TAX REVIEW (CASE BATCH 1) Page 1 of 151

G.R. No. 210551, June 30, 2015
JOSE J. FERRER, JR., PETITIONER, VS. CITY MAYOR
HERBERT BAUTISTA, CITY COUNCIL OF QUEZON CITY, CITY
TREASURER OF QUEZON CITY, AND CITY ASSESSOR OF
QUEZON CITY, RESPONDENTS.
DECISION
tax credit may be availed of only after five (5) years of continue[d]
payment. Further, the taxpayer availing this tax credit must be a taxpayer in
good standing as certified by the City Treasurer and City Assessor.
The tax credit to be granted shall be equivalent to the total amount of the
special assessment paid by the property owner, which shall be given as
follows:
1. 6th year - 20%

2. 7th year - 20%

PERALTA, J.:
3. 8th year - 20%
Before this Court is a petition for certiorari under Rule 65 of the Rules of
Court with prayer for the issuance of a temporary restraining order (TRO) 4. 9th year - 20%
seeking to declare unconstitutional and illegal Ordinance Nos. SP-2095, S-
2011 and SP-2235, S-2013 on the Socialized Housing Tax and Garbage 5. 10th year - 20%
Fee, respectively, which are being imposed by the respondents.
Furthermore, only the registered owners may avail of the tax credit and may
not be continued by the subsequent property owners even if they are buyers
The Case
in good faith, heirs or possessor of a right in whatever legal capacity over
the subject property.[4]
On October 17, 2011,[1] respondent Quezon City Council enacted
Ordinance No. SP-2095, S-2011,[2] or the Socialized Housing Tax of On the other hand, Ordinance No. SP-2235, S-2013[5] was enacted on
Quezon City, Section 3 of which provides: December 16, 2013 and took effect ten days after when it was approved by
SECTION 3. IMPOSITION. A special assessment equivalent to one-half respondent City Mayor.[6] The proceeds collected from the garbage fees on
percent (0.5%) on the assessed value of land in excess of One Hundred residential properties shall be deposited solely and exclusively in an
Thousand Pesos (Php100,000.00) shall be collected by the City Treasurer earmarked special account under the general fund to be utilized for garbage
which shall accrue to the Socialized Housing Programs of the Quezon City collections.[7] Section 1 of the Ordinance set forth the schedule and manner
Government. The special assessment shall accrue to the General Fund under for the collection of garbage fees:
a special account to be established for the purpose. SECTION 1. The City Government of Quezon City in conformity with and
in relation to Republic Act No. 7160, otherwise known as the Local
Effective for five (5) years, the Socialized Housing Tax (SHT) shall be
Government Code of 1991 HEREBY IMPOSES THE FOLLOWING
utilized by the Quezon City Government for the following projects: (a) land
SCHEDULE AND MANNER FOR THE ANNUAL COLLECTION OF
purchase/land banking; (b) improvement of current/existing socialized
GARBAGE FEES, AS FOLLOWS:
housing facilities; (c) land development; (d) construction of core houses,
sanitary cores, medium-rise buildings and other similar structures; and (e)
On all domestic households in Quezon City;
financing of public-private partnership agreement of the Quezon City
Government and National Housing Authority (NHA) with the private LAND AREA IMPOSABLE FEE
sector.[3] Under certain conditions, a tax credit shall be enjoyed by taxpayers
Less than 200 sq. m. PHP 100.00
regularly paying the special assessment:
201 sq. m. – 500 sq. m. PHP 200.00
SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special
assessment tax as imposed by this ordinance shall enjoy a tax credit. The 501 sq. m. – 1,000 sq. m. PHP 300.00
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1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00
On all condominium unit and socialized housing projects/units in Quezon
City;
FLOOR AREA IMPOSABLE FEE
Less than 40 sq. m. PHP25.00
41 sq. m. – 60 sq. m. PHP50.00
61 sq. m. – 100 sq. m. PHP75.00
101 sq. m. – 150 sq. m. PHP100.00
151 sq. m. – 200 sq. [m.] or more PHP200.00
On high-rise Condominium Units
a) High-rise Condominium – The Homeowners Association of high- rise
condominiums shall pay the annual garbage fee on the total size of the
entire condominium and socialized Housing Unit and an additional
garbage fee shall be collected based on area occupied for every unit
already sold or being amortized.
b) High-rise apartment units – Owners of high-rise apartment units shall
pay the annual garbage fee on the total lot size of the entire apartment
and an additional garbage fee based on the schedule prescribed herein
for every unit occupied.
The collection of the garbage fee shall accrue on the first day of January and
shall be paid simultaneously with the payment of the real property tax, but
not later than the first quarter installment.[8] In case a household owner
refuses to pay, a penalty of 25% of the garbage fee due, plus an interest of
2% per month or a fraction thereof, shall be charged. [9]
Petitioner alleges that he is a registered co-owner of a 371-square-meter
residential property in Quezon City which is covered by Transfer Certificate
of Title (TCT) No. 216288, and that, on January 7, 2014, he paid his realty
tax which already included the garbage fee in the sum of Php100.00. [10]
The instant petition was filed on January 17, 2014. We issued a TRO on
February 5, 2014, which enjoined the enforcement of Ordinance Nos. SP-
2095 and SP-2235 and required respondents to comment on the petition
without necessarily giving due course thereto.[11]
Respondents filed their Comment[12] with urgent motion to dissolve the
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TRO on February 17, 2014. Thereafter, petitioner filed a Reply and a
Memorandum on March 3, 2014 and September 8, 2014, respectively.
Procedural Matters
A. Propriety of a Petition for Certiorari
Respondents are of the view that this petition for certiorari is improper
since they are not tribunals, boards or officers exercising judicial or quasi-
judicial functions. Petitioner, however, counters that in enacting Ordinance
Nos. SP-2095 and SP-2235, the Quezon City Council exercised quasi-
judicial function because the ordinances ruled against the property owners
who must pay the SHT and the garbage fee, exacting from them funds for
basic essential public services that they should not be held liable. Even if a
Rule 65 petition is improper, petitioner still asserts that this Court, in a
number of cases like in Rosario v. Court of Appeals,[13] has taken
cognizance of an improper remedy in the interest of justice.
We agree that respondents neither acted in any judicial or quasi-judicial
capacity nor arrogated unto themselves any judicial or quasi-judicial
prerogatives.
A respondent is said to be exercising judicial function where he has the
power to determine what the law is and what the legal rights of the parties
are, and then undertakes to determine these questions and adjudicate upon
the rights of the parties.
Quasi-judicial function, on the other hand, is “a term which applies to the
actions, discretion, etc., of public administrative officers or bodies required
to investigate facts or ascertain the existence of facts, hold hearings, and
draw conclusions from them as a basis for their official action and to
exercise discretion of a judicial nature.”
Before a tribunal, board, or officer may exercise judicial or quasi-judicial
acts, it is necessary that there be a law that gives rise to some specific rights
of persons or property under which adverse claims to such rights are made,
and the controversy ensuing therefrom is brought before a tribunal, board,
or officer clothed with power and authority to determine the law and
adjudicate the respective rights of the contending parties.[14]
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For a writ of certiorari to issue, the following requisites must concur: (1) it
must be directed against a tribunal, board, or officer exercising judicial or
quasi-judicial functions; (2) the tribunal, board, or officer must have acted
without or in excess of jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction; and (3) there is no appeal or any
plain, speedy, and adequate remedy in the ordinary course of law. The
enactment by the Quezon City Council of the assailed ordinances was done
in the exercise of its legislative, not judicial or quasi-judicial, function.
Under Republic Act (R.A.) No. 7160, or the Local Government Code of
1991 (LGC), local legislative power shall be exercised by the Sangguniang
Panlungsod for the city.[15] Said law likewise is specific in providing that
the power to impose a tax, fee, or charge, or to generate revenue shall be
exercised by the sanggunian of the local government unit concerned
through an appropriate ordinance.[16]
Also, although the instant petition is styled as a petition for certiorari, it
essentially seeks to declare the unconstitutionality and illegality of the
questioned ordinances. It, thus, partakes of the nature of a petition for
declaratory relief over which this Court has only appellate, not original,
jurisdiction.[17]
Despite these, a petition for declaratory relief may be treated as one for
prohibition or mandamus, over which We exercise original jurisdiction, in
cases with far-reaching implications or one which raises transcendental
issues or questions that need to be resolved for the public good. [18] The
judicial policy is that this Court will entertain direct resort to it when the
redress sought cannot be obtained in the proper courts or when exceptional
and compelling circumstances warrant availment of a remedy within and
calling for the exercise of Our primary jurisdiction. [19]
Section 2, Rule 65 of the Rules of Court lay down under what
circumstances a petition for prohibition may be filed:
SEC. 2. Petition for prohibition. - When the proceedings of any tribunal,
corporation, board, officer or person, whether exercising judicial, quasi-
judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess
of jurisdiction, and there is no appeal or any other plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered commanding the
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respondent to desist from further proceeding in the action or matter
specified therein, or otherwise granting such incidental reliefs as law and
justice may require.
In a petition for prohibition against any tribunal, corporation, board, or
person – whether exercising judicial, quasi-judicial, or ministerial functions
– who has acted without or in excess of jurisdiction or with grave abuse of
discretion, the petitioner prays that judgment be rendered, commanding the
respondents to desist from further proceeding in the action or matter
specified in the petition. In this case, petitioner's primary intention is to
prevent respondents from implementing Ordinance Nos. SP-2095 and SP-
2235. Obviously, the writ being sought is in the nature of a prohibition,
commanding desistance.
We consider that respondents City Mayor, City Treasurer, and City
Assessor are performing ministerial functions. A ministerial function is one
that an officer or tribunal performs in the context of a given set of facts, in a
prescribed manner and without regard for the exercise of his or its own
judgment, upon the propriety or impropriety of the act done. [20] Respondent
Mayor, as chief executive of the city government, exercises such powers
and performs such duties and functions as provided for by the LGC and
other laws.[21] Particularly, he has the duty to ensure that all taxes and other
revenues of the city are collected, and that city funds are applied to the
payment of expenses and settlement of obligations of the city, in accordance
with law or ordinance.[22] On the other hand, under the LGC, all local taxes,
fees, and charges shall be collected by the provincial, city, municipal, or
barangay treasurer, or their duly-authorized deputies, while the assessor
shall take charge, among others, of ensuring that all laws and policies
governing the appraisal and assessment of real properties for taxation
purposes are properly executed.[23] Anent the SHT, the Department of
Finance (DOF) Local Finance Circular No. 1-97, dated April 16, 1997, is
more specific:
6.3 The Assessor’s office of the Id.ntified LGU shall:
a. immediately undertake an inventory of lands
within its jurisdiction which shall be subject to
the levy of the Social Housing Tax (SHT) by the
local sanggunian concerned;
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b. inform the affected registered owners of the
effectivity of the SHT; a list of the lands and
registered owners shall also be posted in 3
conspicuous places in the city/municipality;
c. furnish the Treasurer’s office and the local
sanggunian concerned of the list of lands
affected;
6.4 The Treasurer’s office shall:
a. collect the Social Housing Tax on top of the
Real Property Tax, SEF Tax and other special
assessments;
b. report to the DOF, thru the Bureau of Local
Government Finance, and the Mayor’s office the
monthly collections on Social Housing Tax
(SHT). An annual report should likewise be
submitted to the HUDCC on the total revenues
raised during the year pursuant to Sec. 43, R.A.
7279 and the manner in which the same was
disbursed.
Petitioner has adduced special and important reasons as to why direct
recourse to Us should be allowed. Aside from presenting a novel question
of law, this case calls for immediate resolution since the challenged
ordinances adversely affect the property interests of all paying constituents
of Quezon City. As well, this petition serves as a test case for the guidance
of other local government units (LGUs). Indeed, the petition at bar is of
transcendental importance warranting a relaxation of the doctrine of
hierarchy of courts. In Social Justice Society (SJS) Officers, et al. v. Lim,[24]
the Court cited the case of Senator Jaworski v. Phil. Amusement & Gaming
Corp.,[25] where We ratiocinated:
Granting arguendo that the present action cannot be properly treated as a
petition for prohibition, the transcendental importance of the issues
involved in this case warrants that we set aside the technical defects
and take primary jurisdiction over the petition at bar. x x x This is in
accordance with the well-entrenched principle that rules of procedure
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are not inflexible tools designed to hinder or delay, but to facilitate and
promote the administration of justice. Their strict and rigid
application, which would result in technicalities that tend to frustrate,
rather than promote substantial justice, must always be eschewed.[26]
B. Locus Standi of Petitioner
Respondents challenge petitioner’s legal standing to file this case on the
ground that, in relation to Section 3 of Ordinance No. SP-2095, petitioner
failed to allege his ownership of a property that has an assessed value of
more than Php100,000.00 and, with respect to Ordinance No. SP-2335, by
what standing or personality he filed the case to nullify the same. According
to respondents, the petition is not a class suit, and that, for not having
specifically alleged that petitioner filed the case as a taxpayer, it could only
be surmised whether he is a party-in-interest who stands to be directly
benefited or injured by the judgment in this case.
It is a general rule that every action must be prosecuted or defended in the
name of the real party-in-interest, who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails of the suit.
Jurisprudence defines interest as "material interest, an interest in issue and
to be affected by the decree, as distinguished from mere interest in the
question involved, or a mere incidental interest. By real interest is meant a
present substantial interest, as distinguished from a mere expectancy or a
future, contingent, subordinate, or consequential interest." "To qualify a
person to be a real party-in-interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought
to be enforced."[27]
“Legal standing” or locus standi calls for more than just a generalized
grievance.[28] The concept has been defined as a personal and substantial
interest in the case such that the party has sustained or will sustain direct
injury as a result of the governmental act that is being challenged.[29] The
gist of the question of standing is whether a party alleges such personal
stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the court
depends for illumination of difficult constitutional questions. [30]
A party challenging the constitutionality of a law, act, or statute must show
“not only that the law is invalid, but also that he has sustained or is in
immediate, or imminent danger of sustaining some direct injury as a result
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of its enforcement, and not merely that he suffers thereby in some indefinite
way.” It must be shown that he has been, or is about to be, denied some
right or privilege to which he is lawfully entitled, or that he is about to be
subjected to some burdens or penalties by reason of the statute complained
of.[31]
Tested by the foregoing, petitioner in this case clearly has legal standing to
file the petition. He is a real party-in-interest to assail the constitutionality
and legality of Ordinance Nos. SP-2095 and SP-2235 because respondents
did not dispute that he is a registered co-owner of a residential property in
Quezon City and that he paid property tax which already included the SHT
and the garbage fee. He has substantial right to seek a refund of the
payments he made and to stop future imposition. While he is a lone
petitioner, his cause of action to declare the validity of the subject
ordinances is substantial and of paramount interest to similarly situated
property owners in Quezon City.
C. Litis Pendentia
Respondents move for the dismissal of this petition on the ground of litis
pendentia. They claim that, as early as February 22, 2012, a case entitled
Alliance of Quezon City Homeowners, Inc., et al., v. Hon. Herbert Bautista,
et al., docketed as Civil Case No. Q-12-7-820, has been pending in the
Quezon City Regional Trial Court, Branch 104, which assails the legality of
Ordinance No. SP-2095. Relying on City of Makati, et al. v. Municipality
(now City) of Taguig, et al.,[32] respondents assert that there is substantial
identity of parties between the two cases because petitioner herein and
plaintiffs in the civil case filed their respective cases as taxpayers of Quezon
City.
For petitioner, however, respondents’ contention is untenable since he is not
a party in Alliance and does not even have the remotest identity or
association with the plaintiffs in said civil case. Moreover, respondents’
arguments would deprive this Court of its jurisdiction to determine the
constitutionality of laws under Section 5, Article VIII of the 1987
Constitution.[33]
Litis pendentia is a Latin term which literally means “a pending suit” and is
variously referred to in some decisions as lis pendens and auter action
pendant.[34] While it is normally connected with the control which the court
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has on a property involved in a suit during the continuance proceedings, it is
more interposed as a ground for the dismissal of a civil action pending in
court.[35] In Film Development Council of the Philippines v. SM Prime
Holdings, Inc.,[36] We elucidated:
Litis pendentia, as a ground for the dismissal of a civil action, refers to a
situation where two actions are pending between the same parties for the
same cause of action, so that one of them becomes unnecessary and
vexatious. It is based on the policy against multiplicity of suit and
authorizes a court to dismiss a case motu proprio.
xxxx
The requisites in order that an action may be dismissed on the ground of
litis pendentia are: (a) the identity of parties, or at least such as representing
the same interest in both actions; (b) the identity of rights asserted and relief
prayed for, the relief being founded on the same facts, and (c) the identity of
the two cases such that judgment in one, regardless of which party is
successful, would amount to res judicata in the other.
xxxx
The underlying principle of litis pendentia is the theory that a party is not
allowed to vex another more than once regarding the same subject matter
and for the same cause of action. This theory is founded on the public
policy that the same subject matter should not be the subject of controversy
in courts more than once, in order that possible conflicting judgments may
be avoided for the sake of the stability of the rights and status of persons,
and also to avoid the costs and expenses incident to numerous suits.
Among the several tests resorted to in ascertaining whether two suits relate
to a single or common cause of action are: (1) whether the same evidence
would support and sustain both the first and second causes of action; and (2)
whether the defenses in one case may be used to substantiate the complaint
in the other.
The determination of whether there is an identity of causes of action for
purposes of litis pendentia is inextricably linked with that of res judicata,
each constituting an element of the other. In either case, both relate to the
sound practice of including, in a single litigation, the disposition of all
issues relating to a cause of action that is before a court.[37]
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There is substantial identity of the parties when there is a community of
interest between a party in the first case and a party in the second case albeit
the latter was not impleaded in the first case.[38] Moreover, the fact that the
positions of the parties are reversed, i.e., the plaintiffs in the first case are
the defendants in the second case or vice-versa, does not negate the identity
of parties for purposes of determining whether the case is dismissible on the
ground of litis pendentia.[39]
In this case, it is notable that respondents failed to attach any pleading
connected with the alleged civil case pending before the Quezon City trial
court. Granting that there is substantial identity of parties between said case
and this petition, dismissal on the ground of litis pendentia still cannot be
had in view of the absence of the second and third requisites. There is no
way for Us to determine whether both cases are based on the same set of
facts that require the presentation of the same evidence. Even if founded on
the same set of facts, the rights asserted and reliefs prayed for could be
different. Moreover, there is no basis to rule that the two cases are
intimately related and/or intertwined with one another such that the
judgment that may be rendered in one, regardless of which party would be
successful, would amount to res judicata in the other.
D. Failure to Exhaust Administrative Remedies
Respondents contend that petitioner failed to exhaust administrative
remedies for his non-compliance with Section 187 of the LGC, which
mandates:
Section 187. Procedure for Approval and Effectivity of Tax Ordinances and
Revenue Measures; Mandatory Public Hearings. – The procedure for
approval of local tax ordinances and revenue measures shall be in
accordance with the provisions of this Code: Provided, That public hearings
shall be conducted for the purpose prior to the enactment thereof: Provided,
further, That any question on the constitutionality or legality of tax
ordinances or revenue measures may be raised on appeal within thirty (30)
days from the effectivity thereof to the Secretary of Justice who shall render
a decision within sixty (60) days from the date of receipt of the appeal:
Provided, however, That such appeal shall not have the effect of suspending
the effectivity of the ordinance and the accrual and payment of the tax, fee,
or charge levied therein: Provided, finally, That within thirty (30) days after
receipt of the decision or the lapse of the sixty-day period without the
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Secretary of Justice acting upon the appeal, the aggrieved party may file
appropriate proceedings with a court of competent jurisdiction.
The provision, the constitutionality of which was sustained in Drilon v.
Lim,[40] has been construed as mandatory[41] considering that –
A municipal tax ordinance empowers a local government unit to impose
taxes. The power to tax is the most effective instrument to raise needed
revenues to finance and support the myriad activities of local government
units for the delivery of basic services essential to the promotion of the
general welfare and enhancement of peace, progress, and prosperity of the
people. Consequently, any delay in implementing tax measures would be to
the detriment of the public. It is for this reason that protests over tax
ordinances are required to be done within certain time frames. x x x. [42]
The obligatory nature of Section 187 was underscored in Hagonoy Market
Vendor Asso. v. Municipality of Hagonoy:[43]
x x x [T]he timeframe fixed by law for parties to avail of their legal
remedies before competent courts is not a “mere technicality” that can be
easily brushed aside. The periods stated in Section 187 of the Local
Government Code are mandatory. x x x Being its lifeblood, collection of
revenues by the government is of paramount importance. The funds for the
operation of its agencies and provision of basic services to its inhabitants
are largely derived from its revenues and collections. Thus, it is essential
that the validity of revenue measures is not left uncertain for a considerable
length of time. Hence, the law provided a time limit for an aggrieved party
to assail the legality of revenue measures and tax ordinances. [44]
Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones,[45] held
that there was no need for petitioners therein to exhaust administrative
remedies before resorting to the courts, considering that there was only a
pure question of law, the parties did not dispute any factual matter on which
they had to present evidence. Likewise, in Cagayan Electric Power and
Light Co., Inc. v. City of Cagayan de Oro,[46] We relaxed the application of
the rules in view of the more substantive matters. For the same reasons, this
petition is an exception to the general rule.
Substantive Issues
Petitioner asserts that the protection of real properties from informal settlers
and the collection of garbage are basic and essential duties and functions of
the Quezon City Government. By imposing the SHT and the garbage fee,
the latter has shown a penchant and pattern to collect taxes to pay for public
TAX REVIEW (CASE BATCH 1)
services that could be covered by its revenues from taxes imposed on
property, idle land, business, transfer, amusement, etc., as well as the
Internal Revenue Allotment (IRA) from the National Government. For
petitioner, it is noteworthy that respondents did not raise the issue that the
Quezon City Government is in dire financial state and desperately needs
money to fund housing for informal settlers and to pay for garbage
collection. In fact, it has not denied that its revenue collection in 2012 is in
the sum of P13.69 billion.
Moreover, the imposition of the SHT and the garbage fee cannot be justified
by the Quezon City Government as an exercise of its power to create
sources of income under Section 5, Article X of the 1987 Constitution. [47]
According to petitioner, the constitutional provision is not a carte blanche
for the LGU to tax everything under its territorial and political jurisdiction
as the provision itself admits of guidelines and limitations.
Petitioner further claims that the annual property tax is an ad valorem tax, a
percentage of the assessed value of the property, which is subject to revision
every three (3) years in order to reflect an increase in the market value of
the property. The SHT and the garbage fee are actually increases in the
property tax which are not based on the assessed value of the property or its
reassessment every three years; hence, in violation of Sections 232 and 233
of the LGC.[48]
For their part, respondents relied on the presumption in favor of the
constitutionality of Ordinance Nos. SP-2095 and SP-2235, invoking
Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,[49] People v.
Siton, et al.,[50] and Hon. Ermita v. Hon. Aldecoa-Delorino.[51] They argue
that the burden of establishing the invalidity of an ordinance rests heavily
upon the party challenging its constitutionality. They insist that the
questioned ordinances are proper exercises of police power similar to
Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC [52] and Social
Justice Society (SJS), et al. v. Hon. Atienza, Jr.[53] and that their enactment
finds basis in the social justice principle enshrined in Section 9, [54] Article II
of the 1987 Constitution.
As to the issue of publication, respondents argue that where the law
provides for its own effectivity, publication in the Official Gazette is not
necessary so long as it is not punitive in character, citing Balbuna, et al. v.
Hon. Secretary of Education, et al.[55] and Askay v. Cosalan.[56] Thus,
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Ordinance No. SP-2095 took effect after its publication, while Ordinance
No. SP-2235 became effective after its approval on December 26, 2013.
Additionally, the parties articulate the following positions:
On the Socialized Housing Tax
Respondents emphasize that the SHT is pursuant to the social justice
principle found in Sections 1 and 2, Article XIII [57] of the 1987 Constitution
and Sections 2 (a)[58] and 43[59] of R.A. No. 7279, or the “Urban
Development and Housing Act of 1992 (UDHA).
Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente,[60] and
Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,[61] respondents
assert that Ordinance No. SP-2095 applies equally to all real property
owners without discrimination. There is no way that the ordinance could
violate the equal protection clause because real property owners and
informal settlers do not belong to the same class.
Ordinance No. SP-2095 is also not oppressive since the tax rate being
imposed is consistent with the UDHA. While the law authorizes LGUs to
collect SHT on properties with an assessed value of more than P50,000.00,
the questioned ordinance only covers properties with an assessed value
exceeding P100,000.00. As well, the ordinance provides for a tax credit
equivalent to the total amount of the special assessment paid by the property
owner beginning in the sixth (6th) year of the effectivity of the ordinance.
On the contrary, petitioner claims that the collection of the SHT is
tantamount to a penalty imposed on real property owners due to the failure
of respondent Quezon City Mayor and Council to perform their duty to
secure and protect real property owners from informal settlers, thereby
burdening them with the expenses to provide funds for housing. For
petitioner, the SHT cannot be viewed as a “charity” from real property
owners since it is forced, not voluntary.
Also, petitioner argues that the collection of the SHT is a kind of class
legislation that violates the right of property owners to equal protection of
the laws since it favors informal settlers who occupy property not their own
and pay no taxes over law-abiding real property owners who pay income
and realty taxes.
TAX REVIEW (CASE BATCH 1)
Petitioner further contends that respondents’ characterization of the SHT as
“nothing more than an advance payment on the real property tax” has no
statutory basis. Allegedly, property tax cannot be collected before it is due
because, under the LGC, chartered cities are authorized to impose property
tax based on the assessed value and the general revision of assessment that
is made every three (3) years.
As to the rationale of SHT stated in Ordinance No. SP-2095, which, in turn,
was based on Section 43 of the UDHA, petitioner asserts that there is no
specific provision in the 1987 Constitution stating that the ownership and
enjoyment of property bear a social function. And even if there is, it is
seriously doubtful and far-fetched that the principle means that property
owners should provide funds for the housing of informal settlers and for
home site development. Social justice and police power, petitioner believes,
does not mean imposing a tax on one, or that one has to give up something,
for the benefit of another. At best, the principle that property ownership and
enjoyment bear a social function is but a reiteration of the Civil Law
principle that property should not be enjoyed and abused to the injury of
other properties and the community, and that the use of the property may be
restricted by police power, the exercise of which is not involved in this case.
Finally, petitioner alleges that 6 Bistekvilles will be constructed out of the
SHT collected. Bistek is the monicker of respondent City Mayor. The
Bistekvilles makes it clear, therefore, that politicians will take the credit for
the tax imposed on real property owners.
On the Garbage Fee
Respondents claim that Ordinance No. S-2235, which is an exercise of
police power, collects on the average from every household a garbage fee in
the meager amount of thirty-three (33) centavos per day compared with the
sum of P1,659.83 that the Quezon City Government annually spends for
every household for garbage collection and waste management.[62]
In addition, there is no double taxation because the ordinance involves a
fee. Even assuming that the garbage fee is a tax, the same cannot be a direct
duplicate tax as it is imposed on a different subject matter and is of a
different kind or character. Based on Villanueva, et al. v. City of Iloilo[63]
and Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,[64] there is
Page 8 of 151
no “taxing twice” because the real property tax is imposed on ownership
based on its assessed value, while the garbage fee is required on the
domestic household. The only reference to the property is the determination
of the applicable rate and the facility of collection.
Petitioner argues, however, that Ordinance No. S-2235 cannot be justified
as an exercise of police power. The cases of Calalang v. Williams,[65]
Patalinghug v. Court of Appeals,[66] and Social Justice Society (SJS), et al.
v. Hon. Atienza, Jr.,[67] which were cited by respondents, are inapplicable
since the assailed ordinance is a revenue measure and does not regulate the
disposal or other aspect of garbage.
The subject ordinance, for petitioner, is discriminatory as it collects garbage
fee only from domestic households and not from restaurants, food courts,
fast food chains, and other commercial dining places that spew garbage
much more than residential property owners.
Petitioner likewise contends that the imposition of garbage fee is
tantamount to double taxation because garbage collection is a basic and
essential public service that should be paid out from property tax, business
tax, transfer tax, amusement tax, community tax certificate, other taxes, and
the IRA of the Quezon City Government. To bolster the claim, he states that
the revenue collection of the Quezon City Government reached Php13.69
billion in 2012. A small portion of said amount could be spent for garbage
collection and other essential services.
It is further noted that the Quezon City Government already collects
garbage fee under Section 47[68] of R.A. No. 9003, or the Ecological Solid
Waste Management Act of 2000, which authorizes LGUs to impose fees in
amounts sufficient to pay the costs of preparing, adopting, and
implementing a solid waste management plan, and that LGUs have access
to the Solid Waste Management (SWM) Fund created under Section 46[69] of
the same law. Also, according to petitioner, it is evident that Ordinance No.
S-2235 is inconsistent with R.A. No. 9003 for while the law encourages
segregation, composting, and recycling of waste, the ordinance only
emphasizes the collection and payment of garbage fee; while the law calls
for an active involvement of the barangay in the collection, segregation, and
recycling of garbage, the ordinance skips such mandate.
Lastly, in challenging the ordinance, petitioner avers that the garbage fee
TAX REVIEW (CASE BATCH 1)
was collected even if the required publication of its approval had not yet
elapsed. He notes that on January 7, 2014, he paid his realty tax which
already included the garbage fee.
The Court’s Ruling
Respondents correctly argued that an ordinance, as in every law, is
presumed valid.
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus
to the discretion of municipal authorities. Courts will go slow in writing off
an ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule
which has gained acceptance is that factors relevant to such an inquiry are
the municipal conditions as a whole and the nature of the business made
subject to imposition.[70]
For an ordinance to be valid though, it must not only be within the corporate
powers of the LGU to enact and must be passed according to the procedure
prescribed by law, it should also conform to the following requirements: (1)
not contrary to the Constitution or any statute; (2) not unfair or oppressive;
(3) not partial or discriminatory; (4) not prohibit but may regulate trade; (5)
general and consistent with public policy; and (6) not unreasonable. [71] As
jurisprudence indicates, the tests are divided into the formal (i.e., whether
the ordinance was enacted within the corporate powers of the LGU and
whether it was passed in accordance with the procedure prescribed by law),
and the substantive (i.e., involving inherent merit, like the conformity of the
ordinance with the limitations under the Constitution and the statutes, as
well as with the requirements of fairness and reason, and its consistency
with public policy).[72]
An ordinance must pass muster under the test of constitutionality and the
test of consistency with the prevailing laws.[73] If not, it is void.[74]
Ordinance should uphold the principle of the supremacy of the
Constitution.[75] As to conformity with existing statutes, Batangas CATV,
Inc. v. Court of Appeals[76] has this to say:
It is a fundamental principle that municipal ordinances are inferior in status
and subordinate to the laws of the state. An ordinance in conflict with a
state law of general character and statewide application is universally held
to be invalid. The principle is frequently expressed in the declaration that
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municipal authorities, under a general grant of power, cannot adopt
ordinances which infringe the spirit of a state law or repugnant to the
general policy of the state. In every power to pass ordinances given to a
municipality, there is an implied restriction that the ordinances shall be
consistent with the general law. In the language of Justice Isagani Cruz
(ret.), this Court, in Magtajas vs. Pryce Properties Corp., Inc., ruled that:
The rationale of the requirement that the ordinances should not contravene a
statute is obvious. Municipal governments are only agents of the national
government. Local councils exercise only delegated legislative powers
conferred on them by Congress as the national lawmaking body. The
delegate cannot be superior to the principal or exercise powers higher than
those of the latter. It is a heresy to suggest that the local government units
can undo the acts of Congress, from which they have derived their power in
the first place, and negate by mere ordinance the mandate of the statute.
Municipal corporations owe their origin to, and derive their powers and
rights wholly from the legislature. It breathes into them the breath of life,
without which they cannot exist. As it creates, so it may destroy. As it may
destroy, it may abridge and control. Unless there is some constitutional
limitation on the right, the legislature might, by a single act, and if we can
suppose it capable of so great a folly and so great a wrong, sweep from
existence all of the municipal corporations in the State, and the corporation
could not prevent it. We know of no limitation on the right so far as to the
corporation themselves are concerned. They are, so to phrase it, the mere
tenants at will of the legislature.
This basic relationship between the national legislature and the local
government units has not been enfeebled by the new provisions in the
Constitution strengthening the policy of local autonomy. Without meaning
to detract from that policy, we here confirm that Congress retains control of
the local government units although in significantly reduced degree now
than under our previous Constitutions. The power to create still includes the
power to destroy. The power to grant still includes the power to withhold or
recall. True, there are certain notable innovations in the Constitution, like
the direct conferment on the local government units of the power to tax,
which cannot now be withdrawn by mere statute. By and large, however,
the national legislature is still the principal of the local government units,
which cannot defy its will or modify or violate it.[77]
LGUs must be reminded that they merely form part of the whole; that the
policy of ensuring the autonomy of local governments was never intended
TAX REVIEW (CASE BATCH 1)
by the drafters of the 1987 Constitution to create an imperium in imperio
and install an intra-sovereign political subdivision independent of a single
sovereign state.[78] “[M]unicipal corporations are bodies politic and
corporate, created not only as local units of local self-government, but as
governmental agencies of the state. The legislature, by establishing a
municipal corporation, does not divest the State of any of its sovereignty;
absolve itself from its right and duty to administer the public affairs of the
entire state; or divest itself of any power over the inhabitants of the district
which it possesses before the charter was granted.”[79]
LGUs are able to legislate only by virtue of a valid delegation of legislative
power from the national legislature; they are mere agents vested with what
is called the power of subordinate legislation.[80] “Congress enacted the
LGC as the implementing law for the delegation to the various LGUs of the
State’s great powers, namely: the police power, the power of eminent
domain, and the power of taxation. The LGC was fashioned to delineate the
specific parameters and limitations to be complied with by each LGU in the
exercise of these delegated powers with the view of making each LGU a
fully functioning subdivision of the State subject to the constitutional and
statutory limitations.”[81]
Specifically, with regard to the power of taxation, it is indubitably the most
effective instrument to raise needed revenues in financing and supporting
myriad activities of the LGUs for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people.[82] As this Court opined in National
Power Corp. v. City of Cabanatuan:[83]
In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives. Taxation assumes even greater significance with the ratification
of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to Article X, Section
5 of the 1987 Constitution, viz:
“Section 5. Each Local Government unit shall have the power to create its
own sources of revenue, to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the
Page 10 of 151
basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the local governments.”
This paradigm shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country’s highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
“dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders.” The
only way to shatter this culture of dependence is to give the LGUs a wider
role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, Section 3
of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local
autonomy, set the guidelines and limitations to this grant of taxing powers x
x x[84]
Fairly recently, We also stated in Pelizloy Realty Corporation v. Province of
Benguet[85] that:
The rule governing the taxing power of provinces, cities, municipalities and
barangays is summarized in Icard v. City Council of Baguio:
It is settled that a municipal corporation unlike a sovereign state is clothed
with no inherent power of taxation. The charter or statute must plainly show
an intent to confer that power or the municipality, cannot assume it. And the
power when granted is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be
resolved against the municipality. Inferences, implications, deductions – all
these – have no place in the interpretation of the taxing power of a
municipal corporation. [Underscoring supplied]
xxxx
Per Section 5, Article X of the 1987 Constitution, “the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges.” Nevertheless,
such authority is “subject to such guidelines and limitations as the Congress
may provide.”
In conformity with Section 3, Article X of the 1987 Constitution, Congress
enacted Republic Act No. 7160, otherwise known as the Local Government
TAX REVIEW (CASE BATCH 1)
Code of 1991. Book II of the LGC governs local taxation and fiscal
matters.[86]
Indeed, LGUs have no inherent power to tax except to the extent that such
power might be delegated to them either by the basic law or by the
statute.[87] “Under the now prevailing Constitution, where there is neither a
grant nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-
sufficiency of local government units by directly granting them general and
broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional objective
obviously is to ensure that, while the local government units are being
strengthened and made more autonomous, the legislature must still see to it
that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair
share of available resources; (c) the resources of the national government
will not be unduly disturbed; and (d) local taxation will be fair, uniform,
and just.”[88]
Subject to the provisions of the LGC and consistent with the basic policy of
local autonomy, every LGU is now empowered and authorized to create its
own sources of revenue and to levy taxes, fees, and charges which shall
accrue exclusively to the local government unit as well as to apply its
resources and assets for productive, developmental, or welfare purposes, in
the exercise or furtherance of their governmental or proprietary powers and
functions.[89] The relevant provisions of the LGC which establish the
parameters of the taxing power of the LGUs are as follows:
SECTION 130. Fundamental Principles. – The following fundamental
principles shall govern the exercise of the taxing and other revenue-raising
powers of local government units:
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayer’s ability to
pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
Page 11 of 151
(4) not be contrary to law, public policy, national economic policy, or in
restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions shall in
no case be let to any private person;
(d) The revenue collected pursuant to the provisions of this Code shall inure
solely to the benefit of, and be subject to the disposition by, the local
government unit levying the tax, fee, charge or other imposition unless
otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a
progressive system of taxation.
SECTION 133. Common Limitations on the Taxing Powers of Local
Government Units. – Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions
mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government
unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried into
or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon
such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;
TAX REVIEW (CASE BATCH 1)
(g) Taxes on business enterprises certified to by the Board of Investments as
pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein;
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the “Cooperative Code of the Philippines” respectively;
and
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units.
SECTION 151. Scope of Taxing Powers. – Except as otherwise provided in
this Code, the city, may levy the taxes, fees, and charges which the province
or municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
Page 12 of 151
allowed for the province or municipality by not more than fifty percent
(50%) except the rates of professional and amusement taxes.
SECTION 186. Power To Levy Other Taxes, Fees or Charges. – Local
government units may exercise the power to levy taxes, fees or charges on
any base or subject not otherwise specifically enumerated herein or taxed
under the provisions of the National Internal Revenue Code, as amended, or
other applicable laws: Provided, That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or contrary to declared national
policy: Provided, further, That the ordinance levying such taxes, fees or
charges shall not be enacted without any prior public hearing conducted for
the purpose.
On the Socialized Housing Tax
Contrary to petitioner’s submission, the 1987 Constitution explicitly
espouses the view that the use of property bears a social function and that
all economic agents shall contribute to the common good.[90] The Court
already recognized this in Social Justice Society (SJS), et al. v. Hon.
Atienza, Jr.:[91]
Property has not only an individual function, insofar as it has to provide for
the needs of the owner, but also a social function insofar as it has to provide
for the needs of the other members of society. The principle is this:
Police power proceeds from the principle that every holder of property,
however absolute and unqualified may be his title, holds it under the
implied liability that his use of it shall not be injurious to the equal
enjoyment of others having an equal right to the enjoyment of their
property, nor injurious to the right of the community. Rights of property,
like all other social and conventional rights, are subject to reasonable
limitations in their enjoyment as shall prevent them from being injurious,
and to such reasonable restraints and regulations established by law as the
legislature, under the governing and controlling power vested in them by
the constitution, may think necessary and expedient.[92]
Police power, which flows from the recognition that salus populi est
suprema lex (the welfare of the people is the supreme law), is the plenary
power vested in the legislature to make statutes and ordinances to promote
the health, morals, peace, education, good order or safety and general
welfare of the people.[93] Property rights of individuals may be subjected to
restraints and burdens in order to fulfill the objectives of the government in
the exercise of police power.[94] In this jurisdiction, it is well-entrenched
TAX REVIEW (CASE BATCH 1)
that taxation may be made the implement of the state’s police power. [95]
Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to
0.5% on the assessed value of land in excess of Php100,000.00. This special
assessment is the same tax referred to in R.A. No. 7279 or the UDHA. [96]
The SHT is one of the sources of funds for urban development and housing
program.[97] Section 43 of the law provides:
Sec. 43. Socialized Housing Tax. – Consistent with the constitutional
principle that the ownership and enjoyment of property bear a social
function and to raise funds for the Program, all local government units are
hereby authorized to impose an additional one-half percent (0.5%) tax on
the assessed value of all lands in urban areas in excess of Fifty thousand
pesos (P50,000.00).
The rationale of the SHT is found in the preambular clauses of the subject
ordinance, to wit:
WHEREAS, the imposition of additional tax is intended to provide the City
Government with sufficient funds to initiate, implement and undertake
Socialized Housing Projects and other related preliminary activities;
WHEREAS, the imposition of 0.5% tax will benefit the Socialized Housing
Programs and Projects of the City Government, specifically the
marginalized sector through the acquisition of properties for human
settlements;
WHEREAS, the removal of the urban blight will definitely increase fair
market value of properties in the city[.]
The above-quoted are consistent with the UDHA, which the LGUs are
charged to implement in their respective localities in coordination with the
Housing and Urban Development Coordinating Council, the national
housing agencies, the Presidential Commission for the Urban Poor, the
private sector, and other non-government organizations.[98] It is the declared
policy of the State to undertake a comprehensive and continuing urban
development and housing program that shall, among others, uplift the
conditions of the underprivileged and homeless citizens in urban areas and
in resettlement areas, and provide for the rational use and development of
urban land in order to bring about, among others, reduction in urban
dysfunctions, particularly those that adversely affect public health, safety
and ecology, and access to land and housing by the underprivileged and
homeless citizens.[99] Urban renewal and resettlement shall include the
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rehabilitation and development of blighted and slum areas[100] and the
resettlement of program beneficiaries in accordance with the provisions of
the UDHA.[101]
Under the UDHA, socialized housing[102] shall be the primary strategy in
providing shelter for the underprivileged and homeless.[103] The LGU or the
NHA, in cooperation with the private developers and concerned agencies,
shall provide socialized housing or resettlement areas with basic services
and facilities such as potable water, power and electricity, and an adequate
power distribution system, sewerage facilities, and an efficient and adequate
solid waste disposal system; and access to primary roads and transportation
facilities.[104] The provisions for health, education, communications,
security, recreation, relief and welfare shall also be planned and be given
priority for implementation by the LGU and concerned agencies in
cooperation with the private sector and the beneficiaries themselves.[105]
Moreover, within two years from the effectivity of the UDHA, the LGUs, in
coordination with the NHA, are directed to implement the relocation and
resettlement of persons living in danger areas such as esteros, railroad
tracks, garbage dumps, riverbanks, shorelines, waterways, and other public
places like sidewalks, roads, parks, and playgrounds.[106] In coordination
with the NHA, the LGUs shall provide relocation or resettlement sites with
basic services and facilities and access to employment and livelihood
opportunities sufficient to meet the basic needs of the affected families. [107]
Clearly, the SHT charged by the Quezon City Government is a tax which is
within its power to impose. Aside from the specific authority vested by
Section 43 of the UDHA, cities are allowed to exercise such other powers
and discharge such other functions and responsibilities as are necessary,
appropriate, or incidental to efficient and effective provision of the basic
services and facilities which include, among others, programs and projects
for low-cost housing and other mass dwellings.[108] The collections made
accrue to its socialized housing programs and projects. The tax is not a pure
exercise of taxing power or merely to raise revenue; it is levied with a
regulatory purpose. The levy is primarily in the exercise of the police power
for the general welfare of the entire city. It is greatly imbued with public
interest. Removing slum areas in Quezon City is not only beneficial to the
underprivileged and homeless constituents but advantageous to the real
property owners as well. The situation will improve the value of the their
property investments, fully enjoying the same in view of an orderly, secure,
TAX REVIEW (CASE BATCH 1)
and safe community, and will enhance the quality of life of the poor,
making them law-abiding constituents and better consumers of business
products.
Though broad and far-reaching, police power is subordinate to
constitutional limitations and is subject to the requirement that its exercise
must be reasonable and for the public good.[109] In the words of City of
Manila v. Hon. Laguio, Jr.:[110]
The police power granted to local government units must always be
exercised with utmost observance of the rights of the people to due process
and equal protection of the law. Such power cannot be exercised
whimsically, arbitrarily or despotically as its exercise is subject to a
qualification, limitation or restriction demanded by the respect and regard
due to the prescription of the fundamental law, particularly those forming
part of the Bill of Rights. Individual rights, it bears emphasis, may be
adversely affected only to the extent that may fairly be required by the
legitimate demands of public interest or public welfare. Due process
requires the intrinsic validity of the law in interfering with the rights of the
person to his life, liberty and property.
xxxx
To successfully invoke the exercise of police power as the rationale for the
enactment of the Ordinance, and to free it from the imputation of
constitutional infirmity, not only must it appear that the interests of the
public generally, as distinguished from those of a particular class, require an
interference with private rights, but the means adopted must be reasonably
necessary for the accomplishment of the purpose and not unduly oppressive
upon individuals. It must be evident that no other alternative for the
accomplishment of the purpose less intrusive of private rights can work. A
reasonable relation must exist between the purposes of the police measure
and the means employed for its accomplishment, for even under the guise of
protecting the public interest, personal rights and those pertaining to private
property will not be permitted to be arbitrarily invaded.
Lacking a concurrence of these two requisites, the police measure shall be
struck down as an arbitrary intrusion into private rights – a violation of the
due process clause.[111]
As with the State, LGUs may be considered as having properly exercised
their police power only if there is a lawful subject and a lawful method or,
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to be precise, if the following requisites are met: (1) the interests of the
public generally, as distinguished from those of a particular class, require its
exercise and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon
individuals.[112]
In this case, petitioner argues that the SHT is a penalty imposed on real
property owners because it burdens them with expenses to provide funds for
the housing of informal settlers, and that it is a class legislation since it
favors the latter who occupy properties which is not their own and pay no
taxes.
We disagree.
Equal protection requires that all persons or things similarly situated should
be treated alike, both as to rights conferred and responsibilities imposed. [113]
The guarantee means that no person or class of persons shall be denied the
same protection of laws which is enjoyed by other persons or other classes
in like circumstances.[114] Similar subjects should not be treated differently
so as to give undue favor to some and unjustly discriminate against
others.[115] The law may, therefore, treat and regulate one class differently
from another class provided there are real and substantial differences to
distinguish one class from another.[116]
An ordinance based on reasonable classification does not violate the
constitutional guaranty of the equal protection of the law. The requirements
for a valid and reasonable classification are: (1) it must rest on substantial
distinctions; (2) it must be germane to the purpose of the law; (3) it must not
be limited to existing conditions only; and (4) it must apply equally to all
members of the same class.[117]
For the purpose of undertaking a comprehensive and continuing urban
development and housing program, the disparities between a real property
owner and an informal settler as two distinct classes are too obvious and
need not be discussed at length. The differentiation conforms to the
practical dictates of justice and equity and is not discriminatory within the
meaning of the Constitution. Notably, the public purpose of a tax may
legally exist even if the motive which impelled the legislature to impose the
tax was to favor one over another.[118] It is inherent in the power to tax that a
State is free to select the subjects of taxation.[119] Inequities which result
TAX REVIEW (CASE BATCH 1)
from a singling out of one particular class for taxation or exemption infringe
no constitutional limitation.[120]
Further, the reasonableness of Ordinance No. SP-2095 cannot be disputed.
It is not confiscatory or oppressive since the tax being imposed therein is
below what the UDHA actually allows. As pointed out by respondents,
while the law authorizes LGUs to collect SHT on lands with an assessed
value of more than P50,000.00, the questioned ordinance only covers lands
with an assessed value exceeding P100,000.00. Even better, on certain
conditions, the ordinance grants a tax credit equivalent to the total amount
of the special assessment paid beginning in the sixth (6th) year of its
effectivity. Far from being obnoxious, the provisions of the subject
ordinance are fair and just.
On the Garbage Fee
In the United States of America, it has been held that the authority of a
municipality to regulate garbage falls within its police power to protect
public health, safety, and welfare.[121] As opined, the purposes and policy
underpinnings of the police power to regulate the collection and disposal of
solid waste are: (1) to preserve and protect the public health and welfare as
well as the environment by minimizing or eliminating a source of disease
and preventing and abating nuisances; and (2) to defray costs and ensure
financial stability of the system for the benefit of the entire community,
with the sum of all charges marshalled and designed to pay for the expense
of a systemic refuse disposal scheme.[122]
Ordinances regulating waste removal carry a strong presumption of
validity.[123] Not surprisingly, the overwhelming majority of U.S. cases
addressing a city's authority to impose mandatory garbage service and fees
have upheld the ordinances against constitutional and statutory
challenges.[124]
A municipality has an affirmative duty to supervise and control the
collection of garbage within its corporate limits.[125] The LGC specifically
assigns the responsibility of regulation and oversight of solid waste to local
governing bodies because the Legislature determined that such bodies were
in the best position to develop efficient waste management programs.[126] To
impose on local governments the responsibility to regulate solid waste but
Page 15 of 151
not grant them the authority necessary to fulfill the same would lead to an
absurd result.[127] As held in one U.S. case:
x x x When a municipality has general authority to regulate a particular
subject matter, the manner and means of exercising those powers, where not
specifically prescribed by the legislature, are left to the discretion of the
municipal authorities. x x x Leaving the manner of exercising municipal
powers to the discretion of municipal authorities "implies a range of
reasonableness within which a municipality's exercise of discretion will not
be interfered with or upset by the judiciary." [128]
In this jurisdiction, pursuant to Section 16 of the LGC and in the proper
exercise of its corporate powers under Section 22 of the same, the
Sangguniang Panlungsod of Quezon City, like other local legislative
bodies, is empowered to enact ordinances, approve resolutions, and
appropriate funds for the general welfare of the city and its inhabitants. [129]
Section 16 of the LGC provides:
SECTION 16. General Welfare. – Every local government unit shall
exercise the powers expressly granted, those necessarily implied therefrom,
as well as powers necessary, appropriate, or incidental for its efficient and
effective governance, and those which are essential to the promotion of the
general welfare. Within their respective territorial jurisdictions, local
government units shall ensure and support, among other things, the
preservation and enrichment of culture, promote health and safety, enhance
the right of the people to a balanced ecology, encourage and support the
development of appropriate and self-reliant scientific and technological
capabilities, improve public morals, enhance economic prosperity and
social justice, promote full employment among their residents, maintain
peace and order, and preserve the comfort and convenience of their
inhabitants.
The general welfare clause is the delegation in statutory form of the police
power of the State to LGUs.[130] The provisions related thereto are liberally
interpreted to give more powers to LGUs in accelerating economic
development and upgrading the quality of life for the people in the
community.[131] Wide discretion is vested on the legislative authority to
determine not only what the interests of the public require but also what
measures are necessary for the protection of such interests since the
Sanggunian is in the best position to determine the needs of its
constituents.[132]
One of the operative principles of decentralization is that, subject to the
TAX REVIEW (CASE BATCH 1)
provisions of the LGC and national policies, the LGUs shall share with the
national government the responsibility in the management and maintenance
of ecological balance within their territorial jurisdiction. [133] In this regard,
cities are allowed to exercise such other powers and discharge such other
functions and responsibilities as are necessary, appropriate, or incidental to
efficient and effective provision of the basic services and facilities which
include, among others, solid waste disposal system or environmental
management system and services or facilities related to general hygiene and
sanitation.[134] R.A. No. 9003, or the Ecological Solid Waste Management
Act of 2000,[135] affirms this authority as it expresses that the LGUs shall be
primarily responsible for the implementation and enforcement of its
provisions within their respective jurisdictions while establishing a
cooperative effort among the national government, other local government
units, non-government organizations, and the private sector. [136]
Necessarily, LGUs are statutorily sanctioned to impose and collect such
reasonable fees and charges for services rendered.[137] “Charges” refer to
pecuniary liability, as rents or fees against persons or property, while “Fee”
means a charge fixed by law or ordinance for the regulation or inspection of
a business or activity.[138]
The fee imposed for garbage collections under Ordinance No. SP-2235 is a
charge fixed for the regulation of an activity. The basis for this could be
discerned from the foreword of said Ordinance, to wit:
WHEREAS, Quezon City being the largest and premiere city in the
Philippines in terms of population and urban geographical areas, apart from
being competent and efficient in the delivery of public service, apparently
requires a big budgetary allocation in order to address the problems relative
and connected to the prompt and efficient delivery of basic services such as
the effective system of waste management, public information programs on
proper garbage and proper waste disposal, including the imposition of waste
regulatory measures;
WHEREAS, to help augment the funds to be spent for the city’s waste
management system, the City Government through the Sangguniang
Panlungsod deems it necessary to impose a schedule of reasonable fees or
charges for the garbage collection services for residential (domestic
household) that it renders to the public.
Page 16 of 151
Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax. In
Smart Communications, Inc. v. Municipality of Malvar, Batangas,[139] the
Court had the occasion to distinguish these two concepts:
In Progressive Development Corporation v. Quezon City, the Court
declared that “if the generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is
the primary purpose, the fact that incidentally revenue is also obtained does
not make the imposition a tax.”
In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court
reiterated that the purpose and effect of the imposition determine whether it
is a tax or a fee, and that the lack of any standards for such imposition gives
the presumption that the same is a tax.
We accordingly say that the designation given by the municipal authorities
does not decide whether the imposition is properly a license tax or a license
fee. The determining factors are the purpose and effect of the imposition as
may be apparent from the provisions of the ordinance. Thus, “[w]hen no
police inspection, supervision, or regulation is provided, nor any standard
set for the applicant to establish, or that he agrees to attain or maintain, but
any and all persons engaged in the business designated, without
qualification or hindrance, may come, and a license on payment of the
stipulated sum will issue, to do business, subject to no prescribed rule of
conduct and under no guardian eye, but according to the unrestrained
judgment or fancy of the applicant and licensee, the presumption is strong
that the power of taxation, and not the police power, is being exercised.”
In Georgia, U.S.A., assessments for garbage collection services have been
consistently treated as a fee and not a tax.[140] In another U.S. case,[141] the
garbage fee was considered as a "service charge" rather than a tax as it was
actually a fee for a service given by the city which had previously been
provided at no cost to its citizens.
Hence, not being a tax, the contention that the garbage fee under Ordinance
No. SP-2235 violates the rule on double taxation[142] must necessarily fail.
Nonetheless, although a special charge, tax, or assessment may be imposed
by a municipal corporation, it must be reasonably commensurate to the cost
of providing the garbage service.[143] To pass judicial scrutiny, a regulatory
fee must not produce revenue in excess of the cost of the regulation because
such fee will be construed as an illegal tax when the revenue generated by
the regulation exceeds the cost of the regulation.[144]
TAX REVIEW (CASE BATCH 1)
Petitioner argues that the Quezon City Government already collects garbage
fee under Section 47 of R.A. No. 9003, which authorizes LGUs to impose
fees in amounts sufficient to pay the costs of preparing, adopting, and
implementing a solid waste management plan, and that it has access to the
SWM Fund under Section 46 of the same law. Moreover, Ordinance No. S-
2235 is inconsistent with R.A. No. 9003, because the ordinance emphasizes
the collection and payment of garbage fee with no concern for segregation,
composting and recycling of wastes. It also skips the mandate of the law
calling for the active involvement of the barangay in the collection,
segregation, and recycling of garbage.
We now turn to the pertinent provisions of R.A. No. 9003.
Under R.A. No. 9003, it is the declared policy of the State to adopt a
systematic, comprehensive and ecological solid waste management program
which shall, among others, ensure the proper segregation, collection,
transport, storage, treatment and disposal of solid waste through the
formulation and adoption of the best environmental practices in ecological
waste management.[145] The law provides that segregation and collection of
solid waste shall be conducted at the barangay level, specifically for
biodegradable, compostable and reusable wastes, while the collection of
non-recyclable materials and special wastes shall be the responsibility of the
municipality or city.[146] Mandatory segregation of solid wastes shall
primarily be conducted at the source, to include household, institutional,
industrial, commercial and agricultural sources.[147] Segregation at source
refers to a solid waste management practice of separating, at the point of
origin, different materials found in solid waste in order to promote recycling
and re-use of resources and to reduce the volume of waste for collection and
disposal.[148] Based on Rule XVII of the Department of Environment and
Natural Resources (DENR) Administrative Order No. 2001-34, Series of
2001,[149] which is the Implementing Rules and Regulations (IRR) of R.A.
No. 9003, barangays shall be responsible for the collection, segregation,
and recycling of biodegradable, recyclable, compostable and reusable
wastes.[150] For the purpose, a Materials Recovery Facility (MRF), which
shall receive biodegradable wastes for composting and mixed non-
biodegradable wastes for final segregation, re-use and recycling, is to be
established in every barangay or cluster of barangays.[151]
According to R.A. 9003, an LGU, through its local solid waste management
Page 17 of 151
board, is mandated by law to prepare a 10-year solid waste management
plan consistent with the National Solid Waste Management Framework.[152]
The plan shall be for the re-use, recycling and composting of wastes
generated in its jurisdiction; ensure the efficient management of solid waste
generated within its jurisdiction; and place primary emphasis on
implementation of all feasible re-use, recycling, and composting programs
while identifying the amount of landfill and transformation capacity that
will be needed for solid waste which cannot be re-used, recycled, or
composted.[153] One of the components of the solid waste management plan
is source reduction:
(e) Source reduction – The source reduction component shall include a
program and implementation schedule which shows the methods by which
the LGU will, in combination with the recycling and composting
components, reduce a sufficient amount of solid waste disposed of in
accordance with the diversion requirements of Section 20.
The source reduction component shall describe the following:
(1) strategies in reducing the volume of solid waste generated at source;
(2) measures for implementing such strategies and the resources necessary
to carry out such activities;
(3) other appropriate waste reduction technologies that may also be
considered, provided that such technologies conform with the standards set
pursuant to this Act;
(4) the types of wastes to be reduced pursuant to Section 15 of this Act;
(5) the methods that the LGU will use to determine the categories of solid
wastes to be diverted from disposal at a disposal facility through re-use,
recycling and composting; and
(6) new facilities and of expansion of existing facilities which will be
needed to implement re-use, recycling and composting.
The LGU source reduction component shall include the evaluation and
identification of rate structures and fees for the purpose of reducing the
amount of waste generated, and other source reduction strategies, including
but not limited to, programs and economic incentives provided under Sec.
45 of this Act to reduce the use of non-recyclable materials, replace
disposable materials and products with reusable materials and products,
TAX REVIEW (CASE BATCH 1)
reduce packaging, and increase the efficiency of the use of paper,
cardboard, glass, metal, and other materials. The waste reduction activities
of the community shall also take into account, among others, local
capability, economic viability, technical requirements, social concerns,
disposition of residual waste and environmental impact: Provided, That,
projection of future facilities needed and estimated cost shall be
incorporated in the plan. x x x[154]
The solid waste management plan shall also include an implementation
schedule for solid waste diversion:
SEC. 20. Establishing Mandatory Solid Waste Diversion. – Each LGU plan
shall include an implementation schedule which shows that within five (5)
years after the effectivity of this Act, the LGU shall divert at least 25% of
all solid waste from waste disposal facilities through re-use, recycling, and
composting activities and other resource recovery activities: Provided, That
the waste diversion goals shall be increased every three (3) years thereafter:
Provided, further, That nothing in this Section prohibits a local government
unit from implementing re-use, recycling, and composting activities
designed to exceed the goal.
The baseline for the twenty-five percent (25%) shall be derived from the
waste characterization result[155] that each LGU is mandated to
undertake.[156]
In accordance with Section 46 of R.A. No. 9003, the LGUs are entitled to
avail of the SWM Fund on the basis of their approved solid waste
management plan. Aside from this, they may also impose SWM Fees under
Section 47 of the law, which states:
SEC. 47. Authority to Collect Solid Waste Management Fees – The local
government unit shall impose fees in amounts sufficient to pay the costs of
preparing, adopting, and implementing a solid waste management plan
prepared pursuant to this Act. The fees shall be based on the following
minimum factors:
(a) types of solid waste;
(b) amount/volume of waste; and
(c) distance of the transfer station to the waste management facility.
The fees shall be used to pay the actual costs incurred by the LGU in
collecting the local fees. In determining the amounts of the fees, an LGU
Page 18 of 151
shall include only those costs directly related to the adoption and
implementation of the plan and the setting and collection of the local fees.
Rule XVII of the IRR of R.A. No. 9003 sets forth the details:
Section 1. Power to Collect Solid Waste Management Fees. – The Local
SWM Board/Local SWM Cluster Board shall impose fees on the SWM
services provided for by the LGU and/or any authorized organization or
unit. In determining the amounts of the fees, a Local SWM Board/Local
SWM Cluster Board shall include only those costs directly related to the
adoption and implementation of the SWM Plan and the setting and
collection of the local fees. This power to impose fees may be ceded to the
private sector and civil society groups which have been duly accredited by
the Local SWM Board/Local SWM Cluster Board; provided, the SWM fees
shall be covered by a Contract or Memorandum of Agreement between the
respective board and the private sector or civil society group.
The fees shall pay for the costs of preparing, adopting and implementing a
SWM Plan prepared pursuant to the Act. Further, the fees shall also be used
to pay the actual costs incurred in collecting the local fees and for project
sustainability.
Section 2. Basis of SWM Service Fees
Reasonable SWM service fees shall be computed based on but not limited
to the following minimum factors:
a) Types of solid waste to include special waste
b) amount/volume of waste
c) distance of the transfer station to the waste management facility
d) capacity or type of LGU constituency
e) cost of construction
f) cost of management
g) type of technology
Section 3. Collection of Fees. – Fees may be collected corresponding to the
following levels:
TAX REVIEW (CASE BATCH 1) Page 19 of 151

