of R.A. 6952, establishing the
Petroleum Price Standby Fund, § 2 of which specifically authorizes the reimbursement
of "cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation."

Anent the overpayment refunds mentioned by the petitioner, no substantive discussion

has been presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor
General taken any effort to defend the propriety of this refund. In fine, neither of the
parties, beyond the mere mention of overpayment refunds, has at all bothered to
discuss the arguments for or against the legality of the so-called overpayment refunds.
To be sure, the absence of any argument for or against the validity of the refund
cannot result in its disallowance by the Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and specifically shown, there can be no basis
upon which to nullify the same.

Finally, the Court finds no necessity to rule on the remaining issue, the same having
been rendered moot and academic. As of date hereof, the pump rates of gasoline have
been reduced to levels below even those prayed for in the petition.

WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the
reimbursement of financing charges, paid pursuant to E.O. 137, and DISMISSED in all
other respects.

SO ORDERED.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer, defendants-
appellants.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory
fees?

This question has been brought before this Court in the past. The parties are, in effect,
asking for a re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of
Appeals in a case where the then Court of First Instance of Rizal dismissed the
portion-about complaint for refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F.
Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of
the Philippines and engaged in the air transportation business under a legislative
franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of taxes. The pertinent provision of the
franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu of
all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956)
PAL has, since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a

regulation requiring all tax exempt entities, among them PAL to pay motor vehicle
registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The
appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its
motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling
in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by virtue
of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision
in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the
effect that motor vehicle registration fees are regulatory exceptional. and not revenue
measures and, therefore, do not come within the exemption granted to PAL? under its
franchise. Hence, PAL filed the complaint against Land Transportation Commissioner
Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First
Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell
in his capacity as National Treasurer, filed a motion to dismiss alleging that the
complaint states no cause of action. In support of the motion to dismiss, defendants
repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that
registration fees of motor vehicles are not taxes, but regulatory fees imposed as an
incident of the exercise of the police power of the state. They contended that while Act
4271 exempts PAL from the payment of any tax except two per cent on its gross
revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such
as motor vehicle registration fees. The resolution of the motion to dismiss was deferred
by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's
complaint "moved by the later ruling laid down by the Supreme Court in the case
or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL
appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc.
(supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main
points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of
"registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It
is not held liable for a tax but for a registration fee. It therefore cannot make use of a
backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of
additional tax on privately-owned passenger automobiles, motorcycles and scooters
was amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A
special science fund was thereby created and its title expressly sets forth that a tax on
privately-owned passenger automobiles, motorcycles and scooters was imposed. The
rates thereof were provided for in its Section 3 which clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished from the registration fee under the Motor
Vehicle Act. There cannot be any clearer expression therefore of the legislative will,
even on the assumption that the earlier legislation could by subdivision the point be
susceptible of the interpretation that a tax rather than a fee was levied. What is thus
most apparent is that where the legislative body relies on its authority to tax it
expressly so states, and where it is enacting a regulatory measure, it is equally
exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the
other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor
vehicles are in section 8 of that law called "fees". But the appellation is no impediment
to their being considered taxes if taxes they really are. For not the name but the object
of the charge determines whether it is a tax or a fee. Geveia speaking, taxes are for
revenue, whereas fees are exceptional. for purposes of regulation and inspection and
are for that reason limited in amount to what is necessary to cover the cost of the
services rendered in that connection. Hence, a charge fixed by statute for the service
to be person,-When by an officer, where the charge has no relation to the value of the
services performed and where the amount collected eventually finds its way into the
treasury of the branch of the government whose officer or officers collected the
chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portion—about 5 per centum—of the total
collections from motor vehicle registration fees. And as proof that the money collected
is not intended for the expenditures of that office, the law itself provides that all such
money shall accrue to the funds for the construction and maintenance of public roads,
streets and bridges. It is thus obvious that the fees are not collected for regulatory
purposes, that is to say, as an incident to the enforcement of regulations governing the
operation of motor vehicles on public highways, for their express object is to provide
revenue with which the Government is to discharge one of its principal functions—the
construction and maintenance of public highways for everybody's use. They are
veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall
be imposed," thus implying that the charges therein imposed—though called fees—are
of the category of taxes. The provision is contained in section 70, of subsection (b), of
the law, as amended by section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for
the registration or operation or on the ownership of any motor vehicle, or for the
exercise of the profession of chauffeur, by any municipal corporation, the provisions of
any city charter to the contrary notwithstanding: Provided, however, That any provincial
board, city or municipal council or board, or other competent authority may exact and
collect such reasonable and equitable toll fees for the use of such bridges and ferries,
within their respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use of such public
roads, as may be authorized by the President of the Philippines upon the
recommendation of the Secretary of Public Works and Communications, but in none of
these cases, shall any toll fee." be charged or collected until and unless the approved
schedule of tolls shall have been posted levied, in a conspicuous place at such toll
station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor
Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic
Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382,
843, 896, 110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the money collected
under the provisions of this Act shall accrue to the road and bridge funds of the
different provinces and chartered cities in proportion to the centum shall during the
next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and Communications for
projects recommended by the Director of Public Works in the different provinces and
chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of

this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).

It appears clear from the above provisions that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly to
raise funds for the construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. On the other
hand, the Philippine Rabbit case mentions a presumption arising from the use of the
term "fees," which appears to have been favored by the legislature to distinguish fees
from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles
subject to payment of taxes, customs s duties or other charges shall be accepted
unless proof of payment of the taxes due thereon has been presented to the
Commission.

referring to taxes other than those imposed on the registration, operation or ownership
of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument
of regulation, As stated by a former presiding judge of the Court of Tax Appeals and
writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation (Sonzinky
v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela
such case, the fees may properly be regarded as taxes even though they also serve as
an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction is properly called a tax.
(1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593;
Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions
are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811,
4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco
and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing
Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the
case of motor vehicle registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision
appears as Section 591-593). in the Land Transportation code. It is patent therefrom
that the legislators had in mind a regulatory tax as the law refers to the imposition on
the registration, operation or ownership of a motor vehicle as a "tax or fee." Though
nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on
the ownership of any motor vehicle, or for the exercise of the profession of chauffeur
..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited
by the respondents, speak of an "additional" tax," where the law could have referred to
an original tax and not one in addition to the tax already imposed on the registration,
operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such
as the special permit fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration
fee and chauffers' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional.
intended only for rigidly purposes in the exercise of the State's police powers. Over the
years, however, as vehicular traffic exploded in number and motor vehicles became
absolute necessities without which modem life as we know it would stand still,
Congress found the registration of vehicles a very convenient way of raising much
needed revenues. Without changing the earlier deputy. of registration payments as
"fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present
exacted pursuant to the Land Transportation and Traffic Code are actually taxes
intended for additional revenues. of government even if one fifth or less of the amount
collected is set aside for the operating expenses of the agency administering the
program.

May the respondent administrative agency be required to refund the amounts stated in
the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the
records as to what payments were made in succeeding years. We have ruled that
Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax
exemptions Of corporate taxpayers found in legislative franchises similar to that
invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R.
No. 615)." July 11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act No.
41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%) of all
gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected by any authority whatsoever, municipal,
provincial, or national from which taxes the grantee is hereby expressly exempted."
The issue raised to this Court now is the validity of the respondent court's decision
which ruled that the exemption under Republic Act No. 41-42). was repealed by
Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary notwithstanding,
all corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code
shall pay the rates provided in this section. All corporations, agencies, or
instrumentalities owned or controlled by the government, including the Government
Service Insurance System and the Social Security System but excluding educational
institutions, shall pay such rate of tax upon their taxable net income as are imposed by
this section upon associations or corporations engaged in a similar business or
industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law
intended all corporate taxpayers to pay income tax as provided by the statute. There
can be no doubt as to the power of Congress to repeal the earlier exemption it granted.
Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the
Constitution as amended in 1973 expressly provide that no franchise shall be granted
to any individual, firm, or corporation except under the condition that it shall be subject
to amendment, alteration, or repeal by the legislature when the public interest so
requires. There is no question as to the public interest involved. The country needs
increased revenues. The repealing clause is clear and unambiguous. There is a listing
of entities entitled to tax exemption. The petitioner is not covered by the provision.
Considering the foregoing, the Court Resolved to DENY the petition for lack of merit.
The decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were
correctly imposed because the tax exemption in the franchise of PAL was repealed
during the period. However, an amended franchise was given to PAL in 1979. Section
13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the lifetime of this franchise whichever of subsections (a)
and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net taxable income
computed in accordance with the provisions of the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees
from all specific. without distinction as to transport or nontransport corporations;
provided that with respect to international airtransport service, only the gross
passengers, mail, and freight revenues. from its outgoing flights shall be subject to this
law.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any
kind, nature or description imposed, levied, established, assessed, or collected by any
municipal, city, provincial, or national authority or government, agency, now or in the
future, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the
earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on
the registration and licensing of motor vehicles. Such payments are already included in
the basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D.
1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other
charge on the registration and licensing of the petitioner's motor vehicles from April 9,
1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

G.R. No. 180356 February 16, 2010

SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19,
2007 Decision1 and October 30, 2007 Resolution2 of the Court of Tax Appeals (CTA)
En Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of
Internal Revenue. The assailed decision affirmed the Decision dated May 10,
20063 and Resolution dated August 11, 20064 rendered by the CTA First Division.