a) Barangay – The Barangay may impose fees for collection and commercial, industrial, construction/demolition, street waste, agricultural,
segregation of biodegradable, compostable and reusable wastes from agro-industrial, institutional, etc. It is reasonable, therefore, for the Court to
households, commerce, other sources of domestic wastes, and for the use of presume that such amount pertains to the totality of wastes, without any
Barangay MRFs. The computation of the fees shall be established by the distinction, generated by Quezon City constituents. To reiterate, however,
respective SWM boards. The manner of collection of the fees shall be the authority of a municipality or city to impose fees extends only to those
dependent on the style of administration of respective Barangay Councils. related to the collection and transport of non-recyclable and special wastes.
However, all transactions shall follow the Commission on Audit rules on
collection of fees. Granting, for the sake of argument, that the 0.66 kilogram of solid waste per
day refers only to non-recyclable and special wastes, still, We cannot
b) Municipality – The municipal and city councils may impose fees on the sustain the validity of Ordinance No. S-2235. It violates the equal protection
barangay MRFs for the collection and transport of non-recyclable and clause of the Constitution and the provisions of the LGC that an ordinance
special wastes and for the disposal of these into the sanitary landfill. The must be equitable and based as far as practicable on the taxpayer’s ability to
level and procedure for exacting fees shall be defined by the Local SWM pay, and not unjust, excessive, oppressive, confiscatory.[158]
Board/Local SWM Cluster Board and supported by LGU ordinances,
however, payments shall be consistent with the accounting system of In the subject ordinance, the rates of the imposable fee depend on land or
government. floor area and whether the payee is an occupant of a lot, condominium,
social housing project or apartment. For easy reference, the relevant
c) Private Sector/Civil Society Group – On the basis of the stipulations of provision is again quoted below:
contract or Memorandum of Agreement, the private sector or civil society On all domestic households in Quezon City;
group shall impose fees for collection, transport and tipping in their SLFs.
Receipts and invoices shall be issued to the paying public or to the LAND AREA IMPOSABLE FEE
government. Less than 200 sq. m. PHP 100.00
From the afore-quoted provisions, it is clear that the authority of a 201 sq. m. – 500 sq. m. PHP 200.00
municipality or city to impose fees is limited to the collection and transport 501 sq. m. – 1,000 sq. m. PHP 300.00
of non-recyclable and special wastes and for the disposal of these into the 1,001 sq. m. – 1,500 sq. m. PHP 400.00
sanitary landfill. Barangays, on the other hand, have the authority to impose 1,501 sq. m. – 2,000 sq. m. or
PHP 500.00
fees for the collection and segregation of biodegradable, compostable and more
reusable wastes from households, commerce, other sources of domestic On all condominium unit and socialized housing projects/units in Quezon
wastes, and for the use of barangay MRFs. This is but consistent with City;
Section 10 of R.A. No. 9003 directing that segregation and collection of
biodegradable, compostable and reusable wastes shall be conducted at the FLOOR AREA IMPOSABLE FEE
barangay level, while the collection of non-recyclable materials and special Less than 40 sq. m. PHP25.00
wastes shall be the responsibility of the municipality or city. 41 sq. m. – 60 sq. m. PHP50.00
61 sq. m. – 100 sq. m. PHP75.00
In this case, the alleged bases of Ordinance No. S-2235 in imposing the
101 sq. m. – 150 sq. m. PHP100.00
garbage fee is the volume of waste currently generated by each person in
Quezon City, which purportedly stands at 0.66 kilogram per day, and the 151 sq. m. – 200 sq. [m.] or
PHP200.00
increasing trend of waste generation for the past three years.[157] more
Respondents did not elaborate any further. The figure presented does not On high-rise Condominium Units
reflect the specific types of wastes generated – whether residential, market,
TAX REVIEW (CASE BATCH 1)
a) High-rise Condominium – The Homeowners Association of high rise
condominiums shall pay the annual garbage fee on the total size of the
entire condominium and socialized Housing Unit and an additional
garbage fee shall be collected based on area occupied for every unit
already sold or being amortized.
b) High-rise apartment units – Owners of high-rise apartment units shall
pay the annual garbage fee on the total lot size of the entire apartment
and an additional garbage fee based on the schedule prescribed herein
for every unit occupied.
For the purpose of garbage collection, there is, in fact, no substantial
distinction between an occupant of a lot, on one hand, and an occupant of a
unit in a condominium, socialized housing project or apartment, on the
other hand. Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree; thus, a similar
schedule of fee is both just and equitable.[159]
The rates being charged by the ordinance are unjust and inequitable: a
resident of a 200 sq. m. unit in a condominium or socialized housing project
has to pay twice the amount than a resident of a lot similar in size; unlike
unit occupants, all occupants of a lot with an area of 200 sq. m. and less
have to pay a fixed rate of Php100.00; and the same amount of garbage fee
is imposed regardless of whether the resident is from a condominium or
from a socialized housing project.
Indeed, the classifications under Ordinance No. S-2235 are not germane to
its declared purpose of “promoting shared responsibility with the residents
to attack their common mindless attitude in over-consuming the present
resources and in generating waste.”[160] Instead of simplistically
categorizing the payee into land or floor occupant of a lot or unit of a
condominium, socialized housing project or apartment, respondent City
Council should have considered factors that could truly measure the amount
of wastes generated and the appropriate fee for its collection. Factors
include, among others, household age and size, accessibility to waste
collection, population density of the barangay or district, capacity to pay,
and actual occupancy of the property. R.A. No. 9003 may also be looked
into for guidance. Under said law, SWM service fees may be computed
based on minimum factors such as types of solid waste to include special
waste, amount/volume of waste, distance of the transfer station to the waste
management facility, capacity or type of LGU constituency, cost of
Page 20 of 151
construction, cost of management, and type of technology. With respect to
utility rates set by municipalities, a municipality has the right to classify
consumers under reasonable classifications based upon factors such as the
cost of service, the purpose for which the service or the product is received,
the quantity or the amount received, the different character of the service
furnished, the time of its use or any other matter which presents a
substantial difference as a ground of distinction.[161]
[A] lack of uniformity in the rate charged is not necessarily unlawful
discrimination. The establishment of classifications and the charging of
different rates for the several classes is not unreasonable and does not
violate the requirements of equality and uniformity. Discrimination to be
unlawful must draw an unfair line or strike an unfair balance between those
in like circumstances having equal rights and privileges. Discrimination
with respect to rates charged does not vitiate unless it is arbitrary and
without a reasonable fact basis or justification.[162]
On top of an unreasonable classification, the penalty clause of Ordinance
No. SP-2235, which states:
SECTION 3. Penalty Clause – A penalty of 25% of the garbage fee due
plus an interest of 2% per month or a fraction thereof (interest) shall be
charged against a household owner who refuses to pay the garbage fee
herein imposed.
lacks the limitation required by Section 168 of the LGC, which provides:
SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or
Charges. – The sanggunian may impose a surcharge not exceeding twenty-
five (25%) of the amount of taxes, fees or charges not paid on time and an
interest at the rate not exceeding two percent (2%) per month of the unpaid
taxes, fees or charges including surcharges, until such amount is fully paid
but in no case shall the total interest on the unpaid amount or portion
thereof exceed thirty-six (36) months. (Emphasis supplied)
Finally, on the issue of publication of the two challenged ordinances.
Petitioner argues that the garbage fee was collected even if the required
publication of its approval had not yet elapsed. He notes that he paid his
realty tax on January 7, 2014 which already included the garbage fee.
Respondents counter that if the law provides for its own effectivity,
publication in the Official Gazette is not necessary so long as it is not penal
in nature. Allegedly, Ordinance No. SP-2095 took effect after its
publication while Ordinance No. SP-2235 became effective after its
approval on December 26, 2013.
TAX REVIEW (CASE BATCH 1) Page 21 of 151

circulation: Provided, however, That in provinces, cities and municipalities

The pertinent provisions of the LGC state:
SECTION 59. Effectivity of Ordinances or Resolutions. – (a) Unless
otherwise stated in the ordinance or the resolution approving the local
development plan and public investment program, the same shall take
effect after ten (10) days from the date a copy thereof is posted in a
bulletin board at the entrance of the provincial capitol or city, municipal, or
barangay hall, as the case may be, and in at least two (2) other conspicuous
places in the local government unit concerned.
(b) The secretary to the sanggunian concerned shall cause the posting of an
ordinance or resolution in the bulletin board at the entrance of the provincial
capitol and the city, municipal, or barangay hall in at least two (2)
conspicuous places in the local government unit concerned not later than
five (5) days after approval thereof.
The text of the ordinance or resolution shall be disseminated and posted in
Filipino or English and in the language or dialect understood by the
majority of the people in the local government unit concerned, and the
secretary to the sanggunian shall record such fact in a book kept for the
purpose, stating the dates of approval and posting.
(c) The gist of all ordinances with penal sanctions shall be published in a
newspaper of general circulation within the province where the local
legislative body concerned belongs. In the absence of any newspaper of
general circulation within the province, posting of such ordinances shall be
made in all municipalities and cities of the province where the sanggunian
of origin is situated.
(d) In the case of highly urbanized and independent component cities, the
main features of the ordinance or resolution duly enacted or adopted shall,
in addition to being posted, be published once in a local newspaper of
general circulation within the city: Provided, That in the absence
thereof the ordinance or resolution shall be published in any newspaper
of general circulation.
where there are no newspapers of local circulation, the same may be posted
in at least two (2) conspicuous and publicly accessible places. (Emphasis
supplied)
On October 17, 2011, respondent Quezon City Council enacted Ordinance
No. SP-2095, which provides that it would take effect after its publication
in a newspaper of general circulation.[163] On the other hand, Ordinance No.
SP-2235, which was passed by the City Council on December 16, 2013,
provides that it would be effective upon its approval. [164] Ten (10) days after
its enactment, or on December 26, 2013, respondent City Mayor approved
the same.[165]
The case records are bereft of any evidence to prove petitioner’s negative
allegation that respondents did not comply with the posting and publication
requirements of the law. Thus, We are constrained not to give credit to his
unsupported claim.
WHEREFORE, the petition is PARTIALLY GRANTED. The
constitutionality and legality of Ordinance No. SP-2095, S-2011, or the
“Socialized Housing Tax of Quezon City,” is SUSTAINED for being
consistent with Section 43 of Republic Act No. 7279. On the other hand,
Ordinance No. SP-2235, S-2013, which collects an annual garbage fee on
all domestic households in Quezon City, is hereby declared as
UNCONSTITUTIONAL AND ILLEGAL. Respondents are DIRECTED
to REFUND with reasonable dispatch the sums of money collected relative
to its enforcement.
The temporary restraining order issued by the Court on February 5, 2014 is
LIFTED with respect to Ordinance No. SP-2095. In contrast, respondents
are PERMANENTLY ENJOINED from taking any further action to
enforce Ordinance No. SP. 2235.
SO ORDERED.

SECTION 188. Publication of Tax Ordinances and Revenue Measures. –

Within ten (10) days after their approval, certified true copies of all
provincial, city, and municipal tax ordinances or revenue measures shall be
published in full for three (3) consecutive days in a newspaper of local
TAX REVIEW (CASE BATCH 1)
G.R. No. 193007, July 19, 2011
RENATO V. DIAZ AND AURORA MA. F. TIMBOL, PETITIONERS,
VS. THE SECRETARY OF FINANCE AND THE COMMISSIONER
OF INTERNAL REVENUE, RESPONDENTS.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added
tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief [1] 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.
Page 22 of 151
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]
TAX REVIEW (CASE BATCH 1)
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.
[6]
In their reply 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:
Page 23 of 151
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
TAX REVIEW (CASE BATCH 1)
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
[8]
that need to be resolved for the public good. The Court has also held that
a petition for prohibition is a proper remedy to prohibit or nullify acts of
[9]
executive officials that amount to usurpation of legislative authority.
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
[10]
mere procedural requisite.
B. On the Substantive Issues:
Page 24 of 151
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
TAX REVIEW (CASE BATCH 1) Page 25 of 151

the performance thereof calls for the exercise or use of the physical or providers under Section 108 who allow others to use their properties or
mental faculties. (Underscoring supplied) facilities for a fee:

1. Lessors of property, whether personal or real;

It is plain from the above that the law imposes VAT on "all kinds of
2. Warehousing service operators;
services" rendered in the Philippines for a fee, including those specified in
3. Lessors or distributors of cinematographic films;
the list. The enumeration of affected services is not exclusive. [11] By
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
qualifying "services" with the words "all kinds," Congress has given the
houses, inns, resorts;
term "services" an all-encompassing meaning. The listing of specific
5. Lending investors (for use of money);
services are intended to illustrate how pervasive and broad is the VAT's
6. Transportation contractors on their transport of goods or cargoes,
reach rather than establish concrete limits to its application. Thus, every
including persons who transport goods or cargoes for hire and other
activity that can be imagined as a form of "service" rendered for a fee
domestic common carriers by land relative to their transport of goods or
should be deemed included unless some provision of law especially
cargoes; and
excludes it.
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
Now, do tollway operators render services for a fee? Presidential Decree
Philippines.
(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 It does not help petitioners' cause that Section 108 subjects to VAT "all
operators' expense. Tollways serve as alternatives to regular public kinds of services" rendered for a fee "regardless of whether or not the
highways that meander through populated areas and branch out to local performance thereof calls for the exercise or use of the physical or mental
roads. Traffic in the regular public highways is for this reason slow- faculties." This means that "services" to be subject to VAT need not fall
moving. In consideration for constructing tollways at their expense, the under the traditional concept of services, the personal or professional kinds
operators are allowed to collect government-approved fees from motorists that require the use of human knowledge and skills.
using the tollways until such operators could fully recover their expenses
and earn reasonable returns from their investments. 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
When a tollway operator takes a toll fee from a motorist, the fee is in effect as "all other franchise grantees" who are subject to VAT, "except those
for the latter's use of the tollway facilities over which the operator enjoys under Section 119 of this Code."
[12]
private proprietary rights that its contract and the law recognize. In this
sense, the tollway operator is no different from the following service Tollway operators are franchise grantees and they do not belong to
TAX REVIEW (CASE BATCH 1)
exceptions (the low-income radio and/or television broadcasting companies
with gross annual incomes of less than P10 million and gas and water
[13]
utilities) that Section 119 spares from the payment of VAT. The word
"franchise" broadly covers government grants of a special right to do an act
[14]
or series of acts of public concern.
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
[16]
delegated by Congress.
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
[18]
this case is evidenced by a "Toll Operation Certificate."
Page 26 of 151
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
TAX REVIEW (CASE BATCH 1)
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
Page 27 of 151
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
TAX REVIEW (CASE BATCH 1)
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
[29]
VAT.
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
[30]
is added to the selling price. Once shifted, the VAT ceases to be a tax
and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Page 28 of 151
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
TAX REVIEW (CASE BATCH 1)
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
[34]
limitations are impaired." 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
[35]
provides some clue as to how the BIR intends to go about it, 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.
Page 29 of 151
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
TAX REVIEW (CASE BATCH 1) Page 30 of 151

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.