The Facts

Petitioner South African Airways is a foreign corporation organized and existing under
and by virtue of the laws of the Republic of South Africa. Its principal office is located at
Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the
Philippines, it is an internal air carrier having no landing rights in the country. Petitioner
has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or commission for petitioner’s off-
line flights for the carriage of passengers and cargo between ports or points outside
the territorial jurisdiction of the Philippines. Petitioner is not registered with the
Securities and Exchange Commission as a corporation, branch office, or partnership. It
is not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights, summarized as follows:

2.5% Gross
Period Date Filed
Phil. Billings
1st Quarter May 30, 2000 222,531.25
For Passenger PhP
2nd Quarter August 29, 2000 424,046.95
 3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
Sub-total PhP 1,522,227.11
1st Quarter May 30, 2000 81,531.00
2nd Quarter August 29, 2000 50,169.65
For Cargo PhP
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue,
Revenue District Office No. 47, a claim for the refund of the amount of PhP
1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable
year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a
Petition for Review with the CTA for the refund of the abovementioned amount. The
case was docketed as CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack
of merit. The CTA ruled that petitioner is a resident foreign corporation engaged in
trade or business in the Philippines. It further ruled that petitioner was not liable to pay
tax on its GPB under Section 28(A)(3)(a) of the National Internal Revenue Code
(NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of 32%
on its income derived from the sales of passage documents in the Philippines. On this
ground, the CTA denied petitioner’s claim for a refund.

Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA
First Division in a Resolution dated August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim
for a refund of its tax payment on its GPB. This was denied by the CTA in its assailed
decision. A subsequent Motion for Reconsideration by petitioner was also denied in the
assailed resolution of the CTA En Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents

through an independent sales agent in the Philippines, is engaged in trade or business
in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the
1997 NIRC.

Whether or not the income derived by petitioner from the sale of passage documents
covering petitioner’s off-line flights is Philippine-source income subject to Philippine
income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax
on Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38.5

The Court’s Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being

taxed for its sale of passage documents in the Philippines. Petitioner, however, failed
to sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,6 we

held, "Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge such burden convincingly."

Petitioner has failed to overcome such burden.

In essence, petitioner calls upon this Court to determine the legal implication of the
amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioner’s
contention that, with the new definition of GPB, it is no longer liable under Sec.
28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is
inapplicable to it, it is thereby excluded from the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. – A corporation organized, authorized, or existing under the

laws of a foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received
in the preceding taxable year from all sources within the Philippines: Provided,
however, that international carriers shall pay a tax of two and one-half percent on their
gross Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined
GPB as follows:

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers
anywhere in the world and excess baggage, cargo and mail originating from the
Philippines, covered by passage documents sold in the Philippines.

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in
the world, provided that the passage documents were sold in the Philippines.
Legislature departed from such concept in the 1997 NIRC where GPB is now defined
under Sec. 28(A)(3)(a):

"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and
cargo occur to or from the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or
from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This
much was also found by the CTA. But petitioner further posits the view that due to the
non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income
tax for its sale of passage documents in the Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British

Overseas Airways),7 which was decided under similar factual circumstances, this Court
ruled that off-line air carriers having general sales agents in the Philippines are
engaged in or doing business in the Philippines and that their income from sales of
passage documents here is income from within the Philippines. Thus, in that case, we
held the off-line air carrier liable for the 32% tax on its taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under
the 1939 NIRC, it does not apply to the instant case, which must be decided under the
1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations,
such as itself, on all income from sources within the Philippines. Petitioner’s
interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international
carrier that does not maintain flights to or from the Philippines, thereby having no GPB
as defined, it is exempt from paying any income tax at all. In other words, the existence
of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to
it.

Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard
to the taxation of off-line air carriers is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term,
exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997
NIRC. Certainly, had legislature’s intentions been to completely exclude all
international air carriers from the application of the general rule under Sec. 28(A)(1), it
would have used the appropriate language to do so; but the legislature did not. Thus,
the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a
taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec.
28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air
carrier or not, would be liable for the tax under Sec. 28(A)(1).

Clearly, no difference exists between British Overseas Airways and the instant case,
wherein petitioner claims that the former case does not apply. Thus, British Overseas
Airways applies to the instant case. The findings therein that an off-line air carrier is
doing business in the Philippines and that income from the sale of passage documents
here is Philippine-source income must be upheld.