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.
TAX REVIEW (CASE BATCH 1)
G.R. No. 175356, December 03, 2013
MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-
SUCAT, INC., PETITIONERS, VS. SECRETARY OF THE
DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT
AND THE SECRETARY OF THE DEPARTMENT OF FINANCE,
RESPONDENTS.
DECISION
DEL CASTILLO, J.:
When a party challenges the constitutionality of a law, the burden of proof
rests upon him.[1]
Before us is a Petition for Prohibition[2] under Rule 65 of the Rules of Court
filed by petitioners Manila Memorial Park, Inc. and La Funeraria Paz-Sucat,
Inc., domestic corporations engaged in the business of providing funeral
and burial services, against public respondents Secretaries of the
Department of Social Welfare and Development (DSWD) and the
Department of Finance (DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act (RA)
No. 7432,[3] as amended by RA 9257,[4] and the implementing rules and
regulations issued by the DSWD and DOF insofar as these allow business
establishments to claim the 20% discount given to senior citizens as a tax
deduction.
Factual Antecedents
Page 31 of 151
On April 23, 1992, RA 7432 was passed into law, granting senior citizens
the following privileges:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall
be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar lodging
establishment[s], restaurants and recreation centers and purchase of
medicine anywhere in the country: Provided, That private establishments
may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged
by theaters, cinema houses and concert halls, circuses, carnivals and other
similar places of culture, leisure, and amusement;
c) exemption from the payment of individual income taxes: Provided, That
their annual taxable income does not exceed the property level as
determined by the National Economic and Development Authority (NEDA)
for that year;
d) exemption from training fees for socioeconomic programs undertaken by
the OSCA as part of its work;
e) free medical and dental services in government establishment[s]
anywhere in the country, subject to guidelines to be issued by the
Department of Health, the Government Service Insurance System and the
Social Security System;
f) to the extent practicable and feasible, the continuance of the same
benefits and privileges given by the Government Service Insurance System
TAX REVIEW (CASE BATCH 1)
(GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be,
as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to
implement RA 7432. Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations:
i. Tax Credit – refers to the amount representing the 20% discount granted
to a qualified senior citizen by all establishments relative to their utilization
of transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses, concert
halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said establishments
from their gross income for income tax purposes and from their gross sales
for value-added tax or other percentage tax purposes.
xxxx
Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR
PRIVATE ESTABLISHMENTS. – Private establishments, i.e., transport
services, hotels and similar lodging establishments, restaurants, recreation
centers, drugstores, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture[,] leisure and amusement,
giving 20% discounts to qualified senior citizens are required to keep
separate and accurate record[s] of sales made to senior citizens, which shall
include the name, identification number, gross sales/receipts, discounts,
dates of transactions and invoice number for every transaction.
The amount of 20% discount shall be deducted from the gross income for
income tax purposes and from gross sales of the business enterprise
concerned for purposes of the VAT and other percentage taxes.
Page 32 of 151
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,[5]
the Court declared Sections 2(i) and 4 of RR No. 02-94 as erroneous
because these contravene RA 7432,[6] thus:
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant. In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures for its
availment. To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as
the amount representing the 20 percent discount that “shall be deducted by
the said establishments from their gross income for income tax purposes
and from their gross sales for value-added tax or other percentage tax
purposes.” In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall
be credited against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an “abatement or reduction made
from the gross amount or value of anything.” To be more precise, it is in
business parlance “a deduction or lowering of an amount of money;” or “a
reduction from the full amount or value of something, especially a price.” In
business there are many kinds of discount, the most common of which is
that affecting the income statement or financial report upon which the
income tax is based.
xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit
as the 20 percent discount deductible from gross income for income tax
purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount.
TAX REVIEW (CASE BATCH 1)
This contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in the
income statement and cannot be deducted again, even for purposes of
computing the income tax.
When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount — when claimed — shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the
tax credit benefit depends upon the existence of a tax liability, but to limit
the benefit to a sales discount — which is not even identical to the discount
privilege that is granted by law — does not define it at all and serves no
useful purpose. The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a
regulation that “operates to create a rule out of harmony with the statute is a
mere nullity;” it cannot prevail.
It is a cardinal rule that courts “will and should respect the
contemporaneous construction placed upon a statute by the executive
officers whose duty it is to enforce it x x x.” In the scheme of judicial tax
administration, the need for certainty and predictability in the
implementation of tax laws is crucial. Our tax authorities fill in the details
that “Congress may not have the opportunity or competence to provide.”
The regulations these authorities issue are relied upon by taxpayers, who are
certain that these will be followed by the courts. Courts, however, will not
uphold these authorities’ interpretations when clearly absurd, erroneous or
improper.
Page 33 of 151
In the present case, the tax authorities have given the term tax credit in
Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA
7432 provides. Their interpretation has muddled x x x the intent of
Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot engraft additional
requirements not contemplated by the legislature.
In case of conflict, the law must prevail. A “regulation adopted pursuant to
law is law.” Conversely, a regulation or any portion thereof not adopted
pursuant to law is no law and has neither the force nor the effect of law. [7]
On February 26, 2004, RA 9257[8] amended certain provisions of RA 7432,
to wit:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall
be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of
medicines in all establishments for the exclusive use or enjoyment of senior
citizens, including funeral and burial services for the death of senior
citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and
(h) as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their
TAX REVIEW (CASE BATCH 1)
gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code,
as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance
issued RR No. 4-2006, the pertinent provision of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES
DISCOUNTS AS DEDUCTION FROM GROSS INCOME. –
Establishments enumerated in subparagraph (6) hereunder granting sales
discounts to senior citizens on the sale of goods and/or services specified
thereunder are entitled to deduct the said discount from gross income
subject to the following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED,
CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be
eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE
SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR
SALES INVOICE issued by the establishment for the sale of goods or
services to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not
exceeding 20% of the gross selling price can be deducted from the gross
income, net of value added tax, if applicable, for income tax purposes,
and from gross sales or gross receipts of the business enterprise
concerned, for VAT or other percentage tax purposes.
(4) The discount can only be allowed as deduction from gross income for
the same taxable year that the discount is granted.
(5) The business establishment giving sales discounts to qualified senior
citizens is required to keep separate and accurate record[s] of sales,
Page 34 of 151
which shall include the name of the senior citizen, TIN, OSCA ID,
gross sales/receipts, sales discount granted, [date] of [transaction] and
invoice number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales
discount to senior citizens on their sale of goods and/or services may
claim the said discount granted as deduction from gross income,
namely:
xxxx
(i) Funeral parlors and similar establishments – The beneficiary or any
person who shall shoulder the funeral and burial expenses of the
deceased senior citizen shall claim the discount, such as casket,
embalmment, cremation cost and other related services for the senior
citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing
RA 9257, to wit:
RULE VI
DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. – The establishment may claim
the discounts granted under Rule V, Section 4 – Discounts for
Establishments, Section 9, Medical and Dental Services in Private Facilities
and Sections 10 and 11 – Air, Sea and Land Transportation as tax deduction
based on the net cost of the goods sold or services rendered. Provided, That
the cost of the discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted; Provided, further, That
the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes
TAX REVIEW (CASE BATCH 1)
and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the Revenue
Regulations to be issued by the Bureau of Internal Revenue (BIR) and
approved by the Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed the present
recourse, praying that Section 4 of RA 7432, as amended by RA 9257, and
the implementing rules and regulations issued by the DSWD and the DOF
be declared unconstitutional insofar as these allow business establishments
to claim the 20% discount given to senior citizens as a tax deduction; that
the DSWD and the DOF be prohibited from enforcing the same; and that
the tax credit treatment of the 20% discount under the former Section 4 (a)
of RA 7432 be reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR
CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS
IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY
PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO
SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY
THE PRIVATE ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL.[9]
Page 35 of 151
Petitioners’ Arguments
Petitioners emphasize that they are not questioning the 20% discount
granted to senior citizens but are only assailing the constitutionality of the
tax deduction scheme prescribed under RA 9257 and the implementing
rules and regulations issued by the DSWD and the DOF.[10]
Petitioners posit that the tax deduction scheme contravenes Article III,
Section 9 of the Constitution, which provides that: “[p]rivate property shall
not be taken for public use without just compensation.”[11] In support of
their position, petitioners cite Central Luzon Drug Corporation,[12] where it
was ruled that the 20% discount privilege constitutes taking of private
property for public use which requires the payment of just compensation, [13]
and Carlos Superdrug Corporation v. Department of Social Welfare and
Development,[14] where it was acknowledged that the tax deduction scheme
does not meet the definition of just compensation.[15]
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug
Corporation[16] that the tax deduction scheme adopted by the government is
justified by police power.[17] They assert that “[a]lthough both police power
and the power of eminent domain have the general welfare for their object,
there are still traditional distinctions between the two”[18] and that “eminent
domain cannot be made less supreme than police power.”[19] Petitioners
further claim that the legislature, in amending RA 7432, relied on an
erroneous contemporaneous construction that prior payment of taxes is
required for tax credit.[20]
Petitioners also contend that the tax deduction scheme violates Article XV,
Section 4[21] and Article XIII, Section 11[22] of the Constitution because it
shifts the State’s constitutional mandate or duty of improving the welfare of
the elderly to the private sector.[23] Under the tax deduction scheme, the
TAX REVIEW (CASE BATCH 1)
private sector shoulders 65% of the discount because only 35%[24] of it is
actually returned by the government.[25] Consequently, the implementation
of the tax deduction scheme prescribed under Section 4 of RA 9257 affects
the businesses of petitioners.[26] Thus, there exists an actual case or
controversy of transcendental importance which deserves judicious
disposition on the merits by the highest court of the land. [27]
Respondents’ Arguments
Respondents, on the other hand, question the filing of the instant Petition
directly with the Supreme Court as this disregards the hierarchy of
courts. [28]
They likewise assert that there is no justiciable controversy as
petitioners failed to prove that the tax deduction treatment is not a “fair and
full equivalent of the loss sustained” by them.[29] As to the constitutionality
of RA 9257 and its implementing rules and regulations, respondents
contend that petitioners failed to overturn its presumption of
[30]
constitutionality. More important, respondents maintain that the tax
deduction scheme is a legitimate exercise of the State’s police power. [31]
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue.
When the constitutionality of a law is put in issue, judicial review may be
availed of only if the following requisites concur: “(1) the existence of an
actual and appropriate case; (2) the existence of personal and substantial
interest on the part of the party raising the [question of constitutionality];
Page 36 of 151
(3) recourse to judicial review is made at the earliest opportunity; and (4)
the [question of constitutionality] is the lis mota of the case.”[32]
In this case, petitioners are challenging the constitutionality of the tax
deduction scheme provided in RA 9257 and the implementing rules and
regulations issued by the DSWD and the DOF. Respondents, however,
oppose the Petition on the ground that there is no actual case or controversy.
We do not agree with respondents.
An actual case or controversy exists when there is “a conflict of legal
rights” or “an assertion of opposite legal claims susceptible of judicial
resolution.”[33] The Petition must therefore show that “the governmental act
being challenged has a direct adverse effect on the individual challenging
it.”[34] In this case, the tax deduction scheme challenged by petitioners has a
direct adverse effect on them. Thus, it cannot be denied that there exists an
actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction scheme
under RA 9257, as an exercise of police power of the State, has already
been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of
whether the legally mandated 20% senior citizen discount is an exercise of
police power or eminent domain. If it is police power, no just compensation
is warranted. But if it is eminent domain, the tax deduction scheme is
unconstitutional because it is not a peso for peso reimbursement of the 20%
discount given to senior citizens. Thus, it constitutes taking of private
property without payment of just compensation.
At the outset, we note that this question has been settled in Carlos
Superdrug Corporation.[35] In that case, we ruled:
TAX REVIEW (CASE BATCH 1)
Petitioners assert that Section 4(a) of the law is unconstitutional because it
constitutes deprivation of private property. Compelling drugstore owners
and establishments to grant the discount will result in a loss of profit and
capital because 1) drugstores impose a mark-up of only 5% to 10% on
branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners are
ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that they
extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to senior
citizens. This is because the discount is treated as a deduction, a tax-
deductible expense that is subtracted from the gross income and results in a
lower taxable income. Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of the tax rate to compute
the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net
income of the private establishments concerned. The discounts given would
have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation.
Page 37 of 151
Just compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the taker’s
gain but the owner’s loss. The word just is used to intensify the meaning of
the word compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and
ample.
A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation.
Having said that, this raises the question of whether the State, in promoting
the health and welfare of a special group of citizens, can impose upon
private establishments the burden of partly subsidizing a government
program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution
of senior citizens to nation-building, and to grant benefits and privileges to
them for their improvement and well-being as the State considers them an
integral part of our society.
The priority given to senior citizens finds its basis in the Constitution as set
forth in the law itself. Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article
XV, Section 4 of the Constitution, it is the duty of the family to take care of
its elderly members while the State may design programs of social security
for them. In addition to this, Section 10 in the Declaration of Principles and
TAX REVIEW (CASE BATCH 1)
State Policies provides: “The State shall provide social justice in all phases
of national development.” Further, Article XIII, Section 11, provides: “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.” Consonant with these constitutional principles the
following are the declared policies of this Act:
………
(f) To recognize the important role of the private sector in the
improvement of the welfare of senior citizens and to actively seek their
partnership.
To implement the above policy, the law grants a twenty percent discount to
senior citizens for medical and dental services, and diagnostic and
laboratory fees; admission fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and amusement; fares
for domestic land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers; and
purchases of medicines for the exclusive use or enjoyment of senior
citizens. As a form of reimbursement, the law provides that business
establishments extending the twenty percent discount to senior citizens may
claim the discount as a tax deduction.
The law is a legitimate exercise of police power which, similar to the power
of eminent domain, has general welfare for its object. Police power is not
capable of an exact definition, but has been purposely veiled in general
terms to underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to conditions
and circumstances, thus assuring the greatest benefits. Accordingly, it has
Page 38 of 151
been described as “the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs.” It is “[t]he power
vested in the legislature by the constitution to make, ordain, and establish
all manner of wholesome and reasonable laws, statutes, and ordinances,
either with penalties or without, not repugnant to the constitution, as they
shall judge to be for the good and welfare of the commonwealth, and of the
subjects of the same.”
For this reason, when the conditions so demand as determined by the
legislature, property rights must bow to the primacy of police power
because property rights, though sheltered by due process, must yield to
general welfare.
Police power as an attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in
the absence of evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the grant of the senior
citizen discount is unduly oppressive to their business, because petitioners
have not taken time to calculate correctly and come up with a financial
report, so that they have not been able to show properly whether or not the
tax deduction scheme really works greatly to their disadvantage.
In treating the discount as a tax deduction, petitioners insist that they will
incur losses because, referring to the DOF Opinion, for every P1.00 senior
citizen discount that petitioners would give, P0.68 will be shouldered by
them as only P0.32 will be refunded by the government by way of a tax
deduction.
TAX REVIEW (CASE BATCH 1)
To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example. According to the
latter, it acquires Norvasc from the distributors at P37.57 per tablet, and
retails it at P39.60 (or at a margin of 5%). If it grants a 20% discount to
senior citizens or an amount equivalent to P7.92, then it would have to sell
Norvasc at P31.68 which translates to a loss from capital of P5.89 per
tablet. Even if the government will allow a tax deduction, only P2.53 per
tablet will be refunded and not the full amount of the discount which is
P7.92. In short, only 32% of the 20% discount will be reimbursed to the
drugstores.
Petitioners’ computation is flawed. For purposes of reimbursement, the law
states that the cost of the discount shall be deducted from gross income, the
amount of income derived from all sources before deducting allowable
expenses, which will result in net income. Here, petitioners tried to show a
loss on a per transaction basis, which should not be the case. An income
statement, showing an accounting of petitioners' sales, expenses, and net
profit (or loss) for a given period could have accurately reflected the effect
of the discount on their income. Absent any financial statement, petitioners
cannot substantiate their claim that they will be operating at a loss should
they give the discount. In addition, the computation was erroneously based
on the assumption that their customers consisted wholly of senior citizens.
Lastly, the 32% tax rate is to be imposed on income, not on the amount of
the discount.
Furthermore, it is unfair for petitioners to criticize the law because they
cannot raise the prices of their medicines given the cutthroat nature of the
players in the industry. It is a business decision on the part of petitioners to
peg the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch as
Page 39 of 151
pricing is a property right, petitioners cannot reproach the law for being
oppressive, simply because they cannot afford to raise their prices for fear
of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry
and the competitive pricing component of the business. While the
Constitution protects property rights, petitioners must accept the realities of
business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property
rights in the process.
Moreover, the right to property has a social dimension. While Article XIII
of the Constitution provides the precept for the protection of property,
various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continuously serve as x x x
reminder[s] that the right to property can be relinquished upon the
command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the
support imparted by petitioners and the other private establishments
concerned. This being the case, the means employed in invoking the active
participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient
proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act. [36] (Bold
in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme
is a valid exercise of the police power of the State.
No compelling reason has been proffered to overturn, modify or abandon
TAX REVIEW (CASE BATCH 1)
the ruling in Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug
Corporation [37]
that the 20% discount is an exercise of the power of eminent
domain, thus, requiring the payment of just compensation. They urge us to
re-examine our ruling in Carlos Superdrug Corporation[38] which allegedly
[39]
reversed the ruling in Central Luzon Drug Corporation. They also point
[40]
out that Carlos Superdrug Corporation recognized that the tax deduction
scheme under the assailed law does not provide for sufficient just
compensation.
We agree with petitioners’ observation that there are statements in Central
Luzon Drug Corporation [41]
describing the 20% discount as an exercise of
the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments concerned. Accordingly,
the tax credit benefit granted to these establishments can be deemed as
their just compensation for private property taken by the State for public
use.
The concept of public use is no longer confined to the traditional notion of
use by the public, but held synonymous with public interest, public benefit,
public welfare, and public convenience. The discount privilege to which our
senior citizens are entitled is actually a benefit enjoyed by the general public
to which these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent
Page 40 of 151
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance — when not done
within a reasonable time from the grant of the discounts — cannot be
considered as just compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent amount it needs to
cope with the reduction in its revenues.
Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain. Tax measures are but “enforced
contributions exacted on pain of penal sanctions” and “clearly imposed for a
public purpose.” In recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.
While it is a declared commitment under Section 1 of RA 7432, social
justice “cannot be invoked to trample on the rights of property owners who
under our Constitution and laws are also entitled to protection. The social
justice consecrated in our [C]onstitution [is] not intended to take away
rights from a person and give them to another who is not entitled thereto.”
For this reason, a just compensation for income that is taken away from
respondent becomes necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body can alter that
fact.
To put it differently, a private establishment that merely breaks even —
without the discounts yet — will surely start to incur losses because of such
discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from
TAX REVIEW (CASE BATCH 1)
the observation we have already raised earlier, it will also be grossly unfair
to an establishment if the discounts will be treated merely as deductions
from either its gross income or its gross sales. Operating at a loss through
no fault of its own, it will realize that the tax credit limitation under RR 2-
94 is inutile, if not improper. Worse, profit-generating businesses will be
put in a better position if they avail themselves of tax credits denied those
that are losing, because no taxes are due from the latter. [42] (Italics in the
original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos Superdrug
Corporation[43] when we stated preliminarily that—
Petitioners assert that Section 4(a) of the law is unconstitutional because it
constitutes deprivation of private property. Compelling drugstore owners
and establishments to grant the discount will result in a loss of profit and
capital because 1) drugstores impose a mark-up of only 5% to 10% on
branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount.
Examining petitioners’ arguments, it is apparent that what petitioners are
ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that they
extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not
fully reimburse petitioners for the discount privilege accorded to senior
citizens. This is because the discount is treated as a deduction, a tax-
deductible expense that is subtracted from the gross income and results in a
lower taxable income. Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of the tax rate to compute
the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed.
Page 41 of 151
Theoretically, the treatment of the discount as a deduction reduces the net
income of the private establishments concerned. The discounts given would
have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation.
Just compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the taker’s
gain but the owner’s loss. The word just is used to intensify the meaning of
the word compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and
ample.
A tax deduction does not offer full reimbursement of the senior citizen
discount. As such, it would not meet the definition of just compensation.
Having said that, this raises the question of whether the State, in promoting
the health and welfare of a special group of citizens, can impose upon
private establishments the burden of partly subsidizing a government
program.
The Court believes so.[44]
This, notwithstanding, we went on to rule in Carlos Superdrug
Corporation[45] that the 20% discount and tax deduction scheme is a valid
exercise of the police power of the State.
TAX REVIEW (CASE BATCH 1)
The present case, thus, affords an opportunity for us to clarify the above-
quoted statements in Central Luzon Drug Corporation[46] and Carlos
[47]
Superdrug Corporation.
First, we note that the above-quoted disquisition on eminent domain in
Central Luzon Drug Corporation[48] is obiter dicta and, thus, not binding
[49]
precedent. As stated earlier, in Central Luzon Drug Corporation, we
ruled that the BIR acted ultra vires when it effectively treated the 20%
discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94,
despite the clear wording of the previous law that the same should be
treated as a tax credit. We were, therefore, not confronted in that case with
the issue as to whether the 20% discount is an exercise of police power or
eminent domain.
Second, although we adverted to Central Luzon Drug Corporation [50]
in our
[51]
ruling in Carlos Superdrug Corporation, this referred only to preliminary
matters. A fair reading of Carlos Superdrug Corporation [52]
would show
that we categorically ruled therein that the 20% discount is a valid exercise
of police power. Thus, even if the current law, through its tax deduction
scheme (which abandoned the tax credit scheme under the previous law),
does not provide for a peso for peso reimbursement of the 20% discount
given by private establishments, no constitutional infirmity obtains because,
being a valid exercise of police power, payment of just compensation is not
warranted.
We have carefully reviewed the basis of our ruling in Carlos Superdrug
Corporation[53] and we find no cogent reason to overturn, modify or
abandon it. We also note that petitioners’ arguments are a mere reiteration
of those raised and resolved in Carlos Superdrug Corporation.[54] Thus, we
sustain Carlos Superdrug Corporation.[55]
Page 42 of 151
Nonetheless, we deem it proper, in what follows, to amplify our explanation
in Carlos Superdrug Corporation[56] as to why the 20% discount is a valid
exercise of police power and why it may not, under the specific
circumstances of this case, be considered as an exercise of the power of
eminent domain contrary to the obiter in Central Luzon Drug
Corporation.[57]
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to restrain the
use of liberty and property for public welfare. [58] The only limitation is that
the restriction imposed should be reasonable, not oppressive. [59] In other
words, to be a valid exercise of police power, it must have a lawful subject
or objective and a lawful method of accomplishing the goal. [60] Under the
police power of the State, “property rights of individuals may be subjected
to restraints and burdens in order to fulfill the objectives of the
government.”[61] The State “may interfere with personal liberty, property,
lawful businesses and occupations to promote the general welfare [as long
as] the interference [is] reasonable and not arbitrary.” [62] Eminent domain,
on the other hand, is the inherent power of the State to take or appropriate
private property for public use.[63] The Constitution, however, requires that
private property shall not be taken without due process of law and the
payment of just compensation.[64]
Traditional distinctions exist between police power and eminent domain.
In the exercise of police power, a property right is impaired by
regulation,[65] or the use of property is merely prohibited, regulated or
restricted[66] to promote public welfare. In such cases, there is no
compensable taking, hence, payment of just compensation is not required.
Examples of these regulations are property condemned for being noxious or
TAX REVIEW (CASE BATCH 1)
intended for noxious purposes (e.g., a building on the verge of collapse to
be demolished for public safety, or obscene materials to be destroyed in the
[67]
interest of public morals) as well as zoning ordinances prohibiting the
use of property for purposes injurious to the health, morals or safety of the
community (e.g., dividing a city’s territory into residential and industrial
areas).[68] It has, thus, been observed that, in the exercise of police power (as
distinguished from eminent domain), although the regulation affects the
right of ownership, none of the bundle of rights which constitute ownership
[69]
is appropriated for use by or for the benefit of the public.
On the other hand, in the exercise of the power of eminent domain, property
interests are appropriated and applied to some public purpose which
necessitates the payment of just compensation therefor. Normally, the title
to and possession of the property are transferred to the expropriating
authority. Examples include the acquisition of lands for the construction of
public highways as well as agricultural lands acquired by the government
under the agrarian reform law for redistribution to qualified farmer
beneficiaries. However, it is a settled rule that the acquisition of title or total
destruction of the property is not essential for “taking” under the power of
[70]
eminent domain to be present. Examples of these include establishment
of easements such as where the land owner is perpetually deprived of his
proprietary rights because of the hazards posed by electric transmission
[71]
lines constructed above his property or the compelled interconnection of
[72]
the telephone system between the government and a private company.
these cases, although the private property owner is not divested of
ownership or possession, payment of just compensation is warranted
because of the burden placed on the property for the use or benefit of the
public.
The 20% senior citizen discount is an exercise of police power.
Page 43 of 151
It may not always be easy to determine whether a challenged governmental
act is an exercise of police power or eminent domain. The very nature of
police power as elastic and responsive to various social conditions[73] as
well as the evolving meaning and scope of public use[74] and just
compensation[75] in eminent domain evinces that these are not static
concepts. Because of the exigencies of rapidly changing times, Congress
may be compelled to adopt or experiment with different measures to
promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain.
The judicious approach, therefore, is to look at the nature and effects of the
challenged governmental act and decide, on the basis thereof, whether the
act is the exercise of police power or eminent domain. Thus, we now look at
the nature and effects of the 20% discount to determine if it constitutes an
exercise of police power or eminent domain.
The 20% discount is intended to improve the welfare of senior citizens who,
at their age, are less likely to be gainfully employed, more prone to illnesses
and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to
honor senior citizens who presumably spent the productive years of their
lives on contributing to the development and progress of the nation. This
distinct cultural Filipino practice of honoring the elderly is an integral part
of this law.
In
As to its nature and effects, the 20% discount is a regulation affecting the
ability of private establishments to price their products and services relative
to a special class of individuals, senior citizens, for which the Constitution
affords preferential concern.[76] In turn, this affects the amount of profits or
income/gross sales that a private establishment can derive from senior
citizens. In other words, the subject regulation affects the pricing, and,
hence, the profitability of a private establishment. However, it does not
TAX REVIEW (CASE BATCH 1)
purport to appropriate or burden specific properties, used in the operation or
conduct of the business of private establishments, for the use or benefit of
the public, or senior citizens for that matter, but merely regulates the pricing
of goods and services relative to, and the amount of profits or income/gross
sales that such private establishments may derive from, senior citizens.
The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws
[77]
which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with
public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they have
a monopoly over the goods or services that they provide to the general
public. The subject regulation differs therefrom in that (1) the discount does
not prevent the establishments from adjusting the level of prices of their
goods and services, and (2) the discount does not apply to all customers of a
given establishment but only to the class of senior citizens. Nonetheless, to
the degree material to the resolution of this case, the 20% discount may be
properly viewed as belonging to the category of price regulatory measures
which affect the profitability of establishments subjected thereto.
On its face, therefore, the subject regulation is a police power measure.
[78]
The obiter in Central Luzon Drug Corporation, however, describes the
20% discount as an exercise of the power of eminent domain and the tax
credit, under the previous law, equivalent to the amount of discount given
as the just compensation therefor. The reason is that (1) the discount would
have formed part of the gross sales of the establishment were it not for the
law prescribing the 20% discount, and (2) the permanent reduction in total
revenues is a forced subsidy corresponding to the taking of private property
Page 44 of 151
for public use or benefit.
The flaw in this reasoning is in its premise. It presupposes that the subject
regulation, which impacts the pricing and, hence, the profitability of a
private establishment, automatically amounts to a deprivation of property
without due process of law. If this were so, then all price and rate of return
on investment control laws would have to be invalidated because they
impact, at some level, the regulated establishment’s profits or income/gross
sales, yet there is no provision for payment of just compensation. It would
also mean that government cannot set price or rate of return on investment
limits, which reduce the profits or income/gross sales of private
establishments, if no just compensation is paid even if the measure is not
confiscatory. The obiter is, thus, at odds with the settled doctrine that the
State can employ police power measures to regulate the pricing of goods
and services, and, hence, the profitability of business establishments in
order to pursue legitimate State objectives for the common good, provided
that the regulation does not go too far as to amount to “taking.” [79]
In City of Manila v. Laguio, Jr.,[80] we recognized that—
x x x a taking also could be found if government regulation of the use of
property went “too far.” When regulation reaches a certain magnitude, in
most if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to a
certain extent, if regulation goes too far it will be recognized as a taking.
No formula or rule can be devised to answer the questions of what is too far
and when regulation becomes a taking. In Mahon, Justice Holmes
recognized that it was “a question of degree and therefore cannot be
disposed of by general propositions.” On many other occasions as well, the
U.S. Supreme Court has said that the issue of when regulation constitutes a
taking is a matter of considering the facts in each case. The Court asks
TAX REVIEW (CASE BATCH 1)
whether justice and fairness require that the economic loss caused by public
action must be compensated by the government and thus borne by the
public as a whole, or whether the loss should remain concentrated on those
[81]
few persons subject to the public action.
The impact or effect of a regulation, such as the one under consideration,
must, thus, be determined on a case-to-case basis. Whether that line
between permissible regulation under police power and “taking” under
eminent domain has been crossed must, under the specific circumstances of
this case, be subject to proof and the one assailing the constitutionality of
the regulation carries the heavy burden of proving that the measure is
unreasonable, oppressive or confiscatory. The time-honored rule is that the
burden of proving the unconstitutionality of a law rests upon the one
assailing it and “the burden becomes heavier when police power is at
issue.”[82]
The 20% senior citizen discount has not been shown to be unreasonable,
oppressive or confiscatory.
[83]
In Alalayan v. National Power Corporation, petitioners, who were
franchise holders of electric plants, challenged the validity of a law limiting
their allowable net profits to no more than 12% per annum of their
investments plus two-month operating expenses. In rejecting their plea, we
ruled that, in an earlier case, it was found that 12% is a reasonable rate of
return and that petitioners failed to prove that the aforesaid rate is
[84]
confiscatory in view of the presumption of constitutionality.
[85]
We adopted a similar line of reasoning in Carlos Superdrug Corporation
when we ruled that petitioners therein failed to prove that the 20% discount
is arbitrary, oppressive or confiscatory. We noted that no evidence, such as
a financial report, to establish the impact of the 20% discount on the overall
profitability of petitioners was presented in order to show that they would
Page 45 of 151
be operating at a loss due to the subject regulation or that the continued
implementation of the law would be unconscionably detrimental to the
business operations of petitioners. In the case at bar, petitioners proceeded
with a hypothetical computation of the alleged loss that they will suffer
similar to what the petitioners in Carlos Superdrug Corporation[86] did.
Petitioners went directly to this Court without first establishing the factual
bases of their claims. Hence, the present recourse must, likewise, fail.
Because all laws enjoy the presumption of constitutionality, courts will
uphold a law’s validity if any set of facts may be conceived to sustain it. [87]
On its face, we find that there are at least two conceivable bases to sustain
the subject regulation’s validity absent clear and convincing proof that it is
unreasonable, oppressive or confiscatory. Congress may have legitimately
concluded that business establishments have the capacity to absorb a
decrease in profits or income/gross sales due to the 20% discount without
substantially affecting the reasonable rate of return on their investments
considering (1) not all customers of a business establishment are senior
citizens and (2) the level of its profit margins on goods and services offered
to the general public. Concurrently, Congress may have, likewise,
legitimately concluded that the establishments, which will be required to
extend the 20% discount, have the capacity to revise their pricing strategy
so that whatever reduction in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be recouped through higher
mark-ups or from other products not subject of discounts. As a result, the
discounts resulting from sales to senior citizens will not be confiscatory or
unduly oppressive.
In sum, we sustain our ruling in Carlos Superdrug Corporation[88] that the
20% senior citizen discount and tax deduction scheme are valid exercises of
police power of the State absent a clear showing that it is arbitrary,
oppressive or confiscatory.
TAX REVIEW (CASE BATCH 1)
Conclusion
In closing, we note that petitioners hypothesize, consistent with our
previous ratiocinations, that the discount will force establishments to raise
their prices in order to compensate for its impact on overall profits or
income/gross sales. The general public, or those not belonging to the senior
citizen class, are, thus, made to effectively shoulder the subsidy for senior
citizens. This, in petitioners’ view, is unfair.
As already mentioned, Congress may be reasonably assumed to have
foreseen this eventuality. But, more importantly, this goes into the wisdom,
efficacy and expediency of the subject law which is not proper for judicial
review. In a way, this law pursues its social equity objective in a non-
traditional manner unlike past and existing direct subsidy programs of the
government for the poor and marginalized sectors of our society. Verily,
Congress must be given sufficient leeway in formulating welfare
legislations given the enormous challenges that the government faces
relative to, among others, resource adequacy and administrative capability
in implementing social reform measures which aim to protect and uphold
the interests of those most vulnerable in our society. In the process, the
individual, who enjoys the rights, benefits and privileges of living in a
democratic polity, must bear his share in supporting measures intended for
the common good. This is only fair.
In fine, without the requisite showing of a clear and unequivocal breach of
the Constitution, the validity of the assailed law must be sustained.
Refutation of the Dissent
The main points of Justice Carpio’s Dissent may be summarized as follows:
Page 46 of 151
(1) the discussion on eminent domain in Central Luzon Drug
Corporation[89] is not obiter dicta; (2) allowable taking, in police power, is
limited to property that is destroyed or placed outside the commerce of man
for public welfare; (3) the amount of mandatory discount is private property
within the ambit of Article III, Section 9[90] of the Constitution; and (4) the
permanent reduction in a private establishment’s total revenue, arising from
the mandatory discount, is a taking of private property for public use or
benefit, hence, an exercise of the power of eminent domain requiring the
payment of just compensation.
I
We maintain that the discussion on eminent domain in Central Luzon Drug
Corporation[91] is obiter dicta.
As previously discussed, in Central Luzon Drug Corporation,[92] the BIR,
pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior citizen
discount in the previous law, RA 7432, as a tax deduction instead of a tax
credit despite the clear provision in that law which stated –
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall
be entitled to the following:
a) The grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar lodging
establishment, restaurants and recreation centers and purchase of medicines
anywhere in the country: Provided, That private establishments may claim
the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law,
viz:
The 20 percent discount required by the law to be given to senior citizens is
a tax credit, not merely a tax deduction from the gross income or gross sale
TAX REVIEW (CASE BATCH 1)
of the establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax deduction, before
the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that
withdraw or modify such grant are void. Basic is the rule that administrative
regulations cannot amend or revoke the law.[93]
As can be readily seen, the discussion on eminent domain was not
necessary in order to arrive at this conclusion. All that was needed was to
point out that the revenue regulation contravened the law which it sought to
implement. And, precisely, this was done in Central Luzon Drug
[94]
Corporation by comparing the wording of the previous law vis-à-vis the
revenue regulation; employing the rules of statutory construction; and
applying the settled principle that a regulation cannot amend the law it
seeks to implement.
[95]
A close reading of Central Luzon Drug Corporation would show that the
Court went on to state that the tax credit “can be deemed” as just
compensation only to explain why the previous law provides for a tax credit
instead of a tax deduction. The Court surmised that the tax credit was a
form of just compensation given to the establishments covered by the 20%
discount. However, the reason why the previous law provided for a tax
credit and not a tax deduction was not necessary to resolve the issue as to
whether the revenue regulation contravenes the law. Hence, the discussion
on eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or
reasons that impelled the enactment of a particular statute or legal
provision. However, statements made relative thereto are not always
necessary in resolving the actual controversies presented before it. This was
the case in Central Luzon Drug Corporation[96] resulting in that unfortunate
statement that the tax credit “can be deemed” as just compensation. This, in
Page 47 of 151
turn, led to the erroneous conclusion, by deductive reasoning, that the 20%
discount is an exercise of the power of eminent domain. The Dissent
essentially adopts this theory and reasoning which, as will be shown below,
is contrary to settled principles in police power and eminent domain
analysis.
II
The Dissent discusses at length the doctrine on “taking” in police power
which occurs when private property is destroyed or placed outside the
commerce of man. Indeed, there is a whole class of police power measures
which justify the destruction of private property in order to preserve public
health, morals, safety or welfare. As earlier mentioned, these would include
a building on the verge of collapse or confiscated obscene materials as well
as those mentioned by the Dissent with regard to property used in violating
a criminal statute or one which constitutes a nuisance. In such cases, no
compensation is required.
However, it is equally true that there is another class of police power
measures which do not involve the destruction of private property but
merely regulate its use. The minimum wage law, zoning ordinances, price
control laws, laws regulating the operation of motels and hotels, laws
limiting the working hours to eight, and the like would fall under this
category. The examples cited by the Dissent, likewise, fall under this
category: Article 157 of the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely
regulate or, to use the term of the Dissent, burden the conduct of the affairs
of business establishments. In such cases, payment of just compensation is
not required because they fall within the sphere of permissible police power
measures. The senior citizen discount law falls under this latter category.
TAX REVIEW (CASE BATCH 1)
III
The Dissent proceeds from the theory that the permanent reduction of
profits or income/gross sales, due to the 20% discount, is a “taking” of
private property for public purpose without payment of just compensation.
At the outset, it must be emphasized that petitioners never presented any
evidence to establish that they were forced to suffer enormous losses or
operate at a loss due to the effects of the assailed law. They came directly to
this Court and provided a hypothetical computation of the loss they would
allegedly suffer due to the operation of the assailed law. The central premise
of the Dissent’s argument that the 20% discount results in a permanent
reduction in profits or income/gross sales, or forces a business
establishment to operate at a loss is, thus, wholly unsupported by
competent evidence. To be sure, the Court can invalidate a law which, on its
[97]
face, is arbitrary, oppressive or confiscatory. But this is not the case here.
In the case at bar, evidence is indispensable before a determination of a
constitutional violation can be made because of the following reasons.
First, the assailed law, by imposing the senior citizen discount, does not
take any of the properties used by a business establishment like, say, the
land on which a manufacturing plant is constructed or the equipment being
used to produce goods or services.
Second, rather than taking specific properties of a business establishment,
the senior citizen discount law merely regulates the prices of the goods or
services being sold to senior citizens by mandating a 20% discount. Thus, if
a product is sold at P10.00 to the general public, then it shall be sold at
P8.00 (i.e., P10.00 less 20%) to senior citizens. Note that the law does not
impose at what specific price the product shall be sold, only that a 20%
Page 48 of 151
discount shall be given to senior citizens based on the price set by the
business establishment. A business establishment is, thus, free to adjust the
prices of the goods or services it provides to the general public.
Accordingly, it can increase the price of the above product to P20.00 but is
required to sell it at P16.00 (i.e., P20.00 less 20%) to senior citizens.
Third, because the law impacts the prices of the goods or services of a
particular establishment relative to its sales to senior citizens, its profits or
income/gross sales are affected. The extent of the impact would, however,
depend on the profit margin of the business establishment on a particular
good or service. If a product costs P5.00 to produce and is sold at P10.00,
then the profit[98] is P5.00[99] or a profit margin[100] of 50%.[101] Under the
assailed law, the aforesaid product would have to be sold at P8.00 to senior
citizens yet the business would still earn P3.00[102] or a 30%[103] profit
margin. On the other hand, if the product costs P9.00 to produce and is
required to be sold at P8.00 to senior citizens, then the business would
experience a loss of P1.00.[104] But note that since not all customers of a
business establishment are senior citizens, the business establishment may
continue to earn P1.00 from non-senior citizens which, in turn, can offset
any loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens,
it does not prevent the business establishment from revising its pricing
strategy. By revising its pricing strategy, a business establishment can
recoup any reduction of profits or income/gross sales which would
otherwise arise from the giving of the 20% discount. To illustrate, suppose
A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior
to the law, A sells his products at P10.00 a piece to X and Y resulting in
income/gross sales of P20.00 (P10.00 + P10.00). With the passage of the
law, A must now sell his product to X at P8.00 (i.e., P10.00 less 20%) so
that his income/gross sales would be P18.00 (P8.00 + P10.00) or lower by
TAX REVIEW (CASE BATCH 1)
P2.00. To prevent this from happening, A decides to increase the price of
his products to P11.11 per piece. Thus, he sells his product to X at P8.89
(i.e., P11.11 less 20%) and to Y at P11.11. As a result, his income/gross
[105]
sales would still be P20.00 (P8.89 + P11.11). The capacity, then, of
business establishments to revise their pricing strategy makes it possible for
them not to suffer any reduction in profits or income/gross sales, or, in the
alternative, mitigate the reduction of their profits or income/gross sales even
after the passage of the law. In other words, business establishments have
the capacity to adjust their prices so that they may remain profitable even
under the operation of the assailed law.
The Dissent, however, states that –
The explanation by the majority that private establishments can always
increase their prices to recover the mandatory discount will only encourage
private establishments to adjust their prices upwards to the prejudice of
customers who do not enjoy the 20% discount. It was likewise suggested
that if a company increases its prices, despite the application of the 20%
discount, the establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-
defeating, for more consumers will suffer from the price increase than will
benefit from the 20% discount. Even then, such ability to increase prices
cannot legally validate a violation of the eminent domain clause. [106]
But, if it is possible that the business establishment, by adjusting its prices,
will suffer no reduction in its profits or income/gross sales (or suffer some
reduction but continue to operate profitably) despite giving the discount,
what would be the basis to strike down the law? If it is possible that the
business establishment, by adjusting its prices, will not be unduly burdened,
how can there be a finding that the assailed law is an unconstitutional
exercise of police power or eminent domain?
That there may be a burden placed on business establishments or the
Page 49 of 151
consuming public as a result of the operation of the assailed law is not, by
itself, a ground to declare it unconstitutional for this goes into the wisdom
and expediency of the law. The cost of most, if not all, regulatory measures
of the government on business establishments is ultimately passed on to the
consumers but that, by itself, does not justify the wholesale nullification of
these measures. It is a basic postulate of our democratic system of
government that the Constitution is a social contract whereby the people
have surrendered their sovereign powers to the State for the common
good.[107] All persons may be burdened by regulatory measures intended for
the common good or to serve some important governmental interest, such as
protecting or improving the welfare of a special class of people for which
the Constitution affords preferential concern. Indubitably, the one assailing
the law has the heavy burden of proving that the regulation is unreasonable,
oppressive or confiscatory, or has gone “too far” as to amount to a “taking.”
Yet, here, the Dissent would have this Court nullify the law without any
proof of such nature.
Further, this Court is not the proper forum to debate the economic theories
or realities that impelled Congress to shift from the tax credit to the tax
deduction scheme. It is not within our power or competence to judge which
scheme is more or less burdensome to business establishments or the
consuming public and, thereafter, to choose which scheme the State should
use or pursue. The shift from the tax credit to tax deduction scheme is a
policy determination by Congress and the Court will respect it for as long as
there is no showing, as here, that the subject regulation has transgressed
constitutional limitations.
Unavoidably, the lack of evidence constrains the Dissent to rely on
speculative and hypothetical argumentation when it states that the 20%
discount is a significant amount and not a minimal loss (which erroneously
assumes that the discount automatically results in a loss when it is possible
TAX REVIEW (CASE BATCH 1)
that the profit margin is greater than 20% and/or the pricing strategy can be
revised to prevent or mitigate any reduction in profits or income/gross sales
[108]
as illustrated above), and not all private establishments make a 20%
profit margin (which conversely implies that there are those who make
[109]
more and, thus, would not be greatly affected by this regulation).
In fine, because of the possible scenarios discussed above, we cannot
assume that the 20% discount results in a permanent reduction in profits or
income/gross sales, much less that business establishments are forced to
operate at a loss under the assailed law. And, even if we gratuitously
assume that the 20% discount results in some degree of reduction in profits
or income/gross sales, we cannot assume that such reduction is arbitrary,
oppressive or confiscatory. To repeat, there is no actual proof to back up
this claim, and it could be that the loss suffered by a business establishment
was occasioned through its fault or negligence in not adapting to the effects
of the assailed law. The law uniformly applies to all business establishments
covered thereunder. There is, therefore, no unjust discrimination as the
aforesaid business establishments are faced with the same constraints.
The necessity of proof is all the more pertinent in this case because, as
similarly observed by Justice Velasco in his Concurring Opinion, the law
has been in operation for over nine years now. However, the grim picture
painted by petitioners on the unconscionable losses to be indiscriminately
suffered by business establishments, which should have led to the closure of
numerous business establishments, has not come to pass.
Verily, we cannot invalidate the assailed law based on assumptions and
conjectures. Without adequate proof, the presumption of constitutionality
must prevail.
IV
Page 50 of 151
At this juncture, we note that the Dissent modified its original arguments by
including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private property
without any distinction. It does not state that there should be profit before
the taking of property is subject to just compensation. The private property
referred to for purposes of taking could be inherited, donated, purchased,
mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be
attended by corresponding payment of just compensation. The 20%
discount granted to senior citizens belong to private establishments, whether
these establishments make a profit or suffer a loss. In fact, the 20% discount
applies to non-profit establishments like country, social, or golf clubs
which are open to the public and not only for exclusive membership. The
issue of profit or loss to the establishments is immaterial.[110]
Two things may be said of this argument.
First, it contradicts the rest of the arguments of the Dissent. After it states
that the issue of profit or loss is immaterial, the Dissent proceeds to argue
that the 20% discount is not a minimal loss[111] and that the 20% discount
forces business establishments to operate at a loss.[112] Even the obiter in
Central Luzon Drug Corporation,[113] which the Dissent essentially adopts
and relies on, is premised on the permanent reduction of total revenues and
the loss that business establishments will be forced to suffer in arguing that
the 20% discount constitutes a “taking” under the power of eminent
domain. Thus, when the Dissent now argues that the issue of profit or loss is
immaterial, it contradicts itself because it later argues, in order to justify
that there is a “taking” under the power of eminent domain in this case, that
the 20% discount forces business establishments to suffer a significant loss
or to operate at a loss.
TAX REVIEW (CASE BATCH 1)
Second, this argument suffers from the same flaw as the Dissent's original
arguments. It is an erroneous characterization of the 20% discount.
According to the Dissent, the 20% discount is part of the gross sales and,
hence, private property belonging to business establishments. However, as
previously discussed, the 20% discount is not private property actually
owned and/or used by the business establishment. It should be distinguished
from properties like lands or buildings actually used in the operation of a
business establishment which, if appropriated for public use, would amount
to a “taking” under the power of eminent domain.
Instead, the 20% discount is a regulatory measure which impacts the pricing
and, hence, the profitability of business establishments. At the time the
discount is imposed, no particular property of the business establishment
can be said to be “taken.” That is, the State does not acquire or take
anything from the business establishment in the way that it takes a piece of
private land to build a public road. While the 20% discount may form part
of the potential profits or income/gross sales[114] of the business
establishment, as similarly characterized by Justice Bersamin in his
Concurring Opinion, potential profits or income/gross sales are not private
property, specifically cash or money, already belonging to the business
establishment. They are a mere expectancy because they are potential fruits
of the successful conduct of the business.
Prior to the sale of goods or services, a business establishment may be
subject to State regulations, such as the 20% senior citizen discount, which
may impact the level or amount of profits or income/gross sales that can be
generated by such establishment. For this reason, the validity of the
discount is to be determined based on its overall effects on the operations of
the business establishment.
Page 51 of 151
Again, as previously discussed, the 20% discount does not automatically
result in a 20% reduction in profits, or, to align it with the term used by the
Dissent, the 20% discount does not mean that a 20% reduction in gross
sales necessarily results. Because (1) the profit margin of a product is not
necessarily less than 20%, (2) not all customers of a business establishment
are senior citizens, and (3) the establishment may revise its pricing strategy,
such reduction in profits or income/gross sales may be prevented or, in the
alternative, mitigated so that the business establishment continues to operate
profitably. Thus, even if we gratuitously assume that some degree of
reduction in profits or income/gross sales occurs because of the 20%
discount, it does not follow that the regulation is unreasonable, oppressive
or confiscatory because the business establishment may make the necessary
adjustments to continue to operate profitably. No evidence was presented by
petitioners to show otherwise. In fact, no evidence was presented by
petitioners at all.
Justice Leonen, in his Concurring and Dissenting Opinion, characterizes
“profits” (or income/gross sales) as an inchoate right. Another way to view
it, as stated by Justice Velasco in his Concurring Opinion, is that the
business establishment merely has a right to profits. The Constitution
adverts to it as the right of an enterprise to a reasonable return on
investment.[115] Undeniably, this right, like any other right, may be regulated
under the police power of the State to achieve important governmental
objectives like protecting the interests and improving the welfare of senior
citizens.
It should be noted though that potential profits or income/gross sales are
relevant in police power and eminent domain analyses because they may, in
appropriate cases, serve as an indicia when a regulation has gone “too far”
as to amount to a “taking” under the power of eminent domain. When the
deprivation or reduction of profits or income/gross sales is shown to be
TAX REVIEW (CASE BATCH 1)
unreasonable, oppressive or confiscatory, then the challenged governmental
regulation may be nullified for being a “taking” under the power of eminent
domain. In such a case, it is not profits or income/gross sales which are
actually taken and appropriated for public use. Rather, when the regulation
causes an establishment to incur losses in an unreasonable, oppressive or
confiscatory manner, what is actually taken is capital and the right of the
business establishment to a reasonable return on investment. If the business
losses are not halted because of the continued operation of the regulation,
this eventually leads to the destruction of the business and the total loss of
the capital invested therein. But, again, petitioners in this case failed to
prove that the subject regulation is unreasonable, oppressive or
confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return
on investment control laws to justify the senior citizen discount law.
According to the Dissent, only profits from industries imbued with public
interest may be regulated because this is a condition of their franchises.
Profits of establishments without franchises cannot be regulated
permanently because there is no law regulating their profits. The Dissent
concludes that the permanent reduction of total revenues or gross sales of
business establishments without franchises is a taking of private property
under the power of eminent domain.
In making this argument, it is unfortunate that the Dissent quotes only a
portion of the ponencia –
The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws
which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with
Page 52 of 151
public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they have
a monopoly over the goods or services that they provide to the general
public. The subject regulation differs therefrom in that (1) the discount does
not prevent the establishments from adjusting the level of prices of their
goods and services, and (2) the discount does not apply to all customers of a
given establishment but only to the class of senior citizens. x x x[116]
The above paragraph, in full, states –
The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws
which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with
public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they have
a monopoly over the goods or services that they provide to the general
public. The subject regulation differs therefrom in that (1) the discount does
not prevent the establishments from adjusting the level of prices of their
goods and services, and (2) the discount does not apply to all customers of a
given establishment but only to the class of senior citizens. Nonetheless, to
the degree material to the resolution of this case, the 20% discount may
be properly viewed as belonging to the category of price regulatory
measures which affects the profitability of establishments subjected
thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past,
regulated prices and profits of business establishments. In other words, this
type of regulatory measures is traditionally recognized as police power
measures so that the senior citizen discount may be considered as a police
power measure as well. What is more, the substantial distinctions between
price and rate of return on investment control laws vis-à-vis the senior
TAX REVIEW (CASE BATCH 1)
citizen discount law provide greater reason to uphold the validity of the
senior citizen discount law. As previously discussed, the ability to adjust
prices allows the establishment subject to the senior citizen discount to
prevent or mitigate any reduction of profits or income/gross sales arising
from the giving of the discount. In contrast, establishments subject to price
and rate of return on investment control laws cannot adjust prices
accordingly.
Certainly, there is no intention to say that price and rate of return on
investment control laws are the justification for the senior citizen discount
law. Not at all. The justification for the senior citizen discount law is the
plenary powers of Congress. The legislative power to regulate business
establishments is broad and covers a wide array of areas and subjects. It is
well within Congress’ legislative powers to regulate the profits or
income/gross sales of industries and enterprises, even those without
franchises. For what are franchises but mere legislative enactments?
There is nothing in the Constitution that prohibits Congress from regulating
the profits or income/gross sales of industries and enterprises without
franchises. On the contrary, the social justice provisions of the Constitution
enjoin the State to regulate the “acquisition, ownership, use, and
disposition” of property and its increments.[117] This may cover the
regulation of profits or income/gross sales of all businesses, without
qualification, to attain the objective of diffusing wealth in order to protect
[118]
and enhance the right of all the people to human dignity. Thus, under the
social justice policy of the Constitution, business establishments may be
compelled to contribute to uplifting the plight of vulnerable or marginalized
groups in our society provided that the regulation is not arbitrary,
oppressive or confiscatory, or is not in breach of some specific
constitutional limitation.
Page 53 of 151
When the Dissent, therefore, states that the “profits of private
establishments which are non-franchisees cannot be regulated
permanently, and there is no such law regulating their profits
permanently,”[119] it is assuming what it ought to prove. First, there are laws
which, in effect, permanently regulate profits or income/gross sales of
establishments without franchises, and RA 9257 is one such law. And,
second, Congress can regulate such profits or income/gross sales because,
as previously noted, there is nothing in the Constitution to prevent it from
doing so. Here, again, it must be emphasized that petitioners failed to
present any proof to show that the effects of the assailed law on their
operations has been unreasonable, oppressive or confiscatory.
The permanent regulation of profits or income/gross sales of business
establishments, even those without franchises, is not as uncommon as the
Dissent depicts it to be.
For instance, the minimum wage law allows the State to set the minimum
wage of employees in a given region or geographical area. Because of the
added labor costs arising from the minimum wage, a permanent reduction
of profits or income/gross sales would result, assuming that the employer
does not increase the prices of his goods or services. To illustrate, suppose it
costs a company P5.00 to produce a product and it sells the same at P10.00
with a 50% profit margin. Later, the State increases the minimum wage. As
a result, the company incurs greater labor costs so that it now costs P7.00 to
produce the same product. The profit per product of the company would be
reduced to P3.00 with a profit margin of 30%. The net effect would be the
same as in the earlier example of granting a 20% senior citizen discount. As
can be seen, the minimum wage law could, likewise, lead to a permanent
reduction of profits. Does this mean that the minimum wage law should,
likewise, be declared unconstitutional on the mere plea that it results in a
permanent reduction of profits? Taking it a step further, suppose the
TAX REVIEW (CASE BATCH 1)
company decides to increase the price of its product in order to offset the
effects of the increase in labor cost; does this mean that the minimum wage
law, following the reasoning of the Dissent, is unconstitutional because the
consuming public is effectively made to subsidize the wage of a group of
laborers, i.e., minimum wage earners?
The same reasoning can be adopted relative to the examples cited by the
Dissent which, according to it, are valid police power regulations. Article
157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and
Section 7 of the Pag-IBIG Fund Law would effectively increase the labor
cost of a business establishment. This would, in turn, be integrated as part
of the cost of its goods or services. Again, if the establishment does not
increase its prices, the net effect would be a permanent reduction in its
profits or income/gross sales. Following the reasoning of the Dissent that
“any form of permanent taking of private property (including profits or
[120]
income/gross sales) is an exercise of eminent domain that requires the
State to pay just compensation,” [121]
then these statutory provisions would,
likewise, have to be declared unconstitutional. It does not matter that these
benefits are deemed part of the employees’ legislated wages because the net
effect is the same, that is, it leads to higher labor costs and a permanent
reduction in the profits or income/gross sales of the business
establishments.[122]
The point then is this – most, if not all, regulatory measures imposed by the
State on business establishments impact, at some level, the latter’s prices
and/or profits or income/gross sales.[123] If the Court were to sustain the
Dissent’s theory, then a wholesale nullification of such measures would
inevitably result. The police power of the State and the social justice
provisions of the Constitution would, thus, be rendered nugatory.
Page 54 of 151
There is nothing sacrosanct about profits or income/gross sales. This, we
made clear in Carlos Superdrug Corporation:[124]
Police power as an attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in
the absence of evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.
xxxx
The Court is not oblivious of the retail side of the pharmaceutical industry
and the competitive pricing component of the business. While the
Constitution protects property rights, petitioners must accept the realities of
business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property
rights in the process.
Moreover, the right to property has a social dimension. While Article XIII
of the Constitution provides the precept for the protection of property,
various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continuously serve as a reminder
that the right to property can be relinquished upon the command of the State
for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the
support imparted by petitioners and the other private establishments
concerned. This being the case, the means employed in invoking the active
participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient
proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued
TAX REVIEW (CASE BATCH 1) Page 55 of 151

implementation of the same would be unconscionably detrimental to

petitioners, the Court will refrain from quashing a legislative act.[125]
In conclusion, we maintain that the correct rule in determining whether the
subject regulatory measure has amounted to a “taking” under the power of
eminent domain is the one laid down in Alalayan v. National Power
Corporation[126] and followed in Carlos Superdrug Corporation[127]
consistent with long standing principles in police power and eminent
domain analysis. Thus, the deprivation or reduction of profits or
income/gross sales must be clearly shown to be unreasonable, oppressive or
confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof
which petitioners failed to do. A law, which has been in operation for many
years and promotes the welfare of a group accorded special concern by the
Constitution, cannot and should not be summarily invalidated on a mere
allegation that it reduces the profits or income/gross sales of business
establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.
TAX REVIEW (CASE BATCH 1) Page 56 of 151

G.R. No. 180651, July 30, 2014
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR
APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION,
INC.; AND HARDWARE WORKSHOP, INC., PETITIONERS, VS.
ANTHONY ACEVEDO, IN HIS CAPACITY AS THE TREASURER
OF MANILA; AND THE CITY OF MANILA, RESPONDENTS.
DECISION
BERSAMIN, J.:
The issue here concerns double taxation. There is double taxation when the
same taxpayer is taxed twice when he should be taxed only once for the
same purpose by the same taxing authority within the same jurisdiction
during the same taxing period, and the taxes are of the same kind or
character. Double taxation is obnoxious.
The Case
Manila.[3] At the same time, the City of Manila imposed additional taxes
upon the petitioners pursuant to Section 21 of the Revenue Code of
Manila,[4] as amended, as a condition for the renewal of their respective
business licenses for the year 1999. Section 21 of the Revenue Code of
Manila stated:
Section 21. Tax on Business Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC - On any of the following businesses and
articles of commerce subject to the excise, value-added or percentage taxes
under the National Internal Revenue Code, hereinafter referred to as NIRC,
as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%)
per annum on the gross sales or receipts of the preceding calendar year is
hereby imposed:
A) On person who sells goods and services in the course of trade or
businesses; x x x
PROVIDED, that all registered businesses in the City of Manila already
paying the aforementioned tax shall be exempted from payment thereof.

Under review are the resolution promulgated in CA-G.R. SP No. 72191 on To comply with the City of Manila’s assessment of taxes under Section 21,
June 18, 2007,[1] whereby the Court of Appeals (CA) denied petitioners’ supra, the petitioners paid under protest the following amounts
appeal for lack of jurisdiction; and the resolution promulgated on November corresponding to the first quarter of 1999,[5] to wit:
[2]
14, 2007, whereby the CA denied their motion for reconsideration for its
lack of merit. (a) Nursery Care Corporation P595,190.25
(b) Shoemart Incorporated P3,283,520.14
Antecedents (c) Star Appliance Center P236,084.03
(d) H & B, Inc. P1,271,118.74
The City of Manila assessed and collected taxes from the individual (e) Supplies Station, Inc. P239,501.25
petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or (f) Hardware Work Shop, Inc. P609,953.24
Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of
TAX REVIEW (CASE BATCH 1)
By letter dated March 1, 1999, the petitioners formally requested the Office
of the City Treasurer for the tax credit or refund of the local business taxes
paid under protest.[6] However, then City Treasurer Anthony Acevedo
[7]
(Acevedo) denied the request through his letter of March 10, 1999.
On April 8, 1999, the petitioners, through their representative, Cecilia R.
Patricio, sought the reconsideration of the denial of their request. [8] Still, the
[9]
City Treasurer did not reconsider.
In the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer
[10]
of Manila.
On April 29, 1999, the petitioners filed their respective petitions for
certiorari in the Regional Trial Court (RTC) in Manila. The petitions,
[11]
docketed as Civil Cases Nos. 99-93668 to 99-93673, were initially
[12]
raffled to different branches, but were soon consolidated in Branch 34.
After the presiding judge of Branch 34 voluntarily inhibited himself, the
[13]
consolidated cases were transferred to Branch 23, but were again re-
raffled to Branch 19 upon the designation of Branch 23 as a special drugs
[14]
court.
The parties agreed on and jointly submitted the following issues for the
consideration and resolution of the RTC, namely:
(a) Whether or not the collection of taxes under Section 21 of Ordinance
No. 7794, as amended, constitutes double taxation.
(b) Whether or not the failure of the petitioners to avail of the statutorily
provided remedy for their tax protest on the ground of
unconstitutionality, illegality and oppressiveness under Section 187 of
Page 57 of 151
the Local Government Code renders the present action dismissible for
non-exhaustion of administrative remedy.[15]
Decision of the RTC
On April 26, 2002, the RTC rendered its decision, holding thusly:
The Court perceives of no instance of the constitutionally proscribed double
taxation, in the strict, narrow or obnoxious sense, imposed upon the
petitioners under Section 15 and 17, on the one hand, and under Section 21,
on the other, of the questioned Ordinance. The tax imposed under Section
15 and 17, as against that imposed under Section 21, are levied against
different tax objects or subject matter. The tax under Section 15 is imposed
upon wholesalers, distributors or dealers, while that under Section 17 is
imposed upon retailers. In short, taxes imposed under Section 15 and 17 is a
tax on the business of wholesalers, distributors, dealers and retailers. On the
other hand, the tax imposed upon herein petitioners under Section 21 is not
a tax against the business of the petitioners (as wholesalers, distributors,
dealers or retailers) but is rather a tax against consumers or end-users of the
articles sold by petitioners. This is plain from a reading of the modifying
paragraph of Section 21 which says:
“The tax shall be payable by the person paying for the services rendered and
shall be paid to the person rendering the services who is required to collect
and pay the tax within twenty (20) days after the end of each quarter.”
(Underscoring supplied)
In effect, the petitioners only act as the collection or withholding agent of
the City while the ones actually paying the tax are the consumers or end-
users of the articles being sold by petitioners. The taxes imposed under Sec.
21 represent additional amounts added by the business establishment to the
TAX REVIEW (CASE BATCH 1)
basic prices of its goods and services which are paid by the end-users to the
businesses. It is actually not taxes on the business of petitioners but on the
consumers. Hence, there is no double taxation in the narrow, strict or
obnoxious sense, involved in the imposition of taxes by the City of Manila
under Sections 15, 17 and 21 of the questioned Ordinance. This in effect
resolves in favor of the constitutionality of the assailed sections of
Ordinance No. 7807 of the City of Manila.
Petitioners, likewise, pray the Court to direct respondents to cease and
desist from implementing Section 21 of the questioned Ordinance. That the
Court cannot do, without doing away with the mandatory provisions of
Section 187 of the Local Government Code which distinctly commands that
an appeal questioning the constitutionality or legality of a tax ordinance
shall not have the effect of suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee or charge levied therein. This is so
because an ordinance carries with it the presumption of validity.
xxx
With the foregoing findings, petitioners’ prayer for the refund of the
amounts paid by them under protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without pronouncement as to costs.
[16]
SO ORDERED.
[17]
The petitioners appealed to the CA.
Ruling of the CA
On June 18, 2007, the CA denied the petitioners’ appeal, ruling as follows:
Page 58 of 151
The six (6) cases were consolidated on a common question of fact and law,
that is, whether the act of the City Treasurer of Manila of assessing and
collecting business taxes under Section 21 of Ordinance 7807, on top of
other business taxes also assessed and collected under the previous sections
of the same ordinance is a violation of the provisions of Section 143 of the
Local Government Code.
Clearly, the disposition of the present appeal in these consolidated cases
does not necessitate the calibration of the whole evidence as there is no
question or doubt as to the truth or the falsehood of the facts obtaining
herein, as both parties agree thereon. The present case involves a question
of law that would not lend itself to an examination or evaluation by this
Court of the probative value of the evidence presented.
Thus the Court is constrained to dismiss the instant petition for lack of
jurisdiction under Section 2, Rule 50 of the 1997 Rules on Civil Procedure
which states:
“Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal
under Rule 41 taken from the Regional Trial Court to the Court of Appeals
raising only questions of law shall be dismissed, issues purely of law not
being reviewable by said court. similarly, an appeal by notice of appeal
instead of by petition for review from the appellate judgment of a Regional
Trial Court shall be dismissed.
An appeal erroneously taken to the Court of Appeals shall not be transferred
to the appropriate court but shall be dismissed outright.
WHEREFORE, the foregoing considered, the appeal is DISMISSED.
SO ORDERED.[18]
TAX REVIEW (CASE BATCH 1)
The petitioners moved for reconsideration, but the CA denied their motion
[19]
through the resolution promulgated on November 14, 2007.
Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE
PETITIONERS AND DENYING THEIR MOTION FOR
RECONSIDERATION, ERRED IN RULING THAT THE ISSUE
INVOLVED IS A PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT REVERSING THE
DECISION OF BRANCH 19 OF THE REGIONAL TRIAL COURT OF
MANILA DATED 26 APRIL 2002 DENYING PETITIONERS’ PRAYER
FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER
PROTEST AND DISMISSING THE PETITION FOR CERTIORARI
FILED BY THE PETITIONERS.
C.
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT
OF THE CITY TREASURER OF MANILA IN IMPOSING, ASSESSING
AND COLLECTING THE ADDITIONAL BUSINESS TAX UNDER
SECTION 21 OF ORDINANCE NO. 7794, AS AMENDED BY
ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF
Page 59 of 151
THE CITY OF MANILA, IS CONSTITUTIVE OF DOUBLE TAXATION
AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991. [20]
The main issues for resolution are, therefore, (1) whether or not the CA
properly denied due course to the appeal for raising pure questions of law;
and (2) whether or not the petitioners were entitled to the tax credit or tax
refund for the taxes paid under Section 21, supra.
Ruling
The appeal is meritorious.
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Court provides three modes of appeal from the decisions and
final orders of the RTC, namely: (1) ordinary appeal or appeal by writ of
error under Rule 41, where the decisions and final orders were rendered in
civil or criminal actions by the RTC in the exercise of original jurisdiction;
(2) petition for review under Rule 42, where the decisions and final orders
were rendered by the RTC in the exercise of appellate jurisdiction; and (3)
petition for review on certiorari to the Supreme Court under Rule 45.[21]
The first mode of appeal is taken to the CA on questions of fact, or mixed
questions of fact and law. The second mode of appeal is brought to the CA
on questions of fact, of law, or mixed questions of fact and law. [22] The third
mode of appeal is elevated to the Supreme Court only on questions of
law.[23]
The distinction between a question of law and a question of fact is well
TAX REVIEW (CASE BATCH 1)
established. On the one hand, a question of law arises when there is doubt
as to what the law is on a certain state of facts; on the other, there is a
question of fact when the doubt arises as to the truth or falsity of the alleged
facts.[24] According to Leoncio v. De Vera:[25]
x x x For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by the litigants
or any of them. The resolution of the issue must rest solely on what the law
provides on the given set of circumstances. Once it is clear that the issue
invites a review of the evidence presented, the question posed is one of fact.
Thus, the test of whether a question is one of law or of fact is not the
appellation given to such question by the party raising the same; rather, it is
whether the appellate court can determine the issue raised without
reviewing or evaluating the evidence, in which case, it is a question of law;
[26]
otherwise it is a question of fact.
The nature of the issues to be raised on appeal can be gleaned from the
appellant’s notice of appeal filed in the trial court, and from the appellant’s
brief submitted to the appellate court.[27] In this case, the petitioners filed a
notice of appeal in which they contended that the April 26, 2002 decision
and the order of July 17, 2002 issued by the RTC denying their consolidated
motion for reconsideration were contrary to the facts and law obtaining in
[28]
the consolidated cases. In their consolidated memorandum filed in the
CA, they essentially assailed the RTC’s ruling that the taxes imposed on
and collected from the petitioners under Section 21 of the Revenue Code of
Manila constituted double taxation in the strict, narrow or obnoxious sense.
Considered together, therefore, the notice of appeal and consolidated
memorandum evidently did not raise issues that required the re-evaluation
of evidence or the relevance of surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a question
Page 60 of 151
of law. The dismissal of their appeal was proper, strictly speaking, because
Section 2, Rule 50 of the Rules of Court provides that an appeal
from the RTC to the CA raising only questions of law shall be dismissed;
and that an appeal erroneously taken to the CA shall be outrightly
dismissed.[29]
2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double taxation
The foregoing notwithstanding, the Court, given the circumstances
obtaining herein and in light of jurisprudence promulgated subsequent to
the filing of the petition, deems it fitting and proper to adopt a liberal
approach in order to render a just and speedy disposition of the substantive
issue at hand. Hence, we resolve, bearing in mind the following
pronouncement in Go v. Chaves:[30]
Our rules of procedure are designed to facilitate the orderly disposition of
cases and permit the prompt disposition of unmeritorious cases which clog
the court dockets and do little more than waste the courts’ time. These
technical and procedural rules, however, are intended to ensure, rather than
suppress, substantial justice. A deviation from their rigid enforcement may
thus be allowed, as petitioners should be given the fullest opportunity to
establish the merits of their case, rather than lose their property on mere
technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance
Corporation that:
Courts have the prerogative to relax procedural rules of even the most
mandatory character, mindful of the duty to reconcile both the need to
speedily put an end to litigation and the parties' right to due process. In
TAX REVIEW (CASE BATCH 1)
numerous cases, this Court has allowed liberal construction of the rules
when to do so would serve the demands of substantial justice and equity.
The petitioners point out that although Section 21 of the Revenue Code of
Manila was not itself unconstitutional or invalid, its enforcement against the
petitioners constituted double taxation because the local business taxes
under Section 15 and Section 17 of the Revenue Code of Manila were
[31]
already being paid by them. They contend that the proviso in Section 21
exempted all registered businesses in the City of Manila from paying the tax
imposed under Section 21;[32] and that the exemption was more in accord
with
Section 143 of the Local Government Code, [33]
the law that vested in the
municipal and city governments the power to impose business taxes.
The respondents counter, however, that double taxation did not occur from
the imposition and collection of the tax pursuant to Section 21 of the
Revenue Code of Manila;[34] that the taxes imposed pursuant to Section 21
were in the concept of indirect taxes upon the consumers of the goods and
[35]
services sold by a business establishment; and that the petitioners did not
exhaust their administrative remedies by first appealing to the Secretary of
Justice to challenge the constitutionality or legality of the tax ordinance. [36]
In resolving the issue of double taxation involving Section 21 of the
Revenue Code of Manila, the Court is mindful of the ruling in City of
Manila v. Coca-Cola Bottlers Philippines, Inc.,[37] which has been reiterated
in Swedish Match Philippines, Inc. v. The Treasurer of the City of
[38]
Manila. In the latter, the Court has held:
Page 61 of 151
x x x [T]he issue of double taxation is not novel, as it has already been
settled by this Court in The City of Manila v. Coca-Cola Bottlers
Philippines, Inc., in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21 of Tax
Ordinance No. 7794, to their own detriment. Said exempting proviso was
precisely included in said section so as to avoid double taxation.
Double taxation means taxing the same property twice when it should be
taxed only once; that is, “taxing the same person twice by the same
jurisdiction for the same thing.” It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as “direct duplicate
taxation,” the two taxes must be imposed on the same subject matter, for
the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be of the
same kind or character.
Using the aforementioned test, the Court finds that there is indeed double
taxation if respondent is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter – the privilege of doing business in the City of Manila;
(2) for the same purpose – to make persons conducting business within the
City of Manila contribute to city revenues; (3) by the same taxing authority
– petitioner City of Manila; (4) within the same taxing jurisdiction – within
the territorial jurisdiction of the City of Manila; (5) for the same taxing
periods – per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under
Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court
revisits Section 143 of the LGC, the very source of the power of
TAX REVIEW (CASE BATCH 1)
municipalities and cities to impose a local business tax, and to which any
local business tax imposed by petitioner City of Manila must conform. It is
apparent from a perusal thereof that when a municipality or city has already
imposed a business tax on manufacturers, etc. of liquors, distilled spirits,
wines, and any other article of commerce, pursuant to Section 143(a) of the
LGC, said municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Section 143(h) of the same
Code. Section 143(h) may be imposed only on businesses that are subject to
excise tax, VAT, or percentage tax under the NIRC, and that are “not
otherwise specified in preceding paragraphs.” In the same way,
businesses such as respondent’s, already subject to a local business tax
under Section 14 of Tax Ordinance No. 7794 [which is based on Section
143(a) of the LGC], can no longer be made liable for local business tax
under Section 21 of the same Tax Ordinance [which is based on Section
143(h) of the LGC].
Based on the foregoing reasons, petitioner should not have been subjected
to taxes under Section 21 of the Manila Revenue Code for the fourth quarter
of 2001, considering that it had already been paying local business tax
under Section 14 of the same ordinance.
xxxx
Accordingly, respondent’s assessment under both Sections 14 and 21 had
no basis. Petitioner is indeed liable to pay business taxes to the City of
Manila; nevertheless, considering that the former has already paid these
taxes under Section 14 of the Manila Revenue Code, it is exempt from the
same payments under Section 21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of petitioner.
It is undisputed that petitioner paid business taxes based on Sections 14 and
Page 62 of 151
21 for the fourth quarter of 2001 in the total amount of P470,932.21.
Therefore, it is entitled to a refund of P164,552.04 corresponding to the
payment under Section 21 of the Manila Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and
Swedish Match Philippines, Inc., the Court now holds that all the elements
of double taxation concurred upon the City of Manila’s assessment on and
collection from the petitioners of taxes for the first quarter of 1999 pursuant
to Section 21 of the Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax
on a person who sold goods and services in the course of trade or business
based on a certain percentage of his gross sales or receipts in the preceding
calendar year, while Section 15 and Section 17 likewise imposed the tax on
a person who sold goods and services in the course of trade or business but
only identified such person with particularity, namely, the wholesaler,
distributor or dealer (Section 15), and the retailer (Section 17), all the taxes
– being imposed on the privilege of doing business in the City of Manila in
order to make the taxpayers contribute to the city’s revenues – were
imposed on the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of
Manila) and within the same jurisdiction in the same taxing period (i.e., per
calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish
Match Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on
Manufacturers, Assemblers and Other Processors) [39] of the Revenue Code
of Manila, the legal principles enunciated therein should similarly apply
TAX REVIEW (CASE BATCH 1) Page 63 of 151

because Section 15 (Tax on Wholesalers, Distributors, or Dealers) and

Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the
same nature of tax as that imposed under Section 14, i.e., local business tax,
albeit on a different subject matter or group of taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of
Manila constituted double taxation, and the taxes collected pursuant thereto
must be refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari;

REVERSES and SETS ASIDE the resolutions promulgated on June 18,
2007 and November 14, 2007 in CA-G.R. SP No. 72191; and DIRECTS the
City of Manila to refund the payments made by the petitioners of the taxes
assessed and collected for the first quarter of 1999 pursuant to Section 21 of
the Revenue Code of Manila.

No pronouncement on costs of suit.

SO ORDERED.
TAX REVIEW (CASE BATCH 1)
G.R. No. 191109, July 18, 2012
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE
PHILIPPINE RECLAMATION AUTHORITY (PRA), PETITIONER,
VS. CITY OF PARAÑAQUE, RESPONDENT.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, on pure questions of law, assailing the January 8, 2010
Order[1] of the Regional Trial Court, Branch 195, Parañaque City (RTC),
which ruled that petitioner Philippine Reclamation Authority (PRA) is a
government-owned and controlled corporation (GOCC), a taxable entity,
and, therefore, not exempt from payment of real property taxes. The
pertinent portion of the said order reads:
In view of the finding of this court that petitioner is not exempt from
payment of real property taxes, respondent Parañaque City Treasurer
Liberato M. Carabeo did not act xxx without or in excess of jurisdiction, or
with grave abuse of discretion amounting to lack or in excess of jurisdiction
in issuing the warrants of levy on the subject properties.
WHEREFORE, the instant petition is dismissed. The Motion for Leave to
File and Admit Attached Supplemental Petition is denied and the
supplemental petition attached thereto is not admitted.
The Public Estates Authority (PEA) is a government corporation created by
virtue of Presidential Decree (P.D.) No. 1084 (Creating the Public Estates
Authority, Defining its Powers and Functions, Providing Funds Therefor
Page 64 of 151
and For Other Purposes) which took effect on February 4, 1977 to provide
a coordinated, economical and efficient reclamation of lands, and the
administration and operation of lands belonging to, managed and/or
operated by, the government with the object of maximizing their utilization
and hastening their development consistent with public interest.
On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued
by then President Ferdinand Marcos, PEA was designated as the agency
primarily responsible for integrating, directing and coordinating all
reclamation projects for and on behalf of the National Government.
On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O.
No. 380 transforming PEA into PRA, which shall perform all the powers
and functions of the PEA relating to reclamation activities.
By virtue of its mandate, PRA reclaimed several portions of the foreshore
and offshore areas of Manila Bay, including those located in Parañaque
City, and was issued Original Certificates of Title (OCT Nos. 180, 202, 206,
207, 289, 557, and 559) and Transfer Certificates of Title (TCT Nos.
104628, 7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.
On February 19, 2003, then Parañaque City Treasurer Liberato M. Carabeo
(Carabeo) issued Warrants of Levy on PRA’s reclaimed properties (Central
Business Park and Barangay San Dionisio) located in Parañaque City based
on the assessment for delinquent real property taxes made by then
Parañaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.
On March 26, 2003, PRA filed a petition for prohibition with prayer for
temporary restraining order (TRO) and/or writ of preliminary injunction
against Carabeo before the RTC.
TAX REVIEW (CASE BATCH 1)
On April 3, 2003, after due hearing, the RTC issued an order denying
PRA’s petition for the issuance of a temporary restraining order.
On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to
proceed with the public auction of the subject reclaimed properties on April
7, 2003. In response, Carabeo sent a letter stating that the public auction
could not be deferred because the RTC had already denied PRA’s TRO
application.
On April 25, 2003, the RTC denied PRA’s prayer for the issuance of a writ
of preliminary injunction for being moot and academic considering that the
auction sale of the subject properties on April 7, 2003 had already been
consummated.
On August 3, 2009, after an exchange of several pleadings and the failure of
both parties to arrive at a compromise agreement, PRA filed a Motion for
Leave to File and Admit Attached Supplemental Petition which sought to
declare as null and void the assessment for real property taxes, the levy
based on the said assessment, the public auction sale conducted on April 7,
2003, and the Certificates of Sale issued pursuant to the auction sale.
On January 8, 2010, the RTC rendered its decision dismissing PRA’s
petition. In ruling that PRA was not exempt from payment of real property
taxes, the RTC reasoned out that it was a GOCC under Section 3 of P.D.
No. 1084. It was organized as a stock corporation because it had an
authorized capital stock divided into no par value shares. In fact, PRA
admitted its corporate personality and that said properties were registered in
its name as shown by the certificates of title. Therefore, as a GOCC, local
tax exemption is withdrawn by virtue of Section 193 of Republic Act (R.A.)
No. 7160 [Local Government Code (LGC)] which was the prevailing law in
2001 and 2002 with respect to real property taxation. The RTC also ruled
Page 65 of 151
that the tax exemption claimed by PRA under E.O. No. 654 had already
been expressly repealed by R.A. No. 7160 and that PRA failed to comply
with the procedural requirements in Section 206 thereof.
Not in conformity, PRA filed this petition for certiorari assailing the
January 8, 2010 RTC Order based on the following
GROUNDS
I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT
PETITIONER IS LIABLE TO PAY REAL PROPERTY TAX ON
THE SUBJECT RECLAIMED LANDS CONSIDERING THAT
PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF
THE NATIONAL GOVERNMENT AND IS, THEREFORE, EXEMPT
FROM PAYMENT OF REAL PROPERTY TAX UNDER SECTIONS
234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS-À-VIS MANILA INTERNATIONAL
AIRPORT AUTHORITY V. COURT OF APPEALS.
II
THE TRIAL COURT GRAVELY ERRED IN FAILING TO
CONSIDER THAT RECLAIMED LANDS ARE PART OF THE
PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL
PROPERTY TAX.
PRA asserts that it is not a GOCC under Section 2(13) of the Introductory
Provisions of the Administrative Code. Neither is it a GOCC under Section
16, Article XII of the 1987 Constitution because it is not required to meet
TAX REVIEW (CASE BATCH 1)
the test of economic viability. Instead, PRA is a government instrumentality
vested with corporate powers and performing an essential public service
pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. Although it has a capital stock divided into shares, it
is not authorized to distribute dividends and allotment of surplus and profits
to its stockholders. Therefore, it may not be classified as a stock corporation
because it lacks the second requisite of a stock corporation which is the
distribution of dividends and allotment of surplus and profits to the
stockholders.
It insists that it may not be classified as a non-stock corporation because it
has no members and it is not organized for charitable, religious,
educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and
like chambers as provided in Section 88 of the Corporation Code.
Moreover, PRA points out that it was not created to compete in the market
place as there was no competing reclamation company operated by the
private sector. Also, while PRA is vested with corporate powers under P.D.
No. 1084, such circumstance does not make it a corporation but merely an
incorporated instrumentality and that the mere fact that an incorporated
instrumentality of the National Government holds title to real property does
not make said instrumentality a GOCC. Section 48, Chapter 12, Book I of
the Administrative Code of 1987 recognizes a scenario where a piece of
land owned by the Republic is titled in the name of a department, agency or
instrumentality.
Thus, PRA insists that, as an incorporated instrumentality of the National
Government, it is exempt from payment of real property tax except when
the beneficial use of the real property is granted to a taxable person. PRA
claims that based on Section 133(o) of the LGC, local governments cannot
Page 66 of 151
tax the national government which delegate to local governments the power
to tax.
It explains that reclaimed lands are part of the public domain, owned by the
State, thus, exempt from the payment of real estate taxes. Reclaimed lands
retain their inherent potential as areas for public use or public service.
While the subject reclaimed lands are still in its hands, these lands remain
public lands and form part of the public domain. Hence, the assessment of
real property taxes made on said lands, as well as the levy thereon, and the
public sale thereof on April 7, 2003, including the issuance of the
certificates of sale in favor of the respondent Parañaque City, are invalid
and of no force and effect.
On the other hand, the City of Parañaque (respondent) argues that PRA
since its creation consistently represented itself to be a GOCC. PRA’s very
own charter (P.D. No. 1084) declared it to be a GOCC and that it has
entered into several thousands of contracts where it represented itself to be a
GOCC. In fact, PRA admitted in its original and amended petitions and
pretrial brief filed with the RTC of Parañaque City that it was a GOCC.
Respondent further argues that PRA is a stock corporation with an
authorized capital stock divided into 3 million no par value shares, out of
which 2 million shares have been subscribed and fully paid up. Section 193
of the LGC of 1991 has withdrawn tax exemption privileges granted to or
presently enjoyed by all persons, whether natural or juridical, including
GOCCs.
Hence, since PRA is a GOCC, it is not exempt from the payment of real
property tax.
THE COURT’S RULING
TAX REVIEW (CASE BATCH 1)
The Court finds merit in the petition.
Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a GOCC as follows:
SEC. 2. General Terms Defined. – x x x x
(13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions relating
to public needs whether governmental or proprietary in nature, and owned
by the Government directly or through its instrumentalities either wholly,
or, where applicable as in the case of stock corporations, to the extent of at
least fifty-one (51) percent of its capital stock: x x x.
On the other hand, Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually
through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a
stock or non-stock corporation” while an instrumentality is vested by law
with corporate powers. Likewise, when the law makes a government
instrumentality operationally autonomous, the instrumentality remains part
of the National Government machinery although not integrated with the
Page 67 of 151
department framework.
When the law vests in a government instrumentality corporate powers, the
instrumentality does not necessarily become a corporation. Unless the
government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers.
Many government instrumentalities are vested with corporate powers but
they do not become stock or non-stock corporations, which is a necessary
condition before an agency or instrumentality is deemed a GOCC.
Examples are the Mactan International Airport Authority, the Philippine
Ports Authority, the University of the Philippines, and Bangko Sentral ng
Pilipinas. All these government instrumentalities exercise corporate powers
but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called
government corporate entities. They are not, however, GOCCs in the strict
sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities. [2]
Correlatively, Section 3 of the Corporation Code defines a stock corporation
as one whose "capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x." Section 87 thereof
defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." Further,
Section 88 provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like
trade, industry, agriculture and like chambers."
TAX REVIEW (CASE BATCH 1)
Two requisites must concur before one may be classified as a stock
corporation, namely: (1) that it has capital stock divided into shares; and
(2) that it is authorized to distribute dividends and allotments of surplus
and profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations,
they must have members and must not distribute any part of their income to
[3]
said members.
In the case at bench, PRA is not a GOCC because it is neither a stock nor a
non-stock corporation. It cannot be considered as a stock corporation
because although it has a capital stock divided into no par value shares as
[4]
provided in Section 7 of P.D. No. 1084, it is not authorized to distribute
dividends, surplus allotments or profits to stockholders. There is no
provision whatsoever in P.D. No. 1084 or in any of the subsequent
[5]
executive issuances pertaining to PRA, particularly, E.O. No. 525, E.O.
[6] [7]
No. 654 and EO No. 798 that authorizes PRA to distribute dividends,
surplus allotments or profits to its stockholders.
PRA cannot be considered a non-stock corporation either because it does
not have members. A non-stock corporation must have members.[8]
Moreover, it was not organized for any of the purposes mentioned in
Section 88 of the Corporation Code. Specifically, it was created to manage
all government reclamation projects.
Furthermore, there is another reason why the PRA cannot be classified as a
GOCC. Section 16, Article XII of the 1987 Constitution provides as
follows:
Section 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
Page 68 of 151
charters in the interest of the common good and subject to the test of
economic viability.
The fundamental provision above authorizes Congress to create GOCCs
through special charters on two conditions: 1) the GOCC must be
established for the common good; and 2) the GOCC must meet the test of
economic viability. In this case, PRA may have passed the first condition of
common good but failed the second one - economic viability. Undoubtedly,
the purpose behind the creation of PRA was not for economic or
commercial activities. Neither was it created to compete in the market place
considering that there were no other competing reclamation companies
being operated by the private sector. As mentioned earlier, PRA was created
essentially to perform a public service considering that it was primarily
responsible for a coordinated, economical and efficient reclamation,
administration and operation of lands belonging to the government with the
object of maximizing their utilization and hastening their development
consistent with the public interest. Sections 2 and 4 of P.D. No. 1084 reads,
as follows:
Section 2. Declaration of policy. It is the declared policy of the State to
provide for a coordinated, economical and efficient reclamation of lands,
and the administration and operation of lands belonging to, managed and/or
operated by the government, with the object of maximizing their utilization
and hastening their development consistent with the public interest.
Section 4. Purposes. The Authority is hereby created for the following
purposes:
(a) To reclaim land, including foreshore and submerged areas, by dredging,
filling or other means, or to acquire reclaimed land;
TAX REVIEW (CASE BATCH 1)
(b) To develop, improve, acquire, administer, deal in, subdivide, dispose,
lease and sell any and all kinds of lands, buildings, estates and other forms
of real property, owned, managed, controlled and/or operated by the
government.
(c) To provide for, operate or administer such services as may be necessary
for the efficient, economical and beneficial utilization of the above
properties.
The twin requirement of common good and economic viability was
lengthily discussed in the case of Manila International Airport Authority v.
[9]
Court of Appeals, the pertinent portion of which reads:
Third, the government-owned or controlled corporations created through
special charters are those that meet the two conditions prescribed in Section
16, Article XII of the Constitution. The first condition is that the
government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or
controlled corporation must meet the test of economic viability. Section 16,
Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.
The Constitution expressly authorizes the legislature to create "government-
owned or controlled corporations" through special charters only if these
entities are required to meet the twin conditions of common good and
economic viability. In other words, Congress has no power to create
Page 69 of 151
government-owned or controlled corporations with special charters unless
they are made to comply with the two conditions of common good and
economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic
or commercial activities and need to compete in the market place.
Being essentially economic vehicles of the State for the common good —
meaning for economic development purposes — these government-
owned or controlled corporations with special charters are usually
organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers
and performing governmental or public functions need not meet the
test of economic viability. These instrumentalities perform essential
public services for the common good, services that every modern State
must provide its citizens. These instrumentalities need not be
economically viable since the government may even subsidize their
entire operations. These instrumentalities are not the "government-owned
or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates
government instrumentalities vested with corporate powers but performing
essential governmental or public functions. Congress has plenary authority
to create government instrumentalities vested with corporate powers
provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special
charters corporations that perform economic or commercial activities, such
entities — known as "government-owned or controlled corporations" —
must meet the test of economic viability because they compete in the
market place.
TAX REVIEW (CASE BATCH 1)
This is the situation of the Land Bank of the Philippines and the
Development Bank of the Philippines and similar government- owned or
controlled corporations, which derive their income to meet operating
expenses solely from commercial transactions in competition with the
private sector. The intent of the Constitution is to prevent the creation of
government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability,
explained to the Constitutional Commission the purpose of this test, as
follows:
MR. OPLE: Madam President, the reason for this concern is really that
when the government creates a corporation, there is a sense in which this
corporation becomes exempt from the test of economic performance. We
know what happened in the past. If a government corporation loses, then it
makes its claim upon the taxpayers' money through new equity infusions
from the government and what is always invoked is the common good. That
is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to
support a few government financial institutions. And this is all taxpayers'
money which could have been relocated to agrarian reform, to social
services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together
with the "common good," this becomes a restraint on future enthusiasts for
state capitalism to excuse themselves from the responsibility of meeting the
market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in
this proposal by Commissioner Foz, the insertion of the standard of
Page 70 of 151
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with
the common good.
Father Joaquin G. Bernas, a leading member of the Constitutional
Commission, explains in his textbook The 1987 Constitution of the
Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission.
The significant addition, however, is the phrase "in the interest of the
common good and subject to the test of economic viability." The addition
includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector
can do better. Moreover, economic viability is more than financial viability
but also includes capability to make profit and generate benefits not
quantifiable in financial terms.
Clearly, the test of economic viability does not apply to government
entities vested with corporate powers and performing essential public
services. The State is obligated to render essential public services regardless
of the economic viability of providing such service. The non-economic
viability of rendering such essential public service does not excuse the State
from withholding such essential services from the public.
However, government-owned or controlled corporations with special
charters, organized essentially for economic or commercial objectives, must
meet the test of economic viability. These are the government-owned or
controlled corporations that are usually organized under their special
charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government- owned or
controlled corporations, along with government-owned or controlled
corporations organized under the Corporation Code, that fall under the
TAX REVIEW (CASE BATCH 1)
definition of "government-owned or controlled corporations" in Section
2(10) of the Administrative Code. [Emphases supplied]
This Court is convinced that PRA is not a GOCC either under Section 2(3)
of the Introductory Provisions of the Administrative Code or under Section
16, Article XII of the 1987 Constitution. The facts, the evidence on record
and jurisprudence on the issue support the position that PRA was not
organized either as a stock or a non-stock corporation. Neither was it
created by Congress to operate commercially and compete in the private
market. Instead, PRA is a government instrumentality vested with corporate
powers and performing an essential public service pursuant to Section 2(10)
of the Introductory Provisions of the Administrative Code. Being an
incorporated government instrumentality, it is exempt from payment of real
property tax.
Clearly, respondent has no valid or legal basis in taxing the subject
reclaimed lands managed by PRA. On the other hand, Section 234(a) of the
LGC, in relation to its Section 133(o), exempts PRA from paying realty
taxes and protects it from the taxing powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:
SEC. 234. Exemptions from Real Property Tax – The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local
Page 71 of 151
Government Units. – Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its
agencies and instrumentalities, and local government units. [Emphasis
supplied]
It is clear from Section 234 that real property owned by the Republic of the
Philippines (the Republic) is exempt from real property tax unless the
beneficial use thereof has been granted to a taxable person. In this case,
there is no proof that PRA granted the beneficial use of the subject
reclaimed lands to a taxable entity. There is no showing on record either
that PRA leased the subject reclaimed properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same
Code, which prohibits local governments from imposing "[t]axes, fees or
charges of any kind on the National Government, its agencies and
instrumentalities x x x." The Administrative Code allows real property
owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remain
owned by the Republic and continue to be exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an
agency or instrumentality of the national government. This happens when
the title of the real property is transferred to an agency or instrumentality
even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption, unless “the
beneficial use thereof has been granted, for consideration or otherwise, to a
TAX REVIEW (CASE BATCH 1)
taxable person."[10]
The rationale behind Section 133(o) has also been explained in the case of
the Manila International Airport Authority,[11] to wit:
Section 133(o) recognizes the basic principle that local governments
cannot tax the national government, which historically merely delegated
to local governments the power to tax. While the 1987 Constitution now
includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and
limitations as the Congress may provide."
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local
governments. The rule is that a tax is never presumed and there must be
clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies
with greater force when local governments seek to tax national government
instrumentalities.
Another rule is that a tax exemption is strictly construed against the
taxpayer claiming the exemption. However, when Congress grants an
exemption to a national government instrumentality from local taxation,
such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to
the benefit of the government itself or its agencies. In such case the practical
effect of an exemption is merely to reduce the amount of money that has to
be handled by government in the course of its operations. For these reasons,
Page 72 of 151
provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing
each other, unless a sound and compelling policy requires such transfer
of public funds from one government pocket to another.
There is also no reason for local governments to tax national
government instrumentalities for rendering essential public services to
inhabitants of local governments. The only exception is when the
legislature clearly intended to tax government instrumentalities for the
delivery of essential public services for sound and compelling policy
considerations. There must be express language in the law empowering
local governments to tax national government instrumentalities. Any doubt
whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless
otherwise provided" in the Code, local governments cannot tax national
government instrumentalities. As this Court held in Basco v. Philippine
Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede,
burden or in any manner control the operation of constitutional laws enacted
by Congress to carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government
over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
TAX REVIEW (CASE BATCH 1)
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to
prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as "a tool for regulation."
(U.S. v. Sanchez, 340 US 42)
The power to tax which was called by Justice Marshall as the "power to
destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power
to wield it. [Emphases supplied]
The Court agrees with PRA that the subject reclaimed lands are still part of
the public domain, owned by the State and, therefore, exempt from payment
of real estate taxes.
Section 2, Article XII of the 1987 Constitution reads in part, as follows:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least 60
Page 73 of 151
per centum of whose capital is owned by such citizens. Such agreements
may be for a period not exceeding twenty-five years, renewable for not
more than twenty-five years, and under such terms and conditions as may
provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of waterpower,
beneficial use may be the measure and limit of the grant.
Similarly, Article 420 of the Civil Code enumerates properties belonging to
the State:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth. [Emphases supplied]
Here, the subject lands are reclaimed lands, specifically portions of the
foreshore and offshore areas of Manila Bay. As such, these lands remain
public lands and form part of the public domain. In the case of Chavez v.
Public Estates Authority and AMARI Coastal Development Corporation,[12]
the Court held that foreshore and submerged areas irrefutably belonged to
the public domain and were inalienable unless reclaimed, classified as
alienable lands open to disposition and further declared no longer needed
for public service. The fact that alienable lands of the public domain were
transferred to the PEA (now PRA) and issued land patents or certificates of
title in PEA’s name did not automatically make such lands private. This
TAX REVIEW (CASE BATCH 1)
Court also held therein that reclaimed lands retained their inherent potential
as areas for public use or public service.
As the central implementing agency tasked to undertake reclamation
projects nationwide, with authority to sell reclaimed lands, PEA took the
place of DENR as the government agency charged with leasing or selling
reclaimed lands of the public domain. The reclaimed lands being leased or
sold by PEA are not private lands, in the same manner that DENR, when it
disposes of other alienable lands, does not dispose of private lands but
alienable lands of the public domain. Only when qualified private parties
acquire these lands will the lands become private lands. In the hands of the
government agency tasked and authorized to dispose of alienable of
disposable lands of the public domain, these lands are still public, not
private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of
the public domain" as well as "any and all kinds of lands." PEA can hold
both lands of the public domain and private lands. Thus, the mere fact that
alienable lands of the public domain like the Freedom Islands are
transferred to PEA and issued land patents or certificates of title in PEA's
[13]
name does not automatically make such lands private.
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of
the Administrative Code of 1987, thus:
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the
Government.-
(1) The President shall have the power to reserve for settlement or public
use, and for specific public purposes, any of the lands of the public domain,
the use of which is not otherwise directed by law. The reserved land shall
Page 74 of 151
thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for
public use. They are properties of public dominion. The ownership of such
lands remains with the State unless they are withdrawn by law or
presidential proclamation from public use.
Under Section 2, Article XII of the 1987 Constitution, the foreshore and
submerged areas of Manila Bay are part of the "lands of the public domain,
waters x x x and other natural resources" and consequently "owned by the
State." As such, foreshore and submerged areas "shall not be alienated,"
unless they are classified as "agricultural lands" of the public domain. The
mere reclamation of these areas by PEA does not convert these inalienable
natural resources of the State into alienable or disposable lands of the public
domain. There must be a law or presidential proclamation officially
classifying these reclaimed lands as alienable or disposable and open to
disposition or concession. Moreover, these reclaimed lands cannot be
classified as alienable or disposable if the law has reserved them for some
public or quasi-public use.
As the Court has repeatedly ruled, properties of public dominion are not
subject to execution or foreclosure sale.[14] Thus, the assessment, levy and
foreclosure made on the subject reclaimed lands by respondent, as well as
the issuances of certificates of title in favor of respondent, are without basis.
WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of
the Regional Trial Court, Branch 195, Parañaque City, is REVERSED and
SET ASIDE. All reclaimed properties owned by the Philippine
Reclamation Authority are hereby declared EXEMPT from real estate
taxes. All real estate tax assessments, including the final notices of real
TAX REVIEW (CASE BATCH 1) Page 75 of 151