Petitioner further reiterates its argument that the intention of Congress in amending the
definition of GPB is to exempt off-line air carriers from income tax by citing the
pronouncements made by Senator Juan Ponce Enrile during the deliberations on the
provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on
this Court. We said in Espino v. Cleofe:8

A cardinal rule in the interpretation of statutes is that the meaning and intention of the
law-making body must be sought, first of all, in the words of the statute itself, read and
considered in their natural, ordinary, commonly-accepted and most obvious
significations, according to good and approved usage and without resorting to forced or
subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
body does not know the meaning of words and rules of grammar. Consequently, the
grammatical reading of a statute must be presumed to yield its correct sense. x x x It is
also a well-settled doctrine in this jurisdiction that statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense
of that body and are, consequently, not controlling in the interpretation of law.
(Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that
petitioner’s interpretation of those provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall
be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).

xxxx

(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as
defined hereunder:

(a) International Air Carrier. – ‘Gross Philippine Billings’ refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage document: Provided,
That tickets revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an
exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision

from which it is excepted. It is a clause which exempts something from the operation of
a statue by express words."9 Further, "an exception need not be introduced by the
words ‘except’ or ‘unless.’ An exception will be construed as such if it removes
something from the operation of a provision of law."10

In the instant case, the general rule is that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines, except for resident
foreign corporations that are international carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating from the Philippines" which shall
be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international
carrier with no flights originating from the Philippines, does not fall under the exception.
As such, petitioner must fall under the general rule. This principle is embodied in the
Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing
not being excepted must be regarded as coming within the purview of the general
rule.11

To reiterate, the correct interpretation of the above provisions is that, if an international

air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.

As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis
that petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus,
petitioner raises the issue of whether the existence of such liability would preclude their
claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioner’s
motion for reconsideration, the CTA First Division ruled in its Resolution dated August
11, 2006, thus:

On the fourth argument, petitioner avers that a deficiency tax assessment does not, in
any way, disqualify a taxpayer from claiming a tax refund since a refund claim can
proceed independently of a tax assessment and that the assessment cannot be offset
by its claim for refund.

Petitioner’s argument is erroneous. Petitioner premises its argument on the existence

of an assessment. In the assailed Decision, this Court did not, in any way, assess
petitioner of any deficiency corporate income tax. The power to make assessments
against taxpayers is lodged with the respondent. For an assessment to be made,
respondent must observe the formalities provided in Revenue Regulations No. 12-99.
This Court merely pointed out that petitioner is liable for the regular corporate income
tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to
speak of.12

Precisely, petitioner questions the offsetting of its payment of the tax under Sec.
28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet
been any assessment of their obligation under the latter provision. Petitioner argues
that such offsetting is in the nature of legal compensation, which cannot be applied
under the circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal

Revenue,13 thus:

In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from the aforementioned
distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we

categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit, which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off.

Verily, petitioner’s argument is correct that the offsetting of its tax refund with its
alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals,14 however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioner’s supplemental motion for reconsideration alleging bringing to said court’s
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to claim for a tax refund for
the same year. To award such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in conceptual effects. Herein private
respondent cannot be entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse
must be filed within the prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved.This would necessarily
require and entail additional efforts and expenses on the part of the Government,
impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.1avvphi1

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

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

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

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable
under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness
of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer
for a refund.

Be that as it may, this Court is unable to affirm the assailed decision and resolution of
the CTA En Banc on the outright denial of petitioner’s claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the propriety of petitioner’s
tax return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioner’s liability under Sec. 28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while
Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and
exemptions, if any. It cannot be assumed that petitioner’s liabilities under the two
provisions would be the same. There is a need to make a determination of petitioner’s
liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a
tax deficiency exists. The assailed decision fails to mention having computed for the
tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to
establish petitioner’s taxable income. There is a necessity to receive evidence to
establish such amount vis-à-vis the claim for refund. It is only after such amount is
established that a tax refund or deficiency may be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution
of the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case is
REMANDED to the CTA En Banc for further proceedings and appropriate action, more
particularly, the reception of evidence for both parties and the corresponding
disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in
this Decision.

SO ORDERED.

G.R. No. 76778 June 6, 1990

FRANCISCO I. CHAVEZ, petitioner,

vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in
her capacity as Acting Municipal Treasurer of the Municipality of Las Piñas,
respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES,
INC., petitioner-intervenor.

MEDIALDEA, J.:

The petition seeks to declare unconstitutional Executive Order No. 73 dated November
25, 1986, which We quote in full, as follows (78 O.G. 5861):

EXECUTIVE ORDER No. 73

PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE

1984 REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF
THE REAL PROPERTY TAX CODE, AS AMENDED

WHEREAS, the collection of real property taxes is still based on the 1978 revision of
property values;

WHEREAS, the latest general revision of real property assessments completed in

1984 has rendered the 1978 revised values obsolete;

WHEREAS, the collection of real property taxes based on the 1984 real property
values was deferred to take effect on January 1, 1988 instead of January 1, 1985, thus
depriving the local government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial
resources to meet the rising cost of rendering effective services to the people;

NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do

hereby order:

SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning
January 1, 1987 for purposes of real property tax collection.

SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations
to implement this Executive Order.

SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.

SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified accordingly.

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

On March 31, 1987, Memorandum Order No. 77 was issued suspending the
implementation of Executive Order No. 73 until June 30, 1987.

The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of

land. He alleges the following: that Executive Order No. 73 accelerated the application
of the general revision of assessments to January 1, 1987 thereby mandating an
excessive increase in real property taxes by 100% to 400% on improvements, and up
to 100% on land; that any increase in the value of real property brought about by the
revision of real property values and assessments would necessarily lead to a
proportionate increase in real property taxes; that sheer oppression is the result of
increasing real property taxes at a period of time when harsh economic conditions
prevail; and that the increase in the market values of real property as reflected in the
schedule of values was brought about only by inflation and economic recession.

The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the
national association of owners-lessors, joins Chavez in his petition to declare
unconstitutional Executive Order No. 73, but additionally alleges the following: that
Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional one
percent (1%) tax on all property owners to raise funds for education, as real property
tax is admittedly a local tax for local governments; that the General Revision of
Assessments does not meet the requirements of due process as regards publication,
notice of hearing, opportunity to be heard and insofar as it authorizes "replacement
cost" of buildings (improvements) which is not provided in Presidential Decree No. 464,
but only in an administrative regulation of the Department of Finance; and that the Joint
Local Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and
unconstitutional as it imposes successive increase of 150% over the 1986 tax.

The Office of the Solicitor General argues against the petition.

The petition is not impressed with merit.

Petitioner Chavez and intervenor ROAP question the constitutionality of Executive

Order No. 73 insofar as the revision of the assessments and the effectivity thereof are
concerned. It should be emphasized that Executive Order No. 73 merely directs, in
Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning
January 1, 1987 for purposes of real property tax collection. (emphasis supplied)

The general revision of assessments completed in 1984 is based on Section 21 of

Presidential Decree No. 464 which provides, as follows:

SEC. 21. General Revision of Assessments. — Beginning with the assessor shall
make a calendar year 1978, the provincial or city general revision of real property
assessments in the province or city to take effect January 1, 1979, and once every five
years thereafter: Provided; however, That if property values in a province or city, or in
any municipality, have greatly changed since the last general revision, the provincial or
city assesor may, with the approval of the Secretary of Finance or upon bis direction,
undertake a general revision of assessments in the province or city, or in any
municipality before the fifth year from the effectivity of the last general revision.

Thus, We agree with the Office of the Solicitor General that the attack on Executive
Order No. 73 has no legal basis as the general revision of assessments is a continuing
process mandated by Section 21 of Presidential Decree No. 464. If at all, it is
Presidential Decree No. 464 which should be challenged as constitutionally infirm.
However, Chavez failed to raise any objection against said decree. It was ROAP which
questioned the constitutionality thereof. Furthermore, Presidential Decree No. 464
furnishes the procedure by which a tax assessment may be questioned:

SEC. 30. Local Board of Assessment Appeals. — Any owner who is not satisfied with
the action of the provincial or city assessor in the assessment of his property may,
within sixty days from the date of receipt by him of the written notice of assessment as
provided in this Code, appeal to the Board of Assessment Appeals of the province or
city, by filing with it a petition under oath using the form prescribed for the purpose,
together with copies of the tax declarations and such affidavit or documents submitted
in support of the appeal.

xxx xxx xxx

SEC. 34. Action by the Local Board of assessment Appeals. — The Local Board of
Assessment Appeals shall decide the appeal within one hundred and twenty days from
the date of receipt of such appeal. The decision rendered must be based on
substantial evidence presented at the hearing or at least contained in the record and
disclosed to the parties or such relevant evidence as a reasonable mind might accept
as adequate to support the conclusion.

In the exercise of its appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue
subpoena and subpoena duces tecum. The proceedings of the Board shall be
conducted solely for the purpose of ascertaining the truth without-necessarily adhering
to technical rules applicable in judicial proceedings.

The Secretary of the Board shall furnish the property owner and the Provincial or City
Assessor with a copy each of the decision of the Board. In case the provincial or city
assessor concurs in the revision or the assessment, it shall be his duty to notify the
property owner of such fact using the form prescribed for the purpose. The owner or
administrator of the property or the assessor who is not satisfied with the decision of
the Board of Assessment Appeals, may, within thirty days after receipt of the decision
of the local Board, appeal to the Central Board of Assessment Appeals by filing his
appeal under oath with the Secretary of the proper provincial or city Board of
Assessment Appeals using the prescribed form stating therein the grounds and the
reasons for the appeal, and attaching thereto any evidence pertinent to the case. A
copy of the appeal should be also furnished the Central Board of Assessment Appeals,
through its Chairman, by the appellant.