estate tax delinquencies, issued by the City of Parañaque on the subject

reclaimed properties; the assailed auction sale, dated April 7, 2003; and the
Certificates of Sale subsequently issued by the Parañaque City Treasurer in
favor of the City of Parañaque, are all declared VOID.

SO ORDERED.
TAX REVIEW (CASE BATCH 1)
G.R. No. 125346, November 11, 2014
LA SUERTE CIGAR & CIGARETTE FACTORY, PETITIONER, VS.
COURT OF APPEALS AND COMMISSIONER OF INTERNAL
REVENUE, RESPONDENTS.
[G.R. Nos. 136328-29]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
FORTUNE TOBACCO CORPORATION, RESPONDENT.
[G.R. No. 144942]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
LA SUERTE CIGAR & CIGARETTE FACTORY, RESPONDENT.
[G.R. No. 148605]
STERLING TOBACCO CORPORATION, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
[G.R. No. 158197]
LA SUERTE CIGAR & CIGARETTE FACTORY, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
[G.R. No. 165499]
LA SUERTE CIGAR & CIGARETTE FACTORY, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Page 76 of 151
DECISION
LEONEN, J.:
These cases involve the taxability of stemmed leaf tobacco imported and
locally purchased by cigarette manufacturers for use as raw material in the
manufacture of their cigarettes. Under the National Internal Revenue Code
of 1997 (1997 NIRC), before it was amended on December 19, 2012
through Republic Act No. 10351[1] (Sin Tax Law), stemmed leaf tobacco is
subject to an excise tax of P0.75 for each kilogram thereof. [2] The 1997
NIRC further provides that stemmed leaf tobacco — “leaf tobacco which
has had the stem or midrib removed”[3] — “may be sold in bulk as raw
material by one manufacturer directly to another without payment of the
tax, under such conditions as may be prescribed in the rules and regulations
prescribed by the Secretary of Finance.”[4]
This is a consolidation of six petitions for review of several decisions of the
Court of Appeals, involving three cigarette manufacturers and the
Commissioner of Internal Revenue. G.R. No. 125346 is an appeal[5] from
the Court of Appeals (Sixth Division) that reversed [6] the Court of Tax
Appeals’ decision[7] and held petitioner La Suerte Cigar & Cigarette Factory
(La Suerte) liable for deficiency specific tax on its purchase of imported and
locally produced stemmed leaf tobacco and sale of stemmed leaf tobacco to
Associated Anglo-American Tobacco Corporation (AATC) during the
period from January 1, 1986 to June 30, 1989. G.R. Nos. 136328–29 is an
appeal[8] by the Commissioner of Internal Revenue (Commissioner) from
the decision[9] of the Court of Appeals that affirmed the Court of Tax
Appeals’ rulings[10] that Fortune Tobacco Corporation (Fortune) was not
obliged to pay the excise tax on its importations of stemmed leaf tobacco
for the periods from January 1, 1986 to June 30, 1989 and July 1, 1989 to
TAX REVIEW (CASE BATCH 1) Page 77 of 151

November 30, 1990. In G.R. No. 148605, Sterling Tobacco Corporation chewing type, or . . . ‘Batek’ tobacco.”[26] Virginia and Burley, considered
(Sterling) appeals[11] the decision[12] of the Court of Appeals that reversed as the aromatic type, are intended for cigarette manufacturing.
the Court of Tax Appeals’ decision [13]
and held it liable to pay deficiency
excise taxes on its importation and local purchases of stemmed leaf tobacco Growing and harvesting
[14]
from November 1986 to June 24, 1989. G.R. No. 144942 is an appeal
from the Court of Appeals’ decision[15] that affirmed the Court of Tax “Tobacco seeds undergo a process of germination, which takes about 7 to
Appeals’ decision [16]
and ordered the refund of specific taxes paid by La 10 days, depending on the tobacco varieties. . . . The tobacco seedlings are
Suerte on its importation of stemmed leaf tobacco in April 1995. In G.R. then sown in cold frames or hotbeds to prevent attacks from insects, and
No. 158197, La Suerte sought to appeal [17]
the decision [18]
of the Court of then transplanted into the fields”[27] after 45 to 65 days.[28]
Appeals holding it liable for deficiency specific tax on its local and
imported purchases of stemmed leaf tobacco and those it sold for the period Harvesting begins 55 to 60 days after transplanting.[29] A farmer carries out
from June 21, 1989 to November 20, 1990. Finally, in G.R. No. 165499, La either priming (leaf by leaf) or stalk harvesting (by the whole plant).[30]
Suerte again sought to appeal by certiorari[19] the decision[20] of the Court of
Appeals reversing the Court of Tax Appeals and holding it liable for Curing
deficiency specific tax on its importation of stemmed leaf tobacco in March
1995. “After harvest, tobacco is stored for curing, which allows for the slow
oxidation and degradation of carotenoids. This allows for the leaves to take
Factual background on properties that are usually attributed to the ‘smoothness’ of the
smoke.”[31]
Overview of cigarette manufacturing
“Curing methods vary with the type of tobacco grown. The tobacco barn
The primary component of cigarettes is tobacco, a processed product design varies accordingly.”[32] There are two main ways of curing tobacco
[21]
derived from the leaves of the plants in the genus Nicotiana. Most in the Philippine setting:
cigarettes contain a mixture or blend of several types of tobacco from a
1) Air-curing (for Burley and Native tobacco) “is carried out by hanging
variety of sources.
the tobacco in well-ventilated barns, where the tobacco is allowed to dry
over a period of 4 to 8 weeks. Air-cured tobacco is generally low in
The tobacco types grown in the Philippines are: Virginia (or ‘flue-
sugar content, which gives the tobacco smoke a light, smooth, semi-
cured’),[22] which accounts for 59.35% of tobacco production, Burley (or
sweet flavor. These tobacco leaves usually have a high nicotine
‘bright air-cured’),[23] which makes up 22.21%, and the Native (or ‘dark
content[;]”[33] and
air-cured),[24] which makes up the remaining 18.44%.[25] “[T]he ‘native’
type is normally categorized into three: cigar filler type, wrapper type and
TAX REVIEW (CASE BATCH 1)
2) Flue-curing (for Virginia tobacco) process “starts by the sticking of
tobacco leaves, which are then hung from tier-poles in curing barns. The
procedure will generally take about a week. Flue-cured tobacco
generally produces cigarette tobacco, which usually has a high content
of sugar, with medium to high levels of nicotine.” [34]
Once cured, the leaves are sorted into grades based on size, color, and
[35]
quality, and packed in standard bales. The bales are then moved to
accredited trading centers where they are purchased by leaf buyers such as
wholesale tobacco dealers and exporters or cigarette manufacturing
companies.[36]
Redrying and aging
After purchase, leaf tobacco is re-dried and then added with moisture to
[37]
make the tobacco pliable enough to remove its large stems. The leaves
are stripped or de-stemmed, either by hand or machine, cleaned and
compressed into boxes or porous wooden vats called hogsheads, and
aged.[38] Thereafter, the leaves are either exported or used for the
manufacture of cigarettes, cigars, and other tobacco products.
[39]
Primary processing
In the cigarette factory, the tobacco leaves undergo a conditioning process
where “high temperatures and humidity restore moisture to suitable levels
for cutting and blending tobacco and completing the cigarette-making
process.”[40]
“[T]obaccos are precisely cut and blended according to . . . formulas, or
recipes, to produce tobaccos for various brands of cigarettes. These brand
recipes include ingredients and flavors that are added to the tobacco to give
each brand its unique characteristics.”[41]
Page 78 of 151
Cigarette making and packing[42]
“The blended tobacco — often referred to as “filler” or “cut-filler” — . . . is
delivered by a pneumatic feed system to cigarette making machines . . .
within the factory.”[43] The machine disperses the shredded tobacco over a
continuous roll of cigarette paper and cuts the paper to the desired length.
The completed cigarettes are subsequently packed, sealed, and placed in
cartons.
Cigarette manufacturers
La Suerte Cigar & Cigarette Factory (La Suerte),[44] Fortune Tobacco
Corporation (Fortune),[45] and Sterling Tobacco Corporation (Sterling)[46]
are domestic corporations engaged in the production and manufacture of
cigars and cigarettes. These companies import leaf tobacco from foreign
sources and purchase locally produced leaf tobacco to be used in the
manufacture of cigars and cigarettes.[47]
The transactions of these cigarette manufacturers pertinent to these
consolidated cases are the following:
1. La Suerte’s local purchases, importations, and sale of
stemmed leaf tobacco from January 1, 1986 to June 30,
1989 (G.R. No. 125346), and from June 1989 to
November 1990 (G.R. No. 158197), and importations in
March 1995 (G.R. No. 165499) and April 1995 (G.R. No.
144942);
TAX REVIEW (CASE BATCH 1)
2. Fortune’s importation of tobacco strips from January 1,
1986 to June 30, 1989, and from July 1, 1989 to
November 30, 1990 (G.R. Nos. 136328–29); and
3. Sterling’s importations and local purchases of stemmed
leaf tobacco from November 1986 to June 24, 1989 (G.R.
No. 148605).
History of applicable tax provisions
The first tax code came into existence in 1939 with the enactment of
[48]
Commonwealth Act No. 466 (1939 Code). Section 136 of the 1939 Code
imposed specific (excise) taxes on manufactured products of tobacco, but
excluded cigars and cigarettes, which were subject to tax under a different
section.[49] Section 136 provided thus:
SECTION 136. Specific Tax on Products of Tobacco. – On manufactured
products of tobacco, except cigars, cigarettes, and tobacco specially
prepared for chewing so as to be unsuitable for consumption in any other
manner, but including all other tobacco twisted by hand or reduced into a
condition to be consumed in any manner other than by the ordinary mode of
drying and curing; and on all tobacco prepared or partially prepared for
sale or consumption, even if prepared without the use of any machine or
instrument and without being pressed or sweetened; and on all fine-cut
shorts and refuse, scraps, clippings, cuttings, and sweepings of tobacco,
there shall be collected on each kilogram, sixty centavos.
On tobacco specially prepared for chewing so as to be unsuitable for use in
any other manner, on each kilogram, forty-eight centavos. (Emphasis
supplied)
Page 79 of 151
Section 132 of the 1939 Code, however, by way of exception, provided that
“stemmed leaf tobacco . . . may be sold in bulk as raw material by one
manufacturer directly to another, under such conditions as may be
prescribed in the regulations of the Department of Finance, without the
prepayment of the tax.” Section 132 stated:
SECTION 132. Removal of Tobacco Products Without Pre-payment of
Tax. – Products of tobacco entirely unfit for chewing or smoking may be
removed free of tax for agricultural or industrial use, under such conditions
as may be prescribed in the regulations of the Department of Finance; and
stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, refuse, scraps, cuttings, clippings and sweepings of tobacco may be
sold in bulk as raw material by one manufacturer directly to another, under
such conditions as may be prescribed in the regulations of the Department
of Finance, without the pre-payment of the tax.
"Stemmed leaf tobacco," as herein used means leaf tobacco which has had
the stem or midrib removed. The term does not include broken leaf tobacco.
(Emphasis supplied)
On September 29, 1954, upon the recommendation of then Acting Collector
of Internal Revenue J. Antonio Araneta, the Department of Finance
promulgated Revenue Regulations No. V-39 (RR No. V-39), or “The
Tobacco Products Regulations,” relative to “the enforcement of the
provisions of Title IV of the [1939 Tax Code] in so far as they affect the
manufacture or importation of, and the collection and payment of the
specific tax on, manufactured tobacco or products of tobacco.” [50] Section
20(a) of RR No. V-39, which lays the rules for tax exemption on tobacco
products, states:
SECTION 20. Exemption from tax of tobacco products intended for
agricultural or industrial purposes. — (a) Sale of stemmed leaf tobacco,
etc., by one factory to another. — Subject to the limitations herein
TAX REVIEW (CASE BATCH 1) Page 80 of 151

established, products of tobacco entirely unfit for chewing or smoking may
be removed free of tax for agricultural or industrial use; and stemmed leaf
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse,
scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as
raw materials by one manufacturer directly to another without the
prepayment of specific tax.
factory, and paying the privilege tax and shall have complied with all the
requirements of engaging in such business contained in the National
Internal Revenue Code and in these regulations, the internal revenue agent
within whose district the factory is located shall deliver to said
manufacturer the necessary official register books and auxiliary register
books. These books consist of the following:

Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing B.I.R. No. 31.09—Official Register Book, A-3 for manufacturers of
tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or chewing and smoking tobacco.
partially manufactured tobacco or other refuse of tobacco may be
transferred from one factory to another under an official L-7 invoice on B.I.R. No. 31.10—Manufactured tobacco (Transcript sheet of above).
which shall be entered the exact weight of the tobacco at the time of its
removal, and entry shall be made in the L-7 register in the place provided B.I.R. No. 31.18—Official Register Book, A-4, for manufacturers of cigar.
on the page of removals. Corresponding debit entry will be made in the L-7
register book of the factory receiving the tobacco under heading “Refuse, B.I.R. No. 31.19—(Transcript sheet of the above).
etc., received from other factory,” showing the date of receipt, assessment
and invoice numbers, name and address of the consignor, form in which B.I.R. No. 31.27—Official Register Book, A-5, for Manufacturers of
received, and the weight of the tobacco. This paragraph should not, cigarettes.
however, be construed to permit the transfer of materials unsuitable for the
manufacture of tobacco products from one factory to another. (Emphasis B.I.R. No. 31.28—(Transcript sheet of above).
supplied)
B.I.R. No. 31.01—Official Register Book, L-7, record of raw materials for
Sections 10 and 11 of RR No. V-39 enumerate and describe the record
manufacturers of any class of tobacco products.
books to be kept and used by manufacturers of tobacco products, viz:
SECTION 10. (a) Register, auxiliary, and stamps requisition books for
B.I.R. No. 31.02—(Transcript sheet of above)[.]
manufacturers. — The Collector of Internal Revenue shall from time to
time supply provincial revenue agents or the Chief of the Tobacco Tax
B.I.R. No. 31.46—Auxiliary Register Book, L-7-1/2, bale book, for
Section with the necessary number of manufacturers official register books
manufacturers of any class of tobacco products.
and official auxiliary register books as may be required in each locality by
manufacturers of tobacco products. Whenever any manufacturer shall have
B.I.R. No. 31.47—(Transcript sheet of above).
qualified himself as such by executing a proper bond, registering his
TAX REVIEW (CASE BATCH 1)
B.I.R. No. 31.12—Stamp requisition book, for manufacturers of
manufactured tobacco.
B.I.R. No. 31.21—Stamp requisition book, for manufacturers of cigars.
B.I.R. No. 31.30—Stamp requisition book, for manufacturers of cigarettes.
B.I.R. No. 31.05—L-7 Official Invoice Book for, use in connection with L-7
register book.
B.I.R. No. 31.05—L-7-1/2 Official Invoice Book, for use in connection with
L-7-1/2 bale book.
(b) General nature of official register and auxiliary register books. —
The L-7 official register book is the record of all raw materials used in the
manufacture of tobacco products of all description in the factory. It is the
primary record of the internal operations of the factory. It shows the raw
materials used in the manufacture and the articles actually manufactured or
produced. The Schedule A register books are the record of the articles
actually manufactured or produced, and transferred from the credit side of
the official register book, L-7. They show the amount of taxes paid and the
name of the person to whom the finished products is consigned or sold
when leaving the factory. The bale book[,] L-7-1/2, is an auxiliary to the L-
7 official register book.
All official register books and other official records herein required of
manufacturers shall be kept in the factory premises, or in the factory
warehouse, in the case of bale books, and open to inspection by any internal
revenue officer at all times of the day or night.
....
Page 81 of 151
SECTION 11. Entries to be made in the official register and auxiliary
register books; monthly transcripts. — (a) Official bale book (L-7-1/2).
All leaf tobacco received in any factory or factory warehouse shall be
debited, and any removal of tobacco from the factory shall be credited in the
official bale book; except cuttings, clippings, sweepings, and other partially
manufactured tobacco, which shall be credited in the L-7 register book.
The Collector of Internal Revenue may in his discretion waive the
requirements of keeping an official bale book by small factories.
(b) The Official Register Book (L-7). — One L-7 books shall suffice for
each manufacturer of tobacco products, regardless of the classes of tobacco
manufactured by him. All loose leaf tobacco received in the factory proper
and all bales of leaf tobacco which are opened in the factory for use in the
manufacture of tobacco products shall be entered in the L-7 official register
book under the heading “Received from Dealers” at the net weights. In the
column headed “Name[”] and “Address” shall be shown the words
“Transferred from tobacco factory warehouse”. All leaf tobacco received
into a factory must be entered in the official bale book pertaining to the
factory and bales of leaf tobacco shall not be taken up in the L-7 register
book until said bales are transferred for use and credited in the official bale
book. While leaf tobacco must be taken in the official bale book, this is
done for statistical purposes only. As soon as it enters the factory for use in
manufacture it should be taken up in the L-7 register book and credited in
the official bale book.
All removals of waste of tobacco, whether transferred to other factories,
removed for agricultural or industrial purposes, or destroyed on the
premises or elsewhere, shall be entered in the official register book, L-7,
TAX REVIEW (CASE BATCH 1) Page 82 of 151

under the heading “Raw Materials Removed”, showing all information pressing (not baling), grinding, or rubbing (grating) any raw or leaf
required therein. (Emphasis supplied) tobacco, or otherwise preparing raw or leaf tobacco, or manufactured or
partially manufactured tobacco and snuff, or putting up for consumption
Section 2 of RR No. V-39 broadly defined “manufactured products of
scraps, refuse, or stems of tobacco resulting from any process of
tobacco” and “manufacturer of tobacco products” as follows:
handling tobacco stems, scraps, clippings, or waste by sifting, twisting,
Section 2. Definition of terms. — When used in there [sic] regulations, the
screening or by any other process.
following terms shall be given the interpretations indicated in their
respective definitions given below, except where the context indicates
....
otherwise:
(m) “Partially manufactured tobacco” — Includes:
(a) “Manufactured products of tobacco” shall include cigars, cigarettes,
(1) “Stemmed leaf” — handstripped tobacco, clean, good, partially broken
smoking tobacco, chewing, snuff, and all other forms of manufactured and
leaf only, free from mold and dust.
partially manufactured tobacco, as defined in section 194 (M) [51] of the
National Internal Revenue Code.
(2) “Long-filler” — handstripped tobacco of good, long pieces of broken
leaf usable as filler for cigars without further preparation, and free from
(b) “Manufacturer of tobacco products” shall include all persons engaged in
mold, dust stems and cigar cuttings.
the manufacture of any of the forms of tobacco mentioned in the next
preceding paragraph.
(3) “Short-filler” — handstripped or machine-stripped tobacco, clean, good,
In 1967, the Secretary of Finance promulgated Revenue Regulations No. short pieces of broken leaf, which will not pass through a screen of two
17-67 (RR No. 17-67), as amended,[52] or the “Tobacco Revenue inches (2") mesh.
Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and
Other Tobacco Products; Grading, Classification, Inspection, Shipments, (4) “Cigar-cuttings” — clean cuttings or clippings from cigars, unsized with
Exportation, Importation and the Manufacturers thereof under the any other form of tobacco.
provisions of Act No. 2613, as amended.” Section 2(i) of RR No. 17-67
defined a “manufacturer of tobacco” and included in the definition one who (5) “Machine-scrap tobacco” — machine-threshed, clean, good tobacco, not
prepares partially manufactured tobacco. Section 2(m) defined “partially included in any of the above terms, usable in the manufacture of
manufactured tobacco” as including stemmed leaf tobacco. Thus, Sections tobacco products.
2(i) and (m) read:
(6) “Stems” — midribs of leaf tobacco removed from the whole leaf or
(i) "Manufacturer of tobacco" — Includes every person whose business it
broken leaf either by hand or machine.
is to manufacture tobacco o[r] snuff or who employs others to
manufacture tobacco or snuff, whether such manufacture be by cutting,
TAX REVIEW (CASE BATCH 1) Page 83 of 151

(7) “Waste tobacco” — denatured tobacco; powder or dust, refuse, unfit for
human consumption; discarded materials in the manufacture of tobacco
products, which may include stems.
Section 3 of RR No. 17-67 classified entities that dealt with tobacco
according to the type of permit that the Bureau of Internal Revenue issued
to each entity. Under this classification, wholesale leaf tobacco dealers were
considered L-3 permittees. Those (referring to wholesale leaf tobacco
dealers) that reprocess partially manufactured tobacco for export, for
themselves, and/or for other L-6 or L-7 permittees were considered L-6
permittees. Manufacturers of tobacco products such as cigarette
manufacturers were considered L-7 permittees. Section 3 of RR No. 17-67
reads:
transferred only to holders of L-3 and L-3R permits after flue-curing the
tobacco.
(f) L-5 — Tobacco planters selling to consumers part or the whole of their
tobacco production.
(g) L-6 — Wholesale leaf tobacco dealers who, exclusively for export,
except as otherwise provided for in these regulations, perform the
following functions:
(1) Handstripped and/or thresh whole leaf tobacco for themselves or for
other L-6 or L-7 permittees;

(a) L-3 — Wholesale leaf tobacco dealer.

(2) Re-process partially manufactured tobacco for themselves, or for
other L-6 or L-7 permittees;
(b) L-3F — Wholesale leaf tobacco dealer. Issued only in favor of Farmer's
Cooperative Marketing Association (FaCoMas) duly organized in
(3) Sell their partially manufactured tobacco to other L-6 permittees.
accordance with law. [This function relative to tobacco trading was
transferred to the Philippine Virginia Tobacco Administration (PVTA)
(h) L-7 — Manufacturers of tobacco products. [L-7 ½ designates an
under Section 15 of Republic Act No. 2265].
auxiliary registered book (bale books), for manufacturers of tobacco
products.]
(c) L-3R — Wholesale leaf tobacco dealers. Issued only in favor of persons
or entities having fully equipped Redrying Plants.
(i) B-14 — Wholesale leaf tobacco dealers (Privilege tax receipt)

(d) L-3-¼ — Buyers for wholesale leaf tobacco dealers.