Within ten (10) days from receipt of the appeal, the Secretary of the Board of
Assessment Appeals concerned shall forward the same and all papers related thereto,
to the Central Board of Assessment Appeals through the Chairman thereof.

xxx xxx xxx

SEC. 36. Scope of Powers and Functions. — The Central Board of Assessment
Appeals shall have jurisdiction over appealed assessment cases decided by the Local
Board of Assessment Appeals. The said Board shall decide cases brought on appeal
within twelve (12) months from the date of receipt, which decision shall become final
and executory after the lapse of fifteen (15) days from the date of receipt of a copy of
the decision by the appellant.

In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals,
or upon express authority, the Hearing Commissioner, shall have the power to
summon witnesses, administer oaths, take depositions, and
issue subpoenas and subpoenas duces tecum.

The Central Board of assessment Appeals shall adopt and promulgate rules of
procedure relative to the conduct of its business.

Simply stated, within sixty days from the date of receipt of the, written notice of
assessment, any owner who doubts the assessment of his property, may appeal to the
Local Board of Assessment Appeals. In case the, owner or administrator of the
property or the assessor is not satisfied with the decision of the Local Board of
Assessment Appeals, he may, within thirty days from the receipt of the decision,
appeal to the Central Board of Assessment Appeals. The decision of the Central Board
of Assessment Appeals shall become final and executory after the lapse of fifteen days
from the date of receipt of the decision.

Chavez argues further that the unreasonable increase in real property taxes brought
about by Executive Order No. 73 amounts to a confiscation of property repugnant to
the constitutional guarantee of due process, invoking the cases of Ermita-Malate Hotel,
et al. v. Mayor of Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v.
Ancheta, et al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).

The reliance on these two cases is certainly misplaced because the due process
requirement called for therein applies to the "power to tax." Executive Order No. 73
does not impose new taxes nor increase taxes.

Indeed, the government recognized the financial burden to the taxpayers that will result
from an increase in real property taxes. Hence, Executive Order No. 1019 was issued
on April 18, 1985, deferring the implementation of the increase in real property taxes
resulting from the revised real property assessments, from January 1, 1985 to January
1, 1988. Section 5 thereof is quoted herein as follows:

SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as
amended by Presidential Decree No. 1621, shall be collected beginning January 1,
1988 instead of January 1, 1985 in order to enable the Ministry of Finance and the
Ministry of Local Government to establish the new systems of tax collection and
assessment provided herein and in order to alleviate the condition of the people,
including real property owners, as a result of temporary economic
difficulties. (emphasis supplied)

The issuance of Executive Order No. 73 which changed the date of implementation of
the increase in real property taxes from January 1, 1988 to January 1, 1987 and
therefore repealed Executive Order No. 1019, also finds ample justification in its
"whereas' clauses, as follows:

WHEREAS, the collection of real property taxes based on the 1984 real property
values was deferred to take effect on January 1, 1988 instead of January 1, 1985, thus
depriving the local government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial
resources to meet the rising cost of rendering effective services to the
people; (emphasis supplied)

xxx xxx xxx

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

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

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

SO ORDERED.

G.R. No. 193007 July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action. Additionally, Diaz
claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT
Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code
or the NIRC) at the House of Representatives. Timbol, on the other hand, claims that
she served as Assistant Secretary of the Department of Trade and Industry and
consultant of the Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however,
in view of the consistent opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees beginning August 16, 2010
unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to
include toll fees within the meaning of "sale of services" that are subject to VAT; that a
toll fee is a "user’s tax," not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause
of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining
the implementation of the VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within
10 days from notice.2 Later, the Court issued another resolution treating the petition as
one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the government’s
comment.4 The government avers that the NIRC imposes VAT on all kinds of services
of franchise grantees, including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-
impairment of contracts clause since they clearly have no personal interest in existing
toll operating agreements (TOAs) between the government and tollway operators. At
any rate, the non-impairment clause cannot limit the State’s sovereign taxing power
which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric
formula for computing toll rates cannot exempt tollway operators from VAT. In any
event, it cannot be claimed that the rights of tollway operators to a reasonable rate of
return will be impaired by the VAT since this is imposed on top of the toll rate. Further,
the imposition of VAT on toll fees would have very minimal effect on motorists using
the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the VAT by rounding off the
toll rate and putting any excess collection in an escrow account. But this would be
illegal since only the Congress can modify VAT rates and authorize its disbursement.
Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which
directs toll companies to record an accumulated input VAT of zero balance in their
books as of August 16, 2010, contravenes Section 111 of the NIRC which grants
entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including

tollway operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on

tax and not a tax on services; b) will impair the tollway operators’ right to a reasonable
return of investment under their TOAs; and c) is not administratively feasible and
cannot be implemented.

The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that petitioners
Diaz and Timbol gave their action. The government has sought reconsideration of the
Court’s resolution,7 however, arguing that petitioners’ allegations clearly made out a
case for declaratory relief, an action over which the Court has no original jurisdiction.
The government adds, moreover, that the petition does not meet the requirements of
Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial,
or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners
Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of
law against the BIR action in the form of an appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need to
be resolved for the public good.8 The Court has also held that a petition for prohibition
is a proper remedy to prohibit or nullify acts of executive officials that amount to
usurpation of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition
would impact, not only on the more than half a million motorists who use the tollways
everyday, but more so on the government’s effort to raise revenue for funding various
projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government.
A belated declaration of nullity of the BIR action would make any attempt to refund to
the motorists what they paid an administrative nightmare with no solution.
Consequently, it is not only the right, but the duty of the Court to take cognizance of
and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the
Court has ample power to waive such technical requirements when the legal questions
to be resolved are of great importance to the public. The same may be said of the
requirement of locus standi which is a mere procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is
levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines "sale or exchange of services"
as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration, including
those performed or rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of property, whether
personal or real; warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; common carriers by air and sea relative
to their transport of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. (Underscoring
supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered
in the Philippines for a fee, including those specified in the list. The enumeration of
affected services is not exclusive.11 By qualifying "services" with the words "all kinds,"
Congress has given the term "services" an all-encompassing meaning. The listing of
specific services are intended to illustrate how pervasive and broad is the VAT’s reach
rather than establish concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be deemed included unless
some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112
or the Toll Operation Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators’ expense. Tollways serve as
alternatives to regular public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense, the operators are
allowed to collect government-approved fees from motorists using the tollways until
such operators could fully recover their expenses and earn reasonable returns from
their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private proprietary
rights12 that its contract and the law recognize. In this sense, the tollway operator is no
different from the following service providers under Section 108 who allow others to
use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses,

inns, resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons

who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and

7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of
services" rendered for a fee "regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties." This means that "services"
to be subject to VAT need not fall under the traditional concept of services, the
personal or professional kinds that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services,"
they also come under the specific class described in Section 108 as "all other franchise
grantees" who are subject to VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the
low-income radio and/or television broadcasting companies with gross annual incomes
of less than ₱10 million and gas and water utilities) that Section 11913 spares from the
payment of VAT. The word "franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise

grantees" under Section 108 since they do not hold legislative franchises. But nothing
in Section 108 indicates that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court cannot surmise any,
for making a distinction between franchises granted by Congress and franchises
granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of
the state, constitute as much a legislative franchise as though the grant had been
made by Congress itself.15 The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies to which the power to
grant franchises has been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special
grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways. Apart from
Congress, tollway franchises may also be granted by the TRB, pursuant to the
exercise of its delegated powers under P.D. 1112.17 The franchise in this case is
evidenced by a "Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code.
But, again, nothing in Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens
other companies rendering public service for a fee to the imposition of VAT.
Businesses of a public nature such as public utilities and the collection of tolls or
charges for its use or service is a franchise.19

Nor can petitioners cite as binding on the Court statements made by certain lawmakers
in the course of congressional deliberations of the would-be law. As the Court said in
South African Airways v. Commissioner of Internal Revenue,20 "statements made by
individual members of Congress in the consideration of a bill do not necessarily reflect
the sense of that body and are, consequently, not controlling in the interpretation of
law." The congressional will is ultimately determined by the language of the law that
the lawmakers voted on. Consequently, the meaning and intention of the law must first
be sought "in the words of the statute itself, read and considered in their natural,
ordinary, commonly accepted and most obvious significations, according to good and
approved usage and without resorting to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21 Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:22

No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the
State," are owned by the State. The term "ports" includes seaports and airports. The
MIAA Airport Lands and Buildings constitute a "port" constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the Philippines.