(j) B-14 (a) — Retail leaf tobacco dealers (Privilege tax receipt)
La Suerte contends that on December 12, 1972, then Internal Revenue
(e) L-4 — Wholesale leaf tobacco dealers. Issued only in favor of persons
Commissioner Misael P. Vera issued a ruling which declared that:
or entities having flue-curing barns, who may purchase or receive green
. . . . The subsequent sale or transfer by the L-6/L-3R permittee for export or
Virginia leaf tobacco from bona fide tobacco planters only, or handle
to an L-7-1/2 for use in the manufacture of cigars or cigarettes may also be
green leaf of their own production, which tobacco shall be sold or
allowed without the prepayment of the specific tax.[53]
TAX REVIEW (CASE BATCH 1)
Almost 40 years from the enactment of the 1939 Tax Code, Presidential
Decree No. 1158-A, otherwise known as the “National Internal Revenue
Code of 1977,” was promulgated on June 3, 1977, to consolidate and
integrate the various tax laws which have so far amended or repealed the
provisions found in the 1939 Tax Code. Section 132 was renumbered as
Section 144, and Section 136 as Section 148. Sections 144 and 148, read:
SEC. 144. Removal of tobacco products without prepayment of tax.—
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
be prescribed in the regulations of the Department of Finance, and stemmed
leaf tobacco, fine-cut shorts, the refuse of fine-cuts chewing tobacco, re-
refuse, scraps, cuttings, clippings, stems or midribs, and sweepings of
tobacco may be sold in bulk as raw material by one manufacturer directly to
another, under such conditions as may be prescribed in the regulations of
the Department of Finance, without the prepayment of the tax.
“Stemmed leaf tobacco”, as herein used means leaf tobacco which has had
the stem or midrib removed. The term does not include broken leaf tobacco.
....
SEC. 148. Specific tax on products of tobacco.—On manufactured products
of tobacco, except cigars, cigarettes, and tobacco specially prepared for
chewing so as to be unsuitable for consumption in any other manner, but
including all other tobacco twisted by hand or reduced into a condition to be
consumed in any manner other than by the ordinary mode of drying and
curing; and on all tobacco prepared or partially prepared for sale or
consumption, even if prepared without the use of any machine or instrument
and without being pressed or sweetened; and on all fine-cut shorts and
refuse, scraps, clippings, cuttings, stems, and sweepings of tobacco, there
shall be collected on each kilogram, seventy-five centavos: Provided,
Page 84 of 151
however, That fine-cut shorts and refuse, scraps, clippings, cuttings, stems
and sweepings of tobacco resulting from the handling, or stripping of whole
leaf tobacco may be transferred, disposed of, or otherwise sold, without
prepayment of the specific tax herein provided for under such conditions as
may be prescribed in the regulations promulgated by the Secretary of
Finance upon recommendation of the Commissioner if the same are to be
exported or to be used in the manufacture of other tobacco products on
which the specific tax will eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use in
any other manner, on each kilogram, sixty centavos.
Sections 144 and 148 were subsequently renumbered as Sections 120 and
125 respectively under Presidential Decree No. 1994, [54] which took effect
on January 1, 1986 (1986 Tax Code); then as Sections 137 and 141 under
Executive Order No. 273;[55] and finally as Sections 140 and 144 under
Republic Act No. 8424 or the “Tax Reform Act of 1997.” However, the
provisions remained basically unchanged.
The business transactions of La Suerte, Fortune, and Sterling that the
Commissioner found to be taxable for specific tax took place during the
effectivity of the 1986 Tax Code, as amended by Executive Order No. 273.
The pertinent provisions are Sections 137 and 141, thus:
SEC. 137. Removal of tobacco products without prepayment of tax. –
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
be prescribed in the regulations of the Ministry of Finance. Stemmed leaf
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps,
cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold
in bulk as raw material by one manufacturer directly to another, without
payment of the tax under such conditions as may be prescribed in the
TAX REVIEW (CASE BATCH 1)
regulations of the Ministry of Finance.
‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had
the stem or midrib removed. The term does not include broken leaf tobacco.
....
SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-
five centavos on each kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to be consumed in
any manner other than the ordinary mode of drying and curing;
(b) tobacco prepared or partially prepared with or without the use of any
machine or instruments or without being pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco.
Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings
of tobacco resulting from the handling or stripping of whole leaf tobacco
may be transferred, disposed of, or otherwise sold, without prepayment of
the specific tax herein provided for under such conditions as may be
prescribed in the regulations promulgated by the Ministry of Finance upon
recommendation of the Commissioner, if the same are to be exported or to
be used in the manufacture of other tobacco products on which the excise
tax will eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use in
any other manner, on each kilogram, sixty centavos.
Parenthetically, the present provisions explicitly state the following:
Page 85 of 151
Stemmed leaf tobacco, tobacco prepared or partially prepared with or
without the use of any machine or instrument or without being pressed or
sweetened, fine-cut shorts and refuse, scraps, clippings, cuttings, stems,
midribs, and sweepings of tobacco resulting from the handling or stripping
of whole leaf tobacco shall be transferred, disposed of, or otherwise sold,
without any prepayment of the excise tax . . . if the same are to be exported
or to be used in the manufacture of cigars, cigarettes, or other tobacco
products on which the excise tax will eventually be paid on the finished
product, under such conditions as may be prescribed in the rules and
regulations promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.[56]
BIR assessments
G.R. No. 125346
Sometime in June, 1989, a team of examiners from the Bureau of Internal
Revenue, led by Crisanto G. Luna, Revenue Officer III of the Field
Operation Division of the Excise Tax Service, conducted an examination of
the books of La Suerte by virtue of a letter of authority issued by then
Commissioner Jose U. Ong.
On January 3, 1990, La Suerte received a letter from then Commissioner
Jose U. Ong demanding the payment of P34,934,827.67 as deficiency
excise tax on La Suerte’s entire importation and local purchase of stemmed
leaf tobacco for the period covering January 1, 1986 to June 30, 1989.
On January 12, 1990, La Suerte . . . protest[ed] the excise tax deficiency
assessment . . . stressing that the BIR assessment was based solely on
Section 141(b) of the Tax Code without, however, applying Section 137
thereof, the more specific provision, which expressly allows the sale of
stemmed leaf tobacco as raw material by one manufacturer directly to
TAX REVIEW (CASE BATCH 1)
another without payment of the excise tax. However, in a letter, dated
August 31, 1990, Commissioner Jose U. Ong denied La Suerte’s protest,
insisting that stemmed leaf tobacco is subject to excise tax “unless there is
an express grant of exemption from [the] payment of tax.”
In a letter dated October 17, 1990, Commissioner Ong reiterated his
demand for the payment of the alleged deficiency excise taxes due from La
Suerte, to wit:
“Please be informed that in an investigation conducted by this Office, it was
ascertained that you incurred a deficiency specific tax on your importation
and local purchase of stemmed leaf tobacco covering the period from
January 1, 1986 to June 30, 1989 in the total amount of P34,904,247.00
computed as follows:
STEMMED–LEAF TOBACCO
13,918,465
Imported P10,438,848.00
kls. x P0.75
32,620,532
Local 24,465,399.00
kls. x 0.75
Total Amount Due (Basic Tax) - - - - - - - - - - - -P34,904,247.00
. . . .” (page 99, Rollo)
On December 6, 1990, La Suerte filed with the Court of Tax Appeals a
Petition for Review seeking for the annulment of the assessments. . .
. . . On July 13, 1995, the Tax Court rendered [its] Decision, the dispositive
portion of which reads[:]
“WHEREFORE, in all the foregoing, the assessment of alleged deficiency
specific tax in the amount of P34,904,247.00 issued by the Respondent is
Page 86 of 151
hereby CANCELLED for lack of merit.
SO ORDERED.”[57]
The Commissioner appealed the Court of Tax Appeals’ decision before the
Court of Appeals. On December 29, 1995, the Court of Appeals Sixth
Division ruled against La Suerte and found that RR No. V-39 limits the tax
exemption on transfers of stemmed leaf tobacco to transfers between two L-
7 permittees.[58] The Court of Appeals ruled as follows:
IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from
is hereby REVERSED and SET ASIDE. Respondent is ordered to pay the
petitioner Commissioner of Internal Revenue the amount of P34,904,247.00
as deficiency specific tax on its importations and local purchases of
stemmed leaf tobacco and its sale of stemmed leaf tobacco to Associated
Anglo-American Tobacco Corporation covering the period from January 1,
1986 to June 30, 1989, plus 25% surcharge for late payment and 20%
interest per annum from October 17, 1990 until fully paid pursuant to
sections 248 and 249 of the Tax Code.
SO ORDERED.[59]
La Suerte filed a motion for reconsideration, which was denied by the Court
of Appeals in its June 7, 1996 resolution.[60]
On August 2, 1996, La Suerte filed the instant petition for review, [61]
praying for the reversal of the Court of Appeals’ decision and cancellation
of the assessment by the Commissioner. La Suerte raises the following
grounds in support of its prayer:
A. THE COURT OF APPEALS ERRED WHEN IT
CONSIDERED SECTION 20 (A) OF RR NO. V-39,
TAX REVIEW (CASE BATCH 1)
SINCE THE COMMISSIONER RAISED IT FOR THE
FIRST TIME IN THE COURT OF APPEALS
B. THE COURT OF APPEALS ERRED WHEN IT HELD
THAT SECTION 20(A) OF RR NO. V-39 RESTRICTS
THE APPLICATION OF SECTION 137 OF THE TAX
CODE, SINCE LANGUAGE IN SEC. 137 IS
UNQUALIFIED, WHILE SEC. 20(A) CONTAINS NO
RESTRICTIVE LANGUAGE
C. THE COURT OF APPEALS ERRED WHEN IT
IGNORED SEC. 43 OF RR NO. 17-67 AS WELL AS
OPINIONS OF BIR OFFICIALS WHICH CONFIRMED
THE EXEMPTION OF STEMMED LEAF TOBACCO
FROM PREPAYMENT OF SPECIFIC TAX
D. THE COURT OF APPEALS ERRED WHEN IT HELD
THAT SEC. 43 OF RR NO. 17-67 DID NOT REPEAL
SECTIONS 35 AND 20(A) OF RR NO. V-39, SINCE
THEIR PROVISIONS ARE REPUGNANT TO EACH
OTHER
E. THE COURT OF APPEALS ERRED WHEN IT HELD
THAT RR NO. V-39 IMPOSES SPECIFIC TAXES ON
STEMMED LEAF TOBACCO, SINCE IT MAKES NO
MENTION AT ALL OF TAXES ON STEMMED LEAF
TOBACCO
F. THE COURT OF APPEALS ERRED WHEN IT HELD
RR NO. V-39 APPLIED TO L-6 PERMITTEES OR
MANUFACTURERS OF STEMMED LEAF
Page 87 of 151
TOBACCO, SINCE L-6 CLASSIFICATION WAS
NON-EXISTENT AT THE TIME
G. THE COURT OF APPEALS ERRED WHEN IT
INTERPRETED SECTION 20(A) OF RR NO. V-39 IN
SUCH A WAY AS TO RESULT IN
ADMINISTRATIVE LEGISLATION, SINCE THE
INTERPRETATION SANCTIONED THE
RESTRICTION OF AN UNQUALIFIED PROVISION
OF LAW BY A MERE REGULATION
H. THE COURT OF APPEALS ERRED WHEN IT GAVE
NO WEIGHT TO THE DECEMBER 12, 1972 BIR
RULING AND OPINIONS OF OTHER BIR
OFFICIALS WHICH CONFIRMED THE EXEMPTION
OF STEMMED LEAF TOBACCO FROM
PREPAYMENT OF SPECIFIC TAX
I. THE COURT OF APPEALS ERRED WHEN IT HELD
[THAT] NON-APPLICATION OF [THE] DECEMBER
12 RULING DID NOT IMPINGE ON PRINCIPLE OF
NON-RETROACTIVITY OF RULINGS BECAUSE
THE ASSESSMENT DID NOT CITE THE RULING,
SINCE CITATION OF A RULING IN AN
ASSESSMENT [IS] NOT NECESSARY FOR
PRINCIPLE TO APPLY
J. THE COURT OF APPEALS ERRED WHEN IT
DISREGARDED THE ADMINISTRATIVE PRACTICE
OF BIR FOR OVER HALF A CENTURY OF NOT
TAX REVIEW (CASE BATCH 1)
SUBJECTING STEMMED LEAF TOBACCO TO
SPECIFIC TAX
K. THE COURT OF APPEALS ERRED WHEN IT HELD
THAT SUBJECTING STEMMED LEAF TOBACCO
TO SPECIFIC TAX IS NOT PROHIBITED FORM OF
DOUBLE TAXATION, SINCE A TAX ON BOTH
STEMMED LEAF TOBACCO AND CIGARETTES
INTO WHICH IT IS MANUFACTURED IS DOUBLE
TAXATION
L. THE COURT OF APPEALS ERRED WHEN IT HELD
LA SUERTE LIABLE FOR SPECIFIC TAX EVEN IF
NO EFFORT WAS FIRST MADE TO COLLECT THE
TAX FROM THE MANUFACTURER OF STEMMED
LEAF TOBACCO, SINCE TAX CODE ALLOWS THIS
ONLY IF SPECIAL ALLOWANCE IS GRANTED,
WHICH IS NOT THE CASE
M. THE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE REENACTMENT
OF THE 1939 CODE AS THE 1977 CODE AND 1986
TAX CODES ADOPTED THE INTERPRETATION IN
THE DECEMBER 1972 BIR RULING
N. THE COURT OF APPEALS ERRED WHEN IT
APPLIED THE RULES OF CONSTRUCTION ON
EXEMPTION FROM TAXES, SINCE NO TAX
EXEMPTION WAS INVOLVED BUT MERELY AN
EXEMPTION FROM PREPAYMENT OF TAX.[62]
Page 88 of 151
G.R. No. 136328–29
In the letter dated November 24, 1989, the Commissioner demanded from
Fortune the payment of deficiency excise tax in the amount of
P28,938,446.25 for its importation of tobacco strips from January 1, 1986 to
June 30, 1989. Fortune requested for reconsideration, which was denied by
the Commissioner on August 31, 1990. Undaunted, Fortune appealed to the
Court of Tax Appeals through a petition for review, which was docketed as
CTA Case No. 4587.[63]
In the decision dated November 23, 1994, the Court of Tax Appeals ruled in
favor of Fortune and set aside the Commissioner’s assessment of
P28,938,446.25 as deficiency excise tax.
Meanwhile, on March 20, 1991, Fortune received another letter from the
Bureau of Internal Revenue, demanding payment of P1,989,821.86 as
deficiency specific tax on its importation of stemmed leaf tobacco from July
1, 1989 to November 30, 1990.[64] Fortune filed its protest and requested the
Commissioner to cancel and withdraw the assessment.[65] On April 18,
1991, the Commissioner denied with finality Fortune’s request. [66] Fortune
appealed to the Court of Tax Appeals, and the case was docketed as CTA
Case No. 4616.[67]
In the decision dated October 6, 1994, the Court of Tax Appeals ruled in
favor of Fortune and set aside the Commissioner’s assessment of
P1,989,821.26 as deficiency excise tax on stemmed leaf tobacco.
The Commissioner filed separate petitions before the Court of Appeals,
challenging the decisions rendered by the Court of Tax Appeals in CTA
Case Nos. 4587 and 4616. These petitions were consolidated on November
28, 1996.[68]
TAX REVIEW (CASE BATCH 1)
In the decision dated January 30, 1998, the Court of Appeals Seventeenth
Division dismissed the consolidated petitions filed by the Commissioner
and affirmed the assailed decisions of the Court of Tax Appeals. It also
denied the Commissioner’s motion for reconsideration.
Hence, the Commissioner filed the present petition [69]
on January 8, 1999.
The Commissioner claims that the Court of Appeals erred (1) “in holding
that stemmed leaf tobacco is not subject to the specific tax imposed under
Section 141 of the Tax Code[;]”[70] (2) “in not holding that under Section
137 of the Tax Code, stemmed leaf tobacco is exempt from specific tax
when sold in bulk as raw material by one manufacturer directly to another
under such conditions as may be prescribed in the regulations of the
Department of Finance[;]”[71] and (3) “in holding that there is double
taxation in the prohibited sense when specific tax is imposed on stemmed
leaf tobacco and again on the finished product of which stemmed leaf
tobacco is a raw material.” [72]
G.R. No. 144942
In April 1995, “[La Suerte] imported stemmed leaf tobacco from various
sellers abroad.”[73] The Commissioner “assessed specific taxes on the
stemmed leaf tobacco in the amount of P175,909.50, which [La Suerte] paid
under protest.” [74]
“Consequently, [La Suerte] filed a claim for refund with
[the Commissioner], [who] failed to act on the same.” [75] Undeterred, La
Suerte appealed to the Court of Tax Appeals, which in its March 9, 1999
decision, ruled in its favor.
The Commissioner appealed to the Court of Appeals Third Division, which
on August 31, 2000, rendered its decision in CA-G.R. SP. No. 51902,
affirming the decision of the Court of Tax Appeals.
Page 89 of 151
The Commissioner then filed the instant petition for review[76] asking this
court to overturn the Court of Appeals’ decision. It avers that the Court of
Appeals erred in holding that Section 137 of the Tax Code applied “without
any conditions as to the domicile of the manufacturers and that [the
Commissioner] cannot indirectly restrict its application to local
manufacturers.”[77]
The Third Division of this court initially denied[78] the petition due to an
insufficient or defective verification and because “the petition was filed by
revenue lawyers and not by the Solicitor General.”[79]
The Commissioner filed a motion for clarification[80] seeking to clarify
whether the Bureau of Internal Revenue legal officers can file petitions for
review pursuant to Section 220 of the Tax Code without the intervention of
the Office of the Solicitor General.
The motion was referred to the En Banc[81] on August 7, 2001, which issued
the resolution on July 4, 2002, holding that “Section 220 of the Tax Reform
Act must not be understood as overturning the long established procedure
before this Court in requiring the Solicitor General to represent the interest
of the Republic. This Court continues to maintain that it is the Solicitor
General who has the primary responsibility to appear for the government in
appellate proceedings.”[82] In the same resolution, this court also declared
the following:
The present controversy ruminate upon the singular issue of whether or not
Revenue Regulation 1767 [sic] issued by petitioner, in relation to Section
137 of the Internal Revenue Code in the imposition of a tax on stemmed-
leaf tobacco, deviated from the tax code. This question basically inquires
then into whether or not the revenue regulation has exceeded, on
constitutional grounds, the allowable limits of legislative delegation.
TAX REVIEW (CASE BATCH 1)
Aware that the dismissal of the petition could have lasting effect on
government tax revenues, the lifeblood of the state, the Court heeds the plea
[83]
of petitioner for a chance to prosecute its case. (Emphasis and
underscoring supplied)
This court resolved to reinstate[84] and give due course[85] to the
Commissioner’s petition.
G.R. No. 148605
“On January 12, 1990, [Sterling] received a pre-assessment notice for
alleged deficiency excise tax on its importation and local purchase of
stemmed-leaf tobacco for P5,187,432.00 covering the period from
November 1986 to January 1989.” [86]
Sterling filed its protest letter
January 19, 1990. The Commissioner, through its letters[88] dated August
31, 1990 and October 17, 1990, denied the protest with finality.
Sterling filed before the Court of Tax Appeals a petition for review
January 3, 1991, seeking the cancellation of the deficiency assessment and
praying that the Commissioner be ordered to desist from collecting the
assessed excise tax. On July 13, 1995, the Court of Tax Appeals rendered
its decision ordering the cancellation of the assessment for deficiency excise
tax.
The Commissioner then appealed[90] to the Court of Appeals. On March 7,
2001, the latter, through its Ninth Division, rendered a decision reversing
the Court of Tax Appeals’ ruling, thus:
WHEREFORE, premises considered, the Decision of the Court of Tax
Appeals in C.T.A. Case No. 4532 is hereby REVERSED and SET ASIDE,
and the respondent is ORDERED to pay to the public petitioner the amount
Page 90 of 151
of P5,187,432.00 as deficiency specific tax on its imported and locally
purchased stemmed leaf tobacco from November 1986 to June 24, 1989,
plus 25% surcharge on 5,187,432.00, and 20% interest per annum on the
total amount due from December 07, 1990 until full payment, pursuant to
Sections 248-49 of the Tax Code.
SO ORDERED.[91]
Sterling filed a motion for reconsideration,[92] which was denied by the
Court of Appeals in its June 19, 2001 resolution.
Hence, on August 13, 2001, Sterling filed the instant petition for review. [93]
Sterling argues that the Court of Appeals erred in holding that (1) then
[87]
dated Section 141 of the Tax Code subjects stemmed leaf tobacco to excise tax;
(2) Section 137 of the Tax Code did not exempt stemmed leaf tobacco from
prepayment of excise tax; (3) Section 20(A) of RR No. V-39 restricts the
application of Section 137 of the Tax Code since its language was
[89]
dated unqualified, while Section 20(A) contained no restrictive language; (4) RR
No. V-39 imposed specific taxes on stemmed leaf tobacco since its
language made no mention of taxes on stemmed leaf tobacco; (5) the reason
behind limiting exemptions only to transfers from one L-7 to another L-7 is
because sale has previously been subjected to specific tax; and (6) the
exemption from specific tax did not apply to imported stemmed leaf
tobacco.[94]
Sterling further argues that the Court of Appeals erred in not holding that
(1) the Commissioner’s interpretation of Section 141 of the Tax Code and
Section 20(A) of RR No. V-39 amounts to an amendment of Sections 141
and 137 of the Tax Code by a mere administrative regulation; (2) a
December 12, 1972 Bureau of Internal Revenue ruling and opinions of
TAX REVIEW (CASE BATCH 1) Page 91 of 151

other Bureau of Internal Revenue officials confirmed the exemption of deficiency specific tax in the sum of P11,575,275.25 subject of the
stemmed leaf tobacco from prepayment of specific tax; (3) the respondent’s letter, dated January 30, 1991, is deemed cancelled.
administrative practice of the Bureau of Internal Revenue for over half a
century of not subjecting stemmed leaf tobacco to excise tax proves that no No pronouncement as to costs of suit.
excise taxes were ever intended to be imposed; (4) imposition of excise tax
on stemmed leaf tobacco would result in the prohibited form of double SO ORDERED.[102]
taxation; and (5) the re-enactment of the relevant provisions in the 1977 and
The Commissioner filed a motion for reconsideration that was denied by the
1986 Tax Codes adopted the interpretation in the December 1972 Bureau of
Court of Tax Appeals in its April 5, 1995 resolution. [103]
Internal Revenue ruling. [95]
Sterling also contends that the “Court of
Appeals erred in applying the rules of construction on exemption from
The Commissioner appealed to the Court of Appeals.[104] In its decision
taxes, since no tax exemption was involved, but merely an exemption from
dated July 18, 2002, the Court of Appeals reversed the decision of the Court
prepayment of excise tax.”[96]
of Tax Appeals. It cited Commissioner of Internal Revenue v. La Campaña
Fabrica de Tabacos, Inc.[105] as basis for its ruling. La Suerte filed a motion
G.R. No. 158197 for reconsideration, but it was denied by the Court of Appeals in the
resolution[106] dated May 9, 2003.
On January 10, 1991, the Commissioner sent a pre-assessment notice to La
Suerte demanding payment of P11,757,275.25 as deficiency specific tax on
La Suerte prays for the reversal of the Court of Appeals’ decision and
its local purchases and importations and on the sale of stemmed leaf
resolution in its petition for review,[107] wherein it raises the following
tobacco during the period from September 14, 1989 to November 20,
arguments:
1990.[97] On February 8, 1991, La Suerte received the formal assessment
letter of the Commissioner.[98] I. THE HONORABLE COURT OF APPEALS
ERRED WHEN IT HELD THAT SECTION
La Suerte filed its protest on March 8, 1991. [99] On May 14, 1991, La Suerte 20(A) OF REV. REGS. NO. V-39 LIMITED
received the Commissioner’s decision “denying the protest with THE CLASS OF MANUFACTURERS
finality.”[100] WHOSE SALES OF STEMMED LEAF
TOBACCO WERE EXEMPT FROM PRE-
“On June 13, 1991, the Court of Tax Appeals promulgated a Decision PAYMENT OF SPECIFIC TAX.
finding for . . . La Suerte and disposing [as follows:]” [101]
WHEREFORE, in view of the foregoing, We find the petition for review II. EVEN IF SEC. 3 OF RR NO. 17-67 HAD
meritorious and the same is hereby GRANTED. Respondent’s decision BEEN WAS [sic] INTENDED TO LIMIT
dated April 29, 1991 is hereby set aside and the formal assessment for the
TAX REVIEW (CASE BATCH 1)
MANUFACTURERS EXEMPT FROM
PREPAYMENT OF SPECIFIC TAX, THIS
WOULD AMOUNT TO UNLAWFUL
DELEGATION OF LEGISLATIVE POWER.
III. RR NO. 17-67 WAS NEITHER ISSUED TO
AMEND RR NO. V-39 NOR TO AMEND THE
TAX CODE, BUT SOLELY TO IMPLEMENT
ACT NO. 2613, AS AMENDED, WHICH WAS
ENACTED IN 1916 AND HAD
ABSOLUTELY NOTHING TO DO WITH
TAXES.
IV. SECTION 2(H) OF RR NO. 17-67 EXCEEDED
THE CONSTITUTIONAL LIMITS ON THE
DELEGATION OF LEGISLATIVE POWER.
V. SECTION 3(M) OF RR NO. 17-67 AS
INTERPRETED BY COMMISSIONER
EXCEEDED ALLOWABLE LIMITS ON
DELEGATION OF LEGISLATIVE POWER.
VI. THE HONORABLE COURT OF APPEALS
ERRED IN APPLYING SECTION 20(A) OF
RR NO. V-39 TO LA SUERTE’S IMPORTS
OF STEMMED LEAF TOBACCO, FOR THE
APPLICABLE PROVISION IS CHAPTER V
OF RR NO. V-39.
VII. THE COMMISSIONER’S PRESENT
INTERPRETATION OF SECTIONS 2(M)(1)
Page 92 of 151
AND 3(H) OF RR NO. 17-67, WAS NOT THE
INTERPRETATION GIVEN TO THOSE
SECTIONS BY ITS FRAMERS, AS SHOWN
BY THE LONG ADMINISTRATIVE
PRACTICE AFTER THE ISSUANCE OF RR
NO. 17-67 AND THE BIR RULING DATED
DECEMBER 12, 1972, WHICH CONFIRMED
THE TAX-FREE TRANSFER OF STEMMED-
LEAF TOBACCO.[108]
G.R. No. 165499
On various dates in March 1995, the Commissioner of Internal Revenue . . .
collected from La Suerte the aggregate amount of THREE HUNDRED
TWENTY-FIVE THOUSAND FOUR HUNDRED TEN PESOS
(P325,410.00) for specific taxes on La Suerte’s bulk purchases of stemmed-
leaf tobacco from foreign tobacco manufacturers. La Suerte paid the said
amount under protest.
....
On September 27, 1996 and October 2, 1996, La Suerte instituted with the
Commissioner of Internal Revenue . . . and with Revenue District No. 52, a
claim for refund of specific taxes said to have been erroneously paid on its
importations of stemmed-leaf tobacco for the period of November 1994 up
to May 1995, including the amount of Three Hundred Twenty Five
Thousand Four Hundred Ten Pesos (P325,410.00). . . .
Inasmuch as its claim for refund was not acted upon by petitioner and in
order to toll the running of the two-year reglementary period within which
to file a judicial claim for such refund as provided under Section 229 of the
TAX REVIEW (CASE BATCH 1)
1997 National Internal Revenue Code, as amended, La Suerte filed on
February 8, 1997 a petition for review with the CTA. [109]
On September 23, 1998, the Court of Tax Appeals rendered judgment
granting the petition for review and ordering the Commissioner to refund
the amount of P325,410.00 to La Suerte.[110] The Commissioner filed a
motion for reconsideration, but this was denied by the Court of Tax Appeals
on December 15, 1998.[111]
On appeal, the Court of Appeals Fourth Division reversed [112] the Court of
Tax Appeals’ ruling. It also denied[113] La Suerte’s motion for
reconsideration. Hence, this petition was filed,[114] reiterating the same
arguments already presented in the other cases.
This court ordered the consolidation of G.R. Nos. 136328–29 and
125346.[115] Thereafter, this court consolidated G.R. Nos. 165499, 144942,
and 148605.[116] Finally, this court approved the consolidation of G.R. Nos.
125346, 136328–29, 144942, 148605, 158197, and 165499. [117]
Issues
I. Whether stemmed leaf tobacco is subject to excise
(specific) tax under Section 141 of the 1986 Tax Code;
II. Whether Section 137 of the 1986 Tax Code exempting
from the payment of specific tax the sale of stemmed leaf
tobacco by one manufacturer to another is not subject to
any qualification and, therefore, exempts an L-7
manufacturer from paying said tax on its purchase of
stemmed leaf tobacco from other manufacturers who are
not classified as L-7 permittees;
Page 93 of 151
III. Whether stemmed leaf tobacco imported by La Suerte,
Fortune, and Sterling is exempt from specific tax under
Section 137 of the 1986 Tax Code;
IV. Whether Section 20(a) of RR No. V-39, in relation to RR
No. 17-67, which limits the exemption from payment of
specific tax on stemmed leaf tobacco to sales transactions
between manufacturers classified as L-7 permittees is a
valid exercise by the Department of Finance of its rule-
making power under Section 338[118] of the 1939 Tax
Code;
V. Whether the possessor or owner of stemmed leaf tobacco
may be held liable for the payment of specific tax if such
tobacco product is removed from the place of production
without payment of said tax;
VI. Whether the August 31, 1990 ruling of then Bureau of
Internal Revenue Commissioner Jose U. Ong denying La
Suerte’s request for exemption from specific tax on its
local purchase and importation of stemmed leaf tobacco
violates the principle on non-retroactivity of
administrative ruling for allegedly contradicting the
previous position taken by the Bureau of Internal
Revenue that such a transaction is not subject to specific
tax as expressed in the December 12, 1972 ruling of then
Bureau of Internal Revenue Commissioner Misael P.
Vera; and
TAX REVIEW (CASE BATCH 1)
VII. Whether the imposition of excise tax on stemmed leaf
tobacco under Section 141 of the 1986 Tax Code
constitutes double taxation.
Arguments of the cigarette manufacturers
The cigarette manufacturers claim that since Section 137 of the 1986 Tax
Code and Section 20(a) of RR No. V-39 do not distinguish “as to the type
of manufacturer that may sell stemmed-leaf tobacco without the prepayment
of specific tax[,] [t]he logical conclusion is that any kind of tobacco
manufacturer is entitled to this treatment.” [119]
The authority of the Secretary
of Finance to prescribe the “conditions” refers only to procedural matters
and should not curtail or modify the substantive right granted by the law.[120]
The cigarette manufacturers add that the reference to an L-7 invoice and L-7
register book in the second paragraph of Section 20(a) cannot limit the
application of the tax exemption provision only to transfers between L-7
permittees because (1) it does not so provide;[121] and (2) under the terms of
RR No. V-39, L-7 referred to manufacturers of any class of tobacco
products, including manufacturers of stemmed leaf tobacco. [122]
They further argue that, going by the theory of the Commissioner, RR No.
17-67 would have unduly restricted the meaning of “manufacturers” by
limiting it to a few manufacturers such as manufacturers of cigars and
[123]
cigarettes. Allegedly, RR No. 17-67 cannot change the original meaning
of L-7 in Section 20(A) of RR No. V-39 without exceeding constitutional
limits of delegated legislative power.[124] La Suerte further points out that
RR No. 17-67 was not even issued for the purpose of implementing the Tax
Code but for the sole purpose of implementing Act No. 2613; and Section 3
of RR No. 17-67 restricts the new designations only for administrative
[125]
purposes.
Page 94 of 151
Moreover, the cigarette manufacturers contend “that Section 132 does not
operate as a tax exemption” because “prepayment means payment of
obligation in advance or before it is due.”[126] Consequently, the rules of
construction on tax exemption do not apply.[127] According to them, “the
absence of tax prepayment for the sale of stemmed leaf tobacco impliedly
indicates the underlying policy of the law: that stemmed leaf tobacco shall
not be taxed twice, first, as stemmed leaf tobacco and, second, as a
component of the finished products of which it forms an integral part.” [128]
Fortune, for its part, claims that stemmed leaf tobacco is not subject to
excise tax. It argues that stemmed leaf tobacco cannot be considered
prepared or partially prepared tobacco because it does not fall within the
definition of a “processed tobacco” under Section 1-b of Republic Act No.
698, as amended.[129] Furthermore, it adds that Section 141 should be
strictly construed against the taxing power.[130] “There being no explicit
reference to stemmed leaf tobacco in Section 141, it cannot be claimed or
construed to be subject to specific tax.”[131]
According to Fortune, “a plain reading of Section 141 readily reveals that
the intention was to impose excise taxes on products of tobacco that are not
to be used as raw materials in the manufacture of other tobacco
products.”[132] “Section 2(m)(1) unduly expanded the meaning of prepared
or partially prepared tobacco to include a raw material like stemmed leaf
tobacco; hence, ultra vires and invalid.”[133]
As regards the taxability of their importations, Sterling argues that since
locally manufactured stemmed leaf tobaccos are not subject to specific tax,
it follows that imported stemmed leaf tobaccos are also not subject to
specific tax.[134] On the other hand, La Suerte claims that Section 20(A) of
RR No. V-39 does not apply to its imports because the applicable provision
is Section 128(b) of the 1986 Tax Code, which states that “imported articles
TAX REVIEW (CASE BATCH 1)
shall be subject to the same tax and the same rates and basis of excise taxes
applicable to locally manufactured articles,” and Chapter V of RR No. V-39
(Payment of specific taxes on imported cigars, cigarettes, smoking and
[135]
chewing tobacco).
Finally, La Suerte and Sterling[136] argues that the Court of Appeals erred:
(1) in ignoring Section 43 of RR No. 17-67, December 12, 1972 Bureau of
Internal Revenue ruling and other Bureau of Internal Revenue opinions
confirming the exemption of stemmed leaf tobacco from prepayment of
specific tax;[137] (2) in disregarding the Bureau of Internal Revenue’s
practice for over half a century of not subjecting stemmed leaf tobacco to
specific tax;[138] (3) in failing to consider that the re-enactment of the 1939
Tax Code as the 1977 and 1986 Tax Codes impliedly adopted the
interpretation in the December 12, 1972 ruling; and 4) in holding that non-
application of the December 12, 1972 ruling did not impinge on the
[139]
principle of non-retroactivity of rulings. Moreover, it argues that the Tax
Code does not authorize collection of specific tax from buyers without a
prior attempt to collect tax from manufacturers.[140]
Respondent’s arguments
Respondent counters that “under Section 141(b), partially prepared or
manufactured tobacco is subject to specific tax.” [141]
The definition of
“partially manufactured tobacco” in Section 2(m) of RR No. 17-67 includes
stemmed leaf tobacco; hence, stemmed leaf tobacco is subject to specific
tax.[142] “Imported stemmed leaf tobacco is also subject to specific tax under
Section 141(b) in relation to Section 128 of the 1977 Tax Code.”
Fortune’s reliance on the definition of “processed tobacco” in Section 1-b of
[144]
Republic Act No. 698 as amended by Republic Act No. 1194 is
allegedly misplaced because the definition therein of processed tobacco
merely clarified the type of tobacco product that may not be imported into
Page 95 of 151
the country.[145]
Respondent posits that “there is no double taxation in the prohibited sense
even if specific tax is also imposed on the finished product of which
stemmed leaf tobacco is a raw material.”[146] Congress clearly intended it
“considering that stemmed leaf tobacco, as partially prepared or
manufactured tobacco, is subjected to specific tax under Section 141(b),
while cigars and cigarettes, of which stemmed leaf tobacco is a raw
material, are also subjected to specific tax under Section 142.” [147] It adds
that there is no constitutional prohibition against double taxation.[148]
“Foreign manufacturers of tobacco products not engaged in trade or
business in the Philippines cannot be classified as L-7, L-6, or L-3R since
they are beyond the pale of Philippine laws and regulations.” [149] “Since the
transfer of stemmed leaf tobacco from one factory to another must be under
an official L-7 invoice and entered in the L-7 registers of both transferor
and transferee, it is obvious that the factories contemplated are those located
or operating in the Philippines and operated only by L-7 permittees.”[150]
The transaction contemplated under Section 137 is sale and not importation
because the law uses the word “sold.”[151] The law uses “importation” or
“imported” whenever the transaction involves bringing in articles from
foreign countries.[152]
Respondent argues that “the issuance of RR Nos. V-39 and 17-67 is a valid
exercise by the Department of Finance of its rule-making power” under
Sections 132 and 338 of the 1939 Tax Code.[153] It explains that “the reason
[143]
for the exemption from specific tax of the sale of stemmed leaf tobacco as
raw material by one L-7 directly to another L-7 is that the stemmed leaf
tobacco is supposed to have been already subjected to specific tax when an
L-7 purchased the same from an L-6.”[154] “Section 20(A) of RR No. V-39
adheres to the standards set forth in Section 245 because it provides the
TAX REVIEW (CASE BATCH 1)
conditions for a tax-free removal of stemmed leaf tobacco under Section
137 without negating the imposition of specific tax under Section
141(b).” [155]
“To construe Section 137 in the restrictive manner suggested
by La Suerte will practically defeat the revenue-generating provision of
Section 141(b).”[156]
It further argues that the August 31, 1990 ruling of then Bureau of Internal
Revenue Commissioner Jose U. Ong denying La Suerte’s request for
exemption from specific tax on its local purchase and importation of
stemmed leaf tobacco does not violate the principle on non-retroactivity of
administrative ruling. It alleges that an erroneous ruling, like the December
12, 1972 ruling, does not give rise to a vested right that can be invoked by
[157]
La Suerte.
Finally, respondent contends that under Section 127, if domestic products
are removed from the place of production without payment of the excise
taxes due thereon, it is not required that the tax be collected first from the
manufacturer or producer before the possessor thereof shall be liable. [158]
Court’s ruling
Nature of excise tax
Excise tax is a tax on the production, sale, or consumption of a specific
commodity in a country. Section 110 of the 1986 Tax Code explicitly
provides that the “excise taxes on domestic products shall be paid by the
manufacturer or producer before [the] removal [of those products] from the
place of production.” “It does not matter to what use the article[s] subject to
tax is put; the excise taxes are still due, even though the articles are
removed merely for storage in some other place and are not actually sold or
consumed.” [159]
The excise tax based on weight, volume capacity or any
Page 96 of 151
other physical unit of measurement is referred to as “specific tax.” If based
on selling price or other specified value, it is referred to as “ad valorem”
tax.
Section 141 subjects partially prepared tobacco, such as stemmed leaf
tobacco, to excise tax
Section 141 of the 1986 Tax Code provides:
SEC. 141. Tobacco Products. – There shall be collected a tax of seventy-
five centavos on each kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to be consumed in
any manner other than the ordinary mode of drying and curing;
(b) tobacco prepared or partially prepared with or without the use of any
machine or instruments or without being pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco.
Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings
of tobacco resulting from the handling or stripping of whole leaf tobacco
may be transferred, disposed of, or otherwise sold, without prepayment of
the specific tax herein provided for under such conditions as may be
prescribed in the regulations promulgated by the Ministry of Finance upon
recommendation of the Commissioner, if the same are to be exported or to
be used in the manufacture of other tobacco products on which the excise
tax will eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use in
any other manner, on each kilogram, sixty centavos. (Emphasis supplied)
TAX REVIEW (CASE BATCH 1)
It is evident that when tobacco is harvested and processed either by hand or
by machine, all its products become subject to specific tax. Section 141
reveals the legislative policy to tax all forms of manufactured tobacco — in
contrast to raw tobacco leaves — including tobacco refuse or all other
tobacco which has been cut, split, twisted, or pressed and is capable of
being smoked without further industrial processing.
Stemmed leaf tobacco is subject to the specific tax under Section 141(b). It
is a partially prepared tobacco. The removal of the stem or midrib from the
leaf tobacco makes the resulting stemmed leaf tobacco a prepared or
partially prepared tobacco. The following is La Suerte’s own illustration of
how the stemmed leaf tobacco comes about: In the process of removing the
stems, the whole leaf tobacco breaks into pieces; after the stems or midribs
are removed, the tobacco is threshed (cut by machine into fine narrow
[160]
strips) and then undergoes a process of redrying, undoubtedly showing
that stemmed leaf tobacco is a partially prepared tobacco.
Since the Tax Code contained no definition of “partially prepared tobacco,”
then the term should be construed in its general, ordinary, and
[161]
comprehensive sense.
RR No. 17-67, as amended, supplements the law by delineating what
products of tobacco are “prepared or manufactured” and “partially prepared
or partially manufactured.” Section 2(m) states:
(m) “Partially manufactured tobacco” — Includes:
(1) “Stemmed leaf” — handstripped tobacco, clean, good, partially broken
leaf only, free from mold and dust.
Page 97 of 151
(2) “Long-filler” — handstripped tobacco of good, long pieces of broken
leaf usable as filler for cigars without further preparation, and free from
mold, dust stems and cigar cuttings.
(3) “Short-filler” — handstripped or machine-stripped tobacco, clean, good,
short pieces of broken leaf, which will not pass through a screen of two
inches (2") mesh.
(4) “Cigar-cuttings” — clean cuttings or clippings from cigars, unsized with
any other form of tobacco.
(5) “Machine-scrap tobacco” — machine-threshed, clean, good tobacco, not
included in any of the above terms, usable in the manufacture of
tobacco products.
(6) “Stems” — midribs of leaf tobacco removed from the whole leaf or
broken leaf either by hand or machine.
(7) “Waste tobacco” — denatured tobacco; powder or dust, refuse, unfit for
human consumption; discarded materials in the manufacture of tobacco
products, which may include stems.
Insisting on the inapplicability of RR No. 17-67, La Suerte points to the
different definitions given to stemmed leaf tobacco by Section 2(m)(1) of
RR No. 17-67 and Section 137. It argues that while RR No. 17-67 defines
stemmed leaf tobacco as handstripped tobacco of clean, good, partially
broken leaf only, free from mold and dust, Section 137 defines it as leaf
tobacco which has had the stem or midrib removed. The term does not
include broken leaf tobacco. We are not convinced.
Different definitions of the term “stemmed leaf” are unavoidable, especially
considering that Section 2(m)(1) is an implementing regulation of Act No.
TAX REVIEW (CASE BATCH 1) Page 98 of 151