x x x The operation by the government of a tollway does not change the character of
the road as one for public use. Someone must pay for the maintenance of the road,
either the public indirectly through the taxes they pay the government, or only those
among the public who actually use the road through the toll fees they pay upon using
the road. The tollway system is even a more efficient and equitable manner of taxing
the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property
whether it is for public dominion or not. Article 420 of the Civil Code defines property of
public dominion as "one intended for public use." Even if the government collects toll
fees, the road is still "intended for public use" if anyone can use the road under the
same terms and conditions as the rest of the public. The charging of fees, the limitation
on the kind of vehicles that can use the road, the speed restrictions and other
conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an airport
for public use. Such fees are often termed user’s tax. This means taxing those among
the public who actually use a public facility instead of taxing all the public including
those who never use the particular public facility. A user’s tax is more equitable – a
principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s
tax" must also pertain to tollway fees. But the main issue in the MIAA case was
whether or not Parañaque City could sell airport lands and buildings under MIAA
administration at public auction to satisfy unpaid real estate taxes. Since local
governments have no power to tax the national government, the Court held that the
City could not proceed with the auction sale. MIAA forms part of the national
government although not integrated in the department framework."24 Thus, its airport
lands and buildings are properties of public dominion beyond the commerce of man
under Article 420(1)25 of the Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made,
not to establish a rule that tollway fees are user’s tax, but to make the point that airport
lands and buildings are properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway fees are not taxes.
Indeed, they are not assessed and collected by the BIR and do not go to the general
coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax,
collectible from motorists, for the construction and maintenance of certain roadways.
The tax in such a case goes directly to the government for the replenishment of
resources it spends for the roadways. This is not the case here. What the government
seeks to tax here are fees collected from tollways that are constructed, maintained,
and operated by private tollway operators at their own expense under the build,
operate, and transfer scheme that the government has adopted for
expressways.26 Except for a fraction given to the government, the toll fees essentially
end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not
taxes in any sense. A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public expenditures.27 Toll fees,
on the other hand, are collected by private tollway operators as reimbursement for the
costs and expenses incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of income. Although toll fees
are charged for the use of public facilities, therefore, they are not government
exactions that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the
liability for the tax and burden of the tax. The seller who is liable for the VAT may shift
or pass on the amount of VAT it paid on goods, properties or services to the buyer. In
such a case, what is transferred is not the seller’s liability but merely the burden of the
VAT.29

Thus, the seller remains directly and legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT paid by the former is added to the
selling price. Once shifted, the VAT ceases to be a tax30 and simply becomes part of
the cost that the buyer must pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person
who, in the course of trade or business, sells or renders services for a fee. In other
words, the seller of services, who in this case is the tollway operator, is the person
liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of
the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross
receipts and not necessarily on the toll fees. Although the tollway operator may shift
the VAT burden to the tollway user, it will not make the latter directly liable for the VAT.
The shifted VAT burden simply becomes part of the toll fees that one has to pay in
order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract

clause on behalf of private investors in the tollway projects. She will neither be
prejudiced by nor be affected by the alleged diminution in return of investments that
may result from the VAT imposition. She has no interest at all in the profits to be
earned under the TOAs. The interest in and right to recover investments solely belongs
to the private tollway investors.

Besides, her allegation that the private investors’ rate of recovery will be adversely
affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule
on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input
VAT make the VAT on tollway operations impractical and incapable of implementation.
They cite the fact that, in order to claim input VAT, the name, address and tax
identification number of the tollway user must be indicated in the VAT receipt or
invoice. The manner by which the BIR intends to implement the VAT – by rounding off
the toll rate and putting any excess collection in an escrow account – is also illegal,
while the alternative of giving "change" to thousands of motorists in order to meet the
exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means
that the tax system should be capable of being effectively administered and enforced
with the least inconvenience to the taxpayer. Non-observance of the canon, however,
will not render a tax imposition invalid "except to the extent that specific constitutional
or statutory limitations are impaired."34 Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation
is illegal or unconstitutional would be premature. Although the transcript of the August
12, 2010 Senate hearing provides some clue as to how the BIR intends to go about
it,35 the facts pertaining to the matter are not sufficiently established for the Court to
pass judgment on. Besides, any concern about how the VAT on tollway operations will
be enforced must first be addressed to the BIR on whom the task of implementing tax
laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on
the matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-
2010 which directs toll companies to record an accumulated input VAT of zero balance
in their books as of August 16, 2010, the date when the VAT imposition was supposed
to take effect. The issuance allegedly violates Section 111(A)36 of the Code which
grants first time VAT payers a transitional input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005,
but failed to charge VAT-inclusive toll fees which by now can no longer be collected.
The tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2%
transitional input VAT belongs to the tollway operators who have not questioned the
circular’s validity. They are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.

Conclusion

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

If the legislative intent was to exempt tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and based on language in the law
too plain to be mistaken.37 But as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to simply apply the law as it is
found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Court’s role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the tax statute. Thus, any
unwarranted burden that may be perceived to result from enforcing such policy must
be properly referred to Congress. The Court has no discretion on the matter but simply
applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A.
7716 or the Expanded Value-Added Tax law was passed. It is only now, however, that
the executive has earnestly pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to the implementation
and execution of tax laws. Consequently, the executive is more properly suited to deal
with the immediate and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and

Commissioner of Internal Revenue’s motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s
petition for lack of merit, and SETS ASIDE the Court’s temporary restraining order
dated August 13, 2010.

SO ORDERED.