2613, which was enacted in 1916 for purposes of improving the quality of ‘Stemmed leaf tobacco,' as herein used, means leaf tobacco which has had
Philippine tobacco products, while Section 137 defines the tobacco product the stem or midrib removed. The term does not include broken leaf tobacco.
only for the purpose of exempting it from the specific tax. Whichever (Emphasis and underscoring supplied)
definition is adopted, there is no doubt that stemmed leaf tobacco is a
Section 137 authorizes a tax exemption subject to the following: (1) that the
partially prepared tobacco.
stemmed leaf tobacco is sold in bulk as raw material by one manufacturer
directly to another; and (2) that the sale or transfer has complied with the
The onus of proving that stemmed leaf tobacco is not subject to the specific
conditions prescribed by the Department of Finance.
tax lies with the cigarette manufacturers. Taxation is the rule, exemption is
the exception.[162] Accordingly, statutes granting tax exemptions must be
That the title of Section 137 uses the term “without prepayment” while the
construed in strictissimi juris against the taxpayer and liberally in favor of
body itself uses “without payment” is of no moment. Both terms simply
the taxing authority. The cigarette manufacturers must justify their claim by
mean that stemmed leaf tobacco may be removed from the factory or place
a clear and categorical provision in the law. Otherwise, they are liable for
of production without prior payment of the specific tax.
the specific tax on stemmed leaf tobacco found in their possession pursuant
to Section 127[163] of the 1986 Tax Code, as amended.
This court has held in Commissioner of Internal Revenue v. La Campaña
Fabrica de Tabacos, Inc.,[164] reiterated in Compania General de Tabacos
Stemmed leaf tobacco transferred in bulk between cigarette de Filipinas v. Court of Appeals[165] and Commissioner of Internal Revenue
manufacturers are exempt from excise tax under Section 137 of the v. La Suerte Cigar and Cigarette Factory, Inc.[166] that the exemption from
1986 Tax Code in conjunction with RR No. V-39 and RR No. 17-67 specific tax of the sale of stemmed leaf tobacco is qualified by and is
subject to “such conditions as may be prescribed in the regulations of the
In the instant case, an exemption on the taxability of stemmed leaf tobacco
Department of Finance.” These conditions were provided for in RR Nos. V-
is found in Section 137, which provides the following:
39 and 17-67. Thus, Section 137 must be read and interpreted in accordance
SEC. 137. Removal of tobacco products without prepayment of tax. –
with these regulations.
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
Section 20(a) of RR No. V-39 provides the rules for tax exemption on
be prescribed in the regulations of the Ministry of Finance. Stemmed leaf
tobacco products:
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps,
SECTION 20. Exemption from tax of tobacco products intended for
cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold
agricultural or industrial purposes. — (a) Sale of stemmed leaf tobacco,
in bulk as raw material by one manufacturer directly to another, without
etc., by one factory to another. — Subject to the limitations herein
payment of the tax under such conditions as may be prescribed in the
established, products of tobacco entirely unfit for chewing or smoking may
regulations of the Ministry of Finance.
be removed free of tax for agricultural or industrial use; and stemmed leaf
TAX REVIEW (CASE BATCH 1)
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse,
scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as
raw materials by one manufacturer directly to another without the
prepayment of the specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or
partially manufactured tobacco or other refuse of tobacco may be
transferred from one factory to another under an official L-7 invoice on
which shall be entered the exact weight of the tobacco at the time of its
removal, and entry shall be made in the L-7 register in the place provided
on the page of removals. Corresponding debit entry will be made in the L-7
register book of the factory receiving the tobacco under heading “Refuse,
etc., received from other factory,” showing the date of receipt, assessment
and invoice numbers, name and address of the consignor, form in which
received, and the net weight of the tobacco. This paragraph should not,
however, be construed to permit the transfer of materials unsuitable for the
manufacture of tobacco products from one factory to another. (Emphasis
supplied)
The conditions under which stemmed leaf tobacco may be transferred from
one factory to another without prepayment of specific tax are as follows:
(a) The transfer shall be under an official L-7 invoice on which shall be
entered the exact weight of the tobacco at the time of its removal;
(b) Entry shall be made in the L-7 register in the place provided on the page
for removals; and
(c) Corresponding debit entry shall be made in the L-7 register book of the
factory receiving the tobacco under the heading, “Refuse, etc., received
from the other factory,” showing the date of receipt, assessment and
Page 99 of 151
invoice numbers, name and address of the consignor, form in which
received, and the weight of the tobacco.
Under Section 3(h) of RR No. 17-67, entities that were issued by the Bureau
of Internal Revenue with an L-7 permit refer to "manufacturers of tobacco
products." Hence, the transferor and transferee of the stemmed leaf tobacco
must be an L-7 tobacco manufacturer.
La Campaña explained that the reason behind the tax exemption of
stemmed leaf tobacco transferred between two L-7 manufacturers is that the
same had already been previously taxed when acquired by the L-7
manufacturer from dealers of tobacco, thus:
[T]he exemption from specific tax of the sale of stemmed leaf tobacco as
raw material by one L-7 directly to another L-7 is because such stemmed
leaf tobacco has been subjected to specific tax when an L-7 manufacturer
purchased the same from wholesale leaf tobacco dealers designated under
Section 3, Chapter I, Revenue Regulations No. 17-67 (supra) as L-3, L-3F,
L-3R, L-4, or L-6, the latter being also a stripper of leaf tobacco. These are
the sources of stemmed leaf tobacco to be used as raw materials by an L-7
manufacturer which does not produce stemmed leaf tobacco. When an L-7
manufacturer sells the stemmed leaf tobacco purchased from the foregoing
suppliers to another L-7 manufacturer as raw material, such sale is not
subject to specific tax under Section 137 (now Section 140), as
implemented by Section 20(a) of Revenue Regulations No. V-39.[167]
There is no new product when stemmed leaf tobacco is transferred between
two L-7 permit holders. Thus, there can be no excise tax that will attach.
The regulation, therefore, is reasonable and does not create a new statutory
right.
RR Nos. V-39 and 17-67 did not exceed the allowable limits of
TAX REVIEW (CASE BATCH 1) Page 100 of 151

legislative delegation governmental functions as in matters pertaining to tax exemptions. This is

coupled by the growing inability of the legislature to cope directly with the
The cigarette manufacturers contend that the authority of the Department of many problems demanding its attention. The growth of society has ramified
Finance to prescribe conditions is merely procedural. Its rule-making power its activities and created peculiar and sophisticated problems that the
is only for the effective enforcement of the law, which implicitly rules out legislature cannot be expected reasonably to comprehend. Specialization
substantive modifications. The Secretary of Finance cannot, by mere even in legislation has become necessary. To many of the problems
regulation, limit the classes of manufacturers that may be entitled to the tax attendant upon present day undertakings, the legislature may not have the
exemption. Otherwise, Section 137 (Section 132 in the 1939 Tax Code) competence, let alone the interest and the time, to provide the required
would be invalid as an undue delegation of legislative power without the direct and efficacious, not to say specific solutions.[172]
required standards or parameters.
Thus, rules and regulations implementing the law are designed to fill in the
details or to make explicit what is general, which otherwise cannot all be
The power of taxation is inherently legislative and may be imposed or
incorporated in the provision of the law.[173] Such rules and regulations,
[168]
revoked only by the legislature. Moreover, this plenary power of
when promulgated in pursuance of the procedure or authority conferred
taxation cannot be delegated by Congress to any other branch of
upon the administrative agency by law,[174] “deserve to be given weight and
government or private persons, unless its delegation is authorized by the
respect by the courts in view of the rule-making authority given to those
Constitution itself.[169] Hence, the discretion to ascertain the following —
who formulate them and their specific expertise in their respective
(a) basis, amount, or rate of tax; (b) person or property that is subject to tax;
fields.”[175] To be valid, a revenue regulation must be within the scope of
(c) exemptions and exclusions from tax; and (d) manner of collecting the
statutory authority or standard granted by the legislature. Specifically, the
tax — may not be delegated away by Congress.
regulation must (1) be germane to the object and purpose of the law;[176] (2)
not contradict, but conform to, the standards the law prescribes; [177] and (3)
However, it is well-settled that the power to fill in the details and manner as
be issued for the sole purpose of carrying into effect the general provisions
to the enforcement and administration of a law may be delegated to various
of our tax laws.[178]
specialized administrative agencies like the Secretary of Finance in this
case.[170]
Section 338 authorizes the Secretary of Finance to promulgate all needful
rules and regulations for the effective enforcement of the provisions of the
This court in Maceda v. Macaraig, Jr.[171] explained the rationale behind the
1939 Tax Code.
permissible delegation of legislative powers to specialized agencies like the
Secretary of Finance:
The specific authority of the Department of Finance to issue regulations
The latest in our jurisprudence indicates that delegation of legislative power
relating to the taxation of tobacco products is found in Section 4[179]
has become the rule and its non-delegation the exception. The reason is the
(Specific provisions to be contained in regulations); Section 125 [180]
increasing complexity of modern life and many technical fields of
TAX REVIEW (CASE BATCH 1)
(Payment of specific tax on imported articles to customs officers prior to
release from the customhouse); Section 132 (Removal of tobacco products
[181]
without prepayment of tax); Section 149 (Extent of supervision over
[182]
establishments producing taxable output); Section 150 (Records to be
[183]
kept by manufacturers; Assessment based thereon); and Section 152
(Labels and form of packages) of the 1939 Tax Code.
RR No. V-39 was promulgated to enforce the provisions of Title IV
(Specific Taxes) of the 1939 Tax Code relating to the manufacture and
importation of, and payment of specific tax on, manufactured tobacco or
products of tobacco. By an explicit provision in Section 132, the lawmakers
defer to the Department of Finance to provide the details upon which the
removal of stemmed leaf tobacco may be exempt from the specific tax in
view of its supposed expertise in the tobacco trade. Section 20(a) of RR No.
V-39 adhered to the standards because it provided the conditions — the
proper documentation and recording of raw materials transferred from one
factory to another — for a tax-free removal of stemmed leaf tobacco,
without negating the imposition of specific tax under Section 137. The
“effective enforcement of the provisions of [the Tax Code]” in Section 338
provides a sufficient standard for the Secretary of Finance in determining
the conditions for the tax-free removal of stemmed leaf tobacco. Section 4
further provides a limitation on the contents of revenue regulations to be
issued by the Secretary of Finance.
On the other hand, RR No. 17-67 was promulgated “[i]n accordance with
the provisions of Section 79 (B) of the Administrative Code, as amended by
[184]
Act No. 2803.” Among the specific administrative powers conferred
upon a department head under the Administrative Code is that of
promulgating rules and regulations, not contrary to law, “necessary to
regulate the proper working and harmonious and efficient administration of
each and all of the offices and dependencies of his Department, and for the
Page 101 of 151
strict enforcement and proper execution of the laws relative to matters
under the jurisdiction of said Department.”[185] Under the 1939 Tax Code,
the Secretary of Finance is authorized to prescribe regulations affecting the
business of persons dealing in articles subject to specific tax, including the
mode in which the processes of production of tobacco and tobacco products
should be conducted and the records to be kept by manufacturers. Clearly
then, the provisions of RR No. 17-67 classifying and regulating the business
of persons dealing in tobacco and tobacco products are within the rule-
making authority of the Secretary of Finance.
RR No. 17-67 did not create a new classification
The contention of the cigarette manufacturers that RR No. 17-67 unduly
restricted the meaning of manufacturers of tobacco products by limiting it to
a few manufacturers such as manufacturers of cigars and cigarettes is
misleading.
The definitions in RR No. 17-67 of “manufacturer of tobacco” and
“manufacturer of cigars and/or cigarettes” are in conformity with, as in fact
they are verbatim adoptions of, the definitions under Section 194(m) and (n)
of the 1939 Tax Code.
The cigarette companies further argue that RR No. 17-67 unduly restricted
the meaning of L-7 in Section 20(a) of RR No. V-39 because when RR No.
V-39 was issued, there was no distinction at all between L-7, L-3, L-6
permittees, and L-7 referred to manufacturers of any class of tobacco
products including stemmed leaf tobacco.
This argument is similarly misplaced.
A reading of the entire RR No. V-39 shows that the regulation pertains
TAX REVIEW (CASE BATCH 1)
particularly to activities of manufacturers of smoking and chewing tobacco,
cigars and cigarettes.[186] This was rightly so because the regulation was
issued to enforce the tax law provisions in relation to the manufacture and
importation of tobacco products. Clearly apparent in Section 10(a) is that
when a manufacturer of chewing and smoking tobacco, cigars, or cigarettes
has been qualified to conduct his or her business as such, he or she is issued
by the internal revenue agent the corresponding register books and auxiliary
register books pertaining to his business as well as the official register book,
L-7, to be used as record of the raw materials for his or her product. It is,
therefore, logical to conclude that the L-7 invoice and L-7 register book
under Section 20(a) refers to those invoice and books used by
manufacturers of chewing and smoking tobacco, cigars or cigarettes.
RR No. 17-67 clarified RR No. V-39 by explicitly designating the
manufacturers of tobacco products as L-7 permittees (Section 2), in contrast
to wholesale leaf tobacco dealers and those that process partially
manufactured tobacco such as stemmed leaf tobacco. RR No. 17-67 did not
create a new and restrictive classification but only expressed in clear and
categorical terms the distinctions between “manufacturers” and “dealers” of
tobacco that were already implicit in RR No. V-39.
Indeed, there is no repugnancy between RR No. 17-67 and RR No. V-39, on
the one hand, and the Tax Code, on the other. It is safer to presume that the
term “manufacturer” used in Section 137 on tax exempt removals referred
to an entity that is engaged in the business of, and was licensed by the
Bureau of Internal Revenue as a, manufacturer of tobacco products. It does
not include an entity engaged in business as a dealer in tobacco that,
incidentally or in furtherance of its business as a dealer, strip or thresh
whole leaf tobacco or reprocess partially manufactured tobacco. [187]
Such construction is consistent with the rule that tax exemptions, deemed to
Page 102 of 151
be in derogation of the state’s sovereign right of taxation, are strictly
applied and may be granted only under clear and unmistakable terms of the
law and not merely upon a vague implication or inference. [188]
RR No. V-39 must be applied and read together with RR No. 17-67
The cigarette manufacturers’ argument is misplaced, stating that RR No.
17-67 could not modify RR No. V-39 because it was promulgated to
enforce Act No. 2613, as amended (entitled “An Act to Improve the
Methods of Production and the Quality of Tobacco in the Philippines and to
Develop the Export Trade Therein”), which allegedly had nothing
whatsoever to do with the Tax Code or with the imposition of taxes.
“The Tobacco Inspection Service, instituted under Act No. 2613, was made
part of the Bureau of Internal Revenue and Bureau of Customs
administration for . . . internal revenue purposes.”[189] The Collector of
Internal Revenue was charged to enforce Act No. 2613, otherwise known as
the Tobacco Inspection Law, with a view to promoting the Philippine
tobacco trade and thereby increase the revenues of the government. This can
be inferred from a reading of the following provisions of Act No. 2613:
SEC. 6. The Collector of Internal Revenue shall have the power and it shall
be his duty:
(a) To establish general and local rules respecting the classification,
marking, and packing of tobacco for domestic sale or factory use and
for exportation so far as may be necessary to secure leaf tobacco of
good quality and to secure its handling under sanitary conditions, and to
the end that leaf tobacco be not mixed, packed, and marked and of the
same quality when it is not of the same class and origin.
TAX REVIEW (CASE BATCH 1)
(b) To establish from time to time adequate rules defining the standard and
the type of leaf and manufactured tobacco which shall be exported, as
well also as the manner in which standard tobacco, shall be packed.
Before establishing the rules above specified, the Collector of Internal
Revenue shall give due notice of the proposed rules or amendments to
those interested and shall give them an opportunity to present their
objections to such rules or amendments.
(c) To require, whenever it shall be deemed expedient the inspection of and
affixture of inspection labels to tobacco removed from the province of
its origin to another province before such removal, or to tobacco for
[190]
domestic sale or factory use.
SEC. 7. No leaf tobacco or manufactured tobacco shall be exported until it
shall have been inspected by the Collector of Internal Revenue or his duly
authorized representative and found to be standard for export. Collector of
customs shall not permit the exportation of tobacco from the Philippines
unless the shipment be in conformity with the requirements set forth in this
Act. The prohibition contained in this section shall not apply to waste and
refuse tobacco accumulated in the manufacturing process when it is
[191]
invoiced and marked as such waste and refuse. (Emphasis supplied)
....
SEC. 9. The Collector of Internal Revenue may appoint inspectors of
tobacco for the purpose of making the inspections herein required, and may
also detail any officer or employee of the Bureau to perform such duty. Said
inspectors or employees shall likewise be charged with the duty of grading
leaf tobacco and shall perform such other duties as may be required of them
in the promotion of the Philippine tobacco industry. The Collector of
Internal Revenue shall likewise appoint, with the approval of the Secretary
Page 103 of 151
of Finance, agents in the United States for the purpose of promoting the
export trade in tobacco with the United States, whose duty it shall be to
inspect shipments of tobacco upon or after their arrival in that country when
so required, to assist manufacturers of, exporters of, and dealers in tobacco
in disseminating information regarding Philippine tobacco and, at the
request of the parties, to act as arbitrators between the exporter in the
Philippine Islands and the importer in the United States whenever a dispute
arises between them as to the quality, sizes, classes, or shapes shipped or
received. When acting as arbitrator as aforesaid, the agent shall proceed in
accordance with the law governing arbitration and award in the locality
where the dispute arises. All agents, inspectors, and employees acting under
and by virtue of this Act shall be subject to all penal provisions applicable
to internal-revenue officers generally.[192] (Emphasis supplied)
....
SEC. 12. The inspection fees collected by virtue of the provisions of this
Act shall constitute a special fund to be known a the Tobacco Inspection
Fund, which shall be expended by the Collector of Internal Revenue, with
the approval of the Secretary of Finance, upon allotment by a Board
consisting of the Commissioner of Internal Revenue, the Director of Plant
Industry, the Director of the Bureau of Commerce and Industry, two
manufacturers designated by the Manila Tobacco Association, and two
persons representing the interests of the tobacco producers and growers,
appointed by the President of the Philippine Islands[.]
These funds may be expended for any of the following purposes:
(a) The payment of the expenses incident to the enforcement of this Act
including the salaries of the inspectors and agents.
TAX REVIEW (CASE BATCH 1)
(b) The payment of expenses incident to the reconditioning and returning to
the Philippine Islands of damaged tobacco and the reimbursement of the
value of the United States internal-revenue stamps lost thereby.
(c) The advertising of Philippine tobacco products in the United States and
in foreign countries.
(d) The establishment of tobacco warehouses in the Philippine Islands and
in the United States at such points as the trade conditions may demand.
(e) The payment of bounties to encourage the production of leaf tobacco of
high quality.
(f) The promotion and defense of the Philippine tobacco interests in the
United States and in foreign countries.
(g) The establishment, operation, and maintenance of tobacco experimental
farms for the purpose of studying and testing the best methods for the
improvement of the leaves: Provided, however, That thirty per centum of
the total annual income of the tobacco inspection fund shall be expended for
the establishment, operation, and maintenance of said tobacco experimental
farms and for the investigation and discovery of efficacious ways and
means for the extermination and control of the pests and diseases of
tobacco: Provided, further, That in the establishment of experimental farms,
preference shall be given to municipalities offering the necessary suitable
land for the establishment of an experimental farm.
(h) The sending of special agents and commissions to study the markets of
the United States and foreign countries with regard to the Philippine cigars
and their propaganda in said markets.
Page 104 of 151
(i) The organization of exhibits of cigars and other Philippine tobacco
products in the United States and in foreign countries.[193]
SEC. 13. The Collector Internal Revenue shall be the executive officer
charged with the enforcement of the provisions of this Act and of the
regulations issued in accordance therewith, but it shall be the duty of the
Director of Agriculture, with the approval of the Secretary of Public
Instruction, to execute and enforce the provisions hereof referring to the
cultivation of tobacco. (Emphasis supplied)
The cigarette manufacturers, thus, erroneously concluded that Act No. 2613
does not involve taxation.
Parenthetically, Section 8 of Act No. 2613 pertained to the imposition of
tobacco inspection fees, which are National Internal Revenue taxes, these
being one of the miscellaneous taxes provided for under the Tax Code. Said
Section 8 was in fact repealed by Section 369(b) of the 1939 Tax Code, and
the provision regarding inspection fees are found in Section 302 of the 1939
Tax Code.
Since the two revenue regulations, RR Nos. V-34 and 17-67, are in pari
materia, i.e., they both pertain specifically to the regulation of tobacco
trade, they should be read and applied together.
Statutes are in pari materia when they relate to the same person or thing or
to the same class of persons or things, or object, or cover the same specific
or particular subject matter.
It is axiomatic in statutory construction that a statute must be interpreted,
not only to be consistent with itself, but also to harmonize with other laws
on the same subject matter, as to form a complete, coherent and intelligible
system. The rule is expressed in the maxim, “interpretare et concordare
TAX REVIEW (CASE BATCH 1) Page 105 of 151

legibus est optimus interpretandi,” or every statute must be so construed

and harmonized with other statutes as to form a uniform system of
jurisprudence.[194] (Citation omitted)
The foregoing rules on statutory construction can be applied by analogy to
administrative issuances such as RR No. V-39 and RR No. 17-67,
especially since both are issued by the same administrative agency.
Contrary to La Suerte’s claim, Chapter V, Section 61 of RR No. V-39[195] is
not applicable to justify the tax exemption of its importation of stemmed
leaf tobacco because from the title of Chapter V, the provision particularly
refers to specific taxes on imported cigars, cigarettes, smoking and chewing
tobacco.

No estoppel against government

Importation of stemmed leaf tobacco not included in the exemption
under Section 137
The cigarette manufacturers contend that for a long time prior to the
transactions herein involved, the Collector of Internal Revenue had never
The transaction contemplated in Section 137 does not include importation
subjected their purchases and importations of stemmed leaf tobacco to
of stemmed leaf tobacco for the reason that the law uses the word “sold” to
excise taxes. This prolonged practice allegedly represents the official and
describe the transaction of transferring the raw materials from one
authoritative interpretation of the law by the Bureau of Internal Revenue
manufacturer to another.
which must be respected.

The Tax Code treats an importer and a manufacturer differently. Section

We are not persuaded.
123 clearly distinguishes between goods manufactured or produced in the
Philippines and things imported. The law uses the proper term
In Philippine Long Distance Telephone Co. v. Collector of Internal
“importation” or “imported” whenever the transaction involves bringing in
Revenue,[196] this court has held that this principle is not absolute, and an
articles from foreign countries as provided under Section 125 (cf. Section
erroneous implementation by an officer based on a misapprehension of law
124). Whenever the Tax Code refers to importers and manufacturers, they
may be corrected when the true construction is ascertained. Thus:
are separately mentioned as two distinct persons or entities (Sections 156
The appellant argues that the Collector of Internal Revenue, previous to the
and 160). Under Chapter II, whenever the law uses the word manufacturer,
transactions herein involved, had never collected the franchise tax on items
it only means local manufacturer or producer of domestic products
of the same nature as those herein in question and this is strong evidence
(Sections 150, 151, and 152 of the 1939 Tax Code).
that such transactions are not subject to tax on the principle that a prolonged
practice on the part of an executive or administrative officer in charge of
Moreover, foreign manufacturers of tobacco products not engaged in trade
executing a certain statute is an authoritative construction of great weight.
or business in the Philippines cannot be designated as L-7 since these are
This contention may be granted, but the principle is not absolute and may
beyond the pale of Philippine law and regulations. The factories
be overcome by strong reasons to the contrary. If through a
contemplated are those located or operating only in the Philippines.
misapprehension of law an officer has erroneously executed it for a long
TAX REVIEW (CASE BATCH 1)
time, the error may be corrected when the true construction is ascertained.
Such we deem to be the situation in the present case. Incidentally, the
doctrine of estoppel does not apply here.[197] (Emphasis supplied)
This court reiterated this rule in Abello v. Commissioner of Internal
Revenue[198] where it rejected petitioners’ claim that the prolonged practice
(since 1939 up to 1988) of the Bureau of Internal Revenue in not subjecting
political contributions to donor’s tax was an authoritative interpretation of
the statute, entitled to great weight and the highest respect:
This Court holds that the BIR is not precluded from making a new
interpretation of the law, especially when the old interpretation was flawed.
It is a well-entrenched rule that[:]
. . . erroneous application and enforcement of the law by public officers do
not block subsequent correct application of the statute, and that the
Government is never estopped by mistake or error on the part of its
agents.[199] (Emphasis supplied, citations omitted)
Prolonged practice of the Bureau of Internal Revenue in not collecting the
specific tax on stemmed leaf tobacco cannot validate what is otherwise an
erroneous application and enforcement of the law. The government is never
estopped from collecting legitimate taxes because of the error committed by
its agents.[200]
In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals,[201] this
court upheld the validity of a revenue memorandum circular issued by the
Commissioner of Internal Revenue to correct an error in a previous circular
that resulted in the non-collection of tobacco inspection fees for a long time
and declared that estoppel cannot work against the government:
. . . the assailed Revenue Memorandum Circular was issued to rectify the
error in General Circular No. V-27 and to interpret the phrase “tobacco for
domestic sale or factory use” with the view of arresting huge losses of
tobacco inspection fees which were not collected and imposed since the said
Page 106 of 151
Circular (No. V-27) took effect. Furthermore, the questioned Revenue
Memorandum Circular was also issued to apprise those concerned of the
construction and interpretation which should be accorded to Act No. 2613,
as amended, and which respondent is duty bound to enforce. It is an opinion
on how the law should be construed and there was no attempt whatsoever to
enlarge or restrict the meaning of the law.
The basis for the issuance of said Memorandum Circular was so stated in
Resolution No. 2-67 of the Tobacco Board, wherein petitioners as members
of the Manila Tobacco Association, Inc. were duly represented, the
pertinent portions of which read:
“. . . .
WHEREAS, this original recommendation of Mr. Hernandez was perfectly
in accordance with existing law, more particularly Sec. 1 of Republic Act
No. 31 which took effect since September 25, 1946, but perhaps thru
oversight by the former Commissioners and officers of the Tobacco
Inspection Service the propriety and legality of effecting the inspection of
tobacco products for local sales and imported leaf tobacco for factory use
might have overlooked resulting in huge losses of tobacco inspection fees . .
.” (Italics supplied)
....
Tobacco Inspection fees are undoubtedly National Internal Revenue taxes,
they being one of the miscellaneous taxes provided for under the Tax Code.
Section 228 (formerly Section 302) of Chapter VII of the Code specifically
provides for the collection and manner of payment of the said inspection
fees. It is within the power and duty of the Commissioner to collect the
same, even without inspection, should tobacco products be removed
clandestinely or surreptitiously from the establishment of the wholesaler,
TAX REVIEW (CASE BATCH 1)
manufacturer or redrying plant and from the customs custody in case of
imported leaf tobacco. Errors, omissions or flaws committed by BIR
inspectors and representatives while in the performance of their duties
cannot be set up as estoppel nor estop the Government from collecting a tax
legally due. Tobacco inspection fees are levied and collected for purposes of
regulation and control and also as a source of revenue since fifty percentum
(50%) of said fees shall accrue to the Tobacco Inspection Fee Fund created
by Sec. 12 of Act No. 2613, as amended and the other fifty percentum, to
[202]
the Cultural Center of the Philippines. (Sec. 88, Chapter VII, NIRC)
(Emphasis in this paragraph supplied, citation omitted)
Furthermore, the December 12, 1972 ruling of Commissioner Misael P.
Vera runs counter to Section 20(a) of RR No. V-39 in relation to RR No.
17-67, which provides that only transfers of stemmed leaf tobacco between
L-7 permittees are exempt. An implementing regulation cannot be
superseded by a ruling which is a mere interpretation of the law. While
opinions and rulings of officials of the government called upon to execute
or implement administrative laws command much respect and weight,
courts are not bound to accept the same if they override, instead of remain
consistent and in harmony with, the law they seek to apply and
implement.[203]
Double taxation
The contention that the cigarette manufacturers are doubly taxed because
they are paying the specific tax on the raw material and on the finished
product in which the raw material was a part is also devoid of merit.
For double taxation in the objectionable or prohibited sense to exist, “the
same property must be taxed twice, when it should be taxed but once.” [204]
“[B]oth taxes must be imposed on the same property or subject- matter, for
Page 107 of 151
the same purpose, by the same . . . taxing authority, within the same
jurisdiction or taxing district, during the same taxing period, and they must
be the same kind or character of tax.”[205]
At all events, there is no constitutional prohibition against double taxation
in the Philippines.[206] This court has explained in Pepsi-Cola Bottling
Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte:[207]
There is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. The
reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction
against double taxation found in the Constitution of the United States and
some states of the Union. Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity
or by the same jurisdiction for the same purpose, but not in a case where
one tax is imposed by the State and the other by the city or municipality. [208]
(Emphasis supplied, citations omitted)
“It is something not favored, but is permissible, provided some other
constitutional requirement is not thereby violated, such as the requirement
that taxes must be uniform.”[209]
Excise taxes are essentially taxes on property[210] because they are levied on
certain specified goods or articles manufactured or produced in the
Philippines for domestic sale or consumption or for any other disposition,
and on goods imported. In this case, there is no double taxation in the
prohibited sense because the specific tax is imposed by explicit provisions
of the Tax Code on two different articles or products: (1) on the stemmed
TAX REVIEW (CASE BATCH 1) Page 108 of 151

leaf tobacco; and (2) on cigar or cigarette.[211]
WHEREFORE, this court:
1. DENIES the petition for review filed by La Suerte Cigar
& Cigarette Factory in G.R. No. 125346 and AFFIRMS
the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 38107;
2. GRANTS the petition for review filed by the
Commissioner of Internal Revenue in G.R. Nos. 136328–
29 and REVERSES and SETS ASIDE the challenged
decision and resolution of the Court of Appeals in CA-
G.R. SP. Nos. 38219 and 40313. Fortune Tobacco
Corporation is ORDERED to pay the following taxes:
4. DENIES the petition for review filed by Sterling
Tobacco Corporation in G.R. No. 148605 and AFFIRMS
the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 38159;
5. DENIES the petition for review filed by La Suerte Cigar
& Cigarette Factory in G.R. No. 158197 and AFFIRMS
the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 37124; and
6. DENIES the petition for review filed by La Suerte Cigar
& Cigarette Factory in G.R. No. 165499 and AFFIRMS
the questioned decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 50241.

a. P28,938,446.25 as deficiency excise tax for the

period covering January 1, 1986 to June 30, 1989, plus
20% interest per annum from November 24, 1989 until
fully paid; and

b. P1,989,821.26 as deficiency excise tax for the period

covering July 1, 1989 to November 30, 1990, plus 20%
interest per annum from March 1, 1991 until fully paid.

3. GRANTS the petition for review filed by the

Commissioner of Internal Revenue in G.R. No. 144942
and REVERSES and SETS ASIDE the challenged
decision of the Court of Appeals in CA-G.R. SP. No.
51902. La Suerte Cigar & Cigarette Factory’s claim for
refund of the amount of P175,909.50 is DENIED.
TAX REVIEW (CASE BATCH 1)
G.R. No. 195909, September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
ST. LUKE’S MEDICAL CENTER, INC., RESPONDENT.
[G.R. NO. 195960]
ST. LUKE’S MEDICAL CENTER, INC., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated[1] petitions for review on certiorari under Rule 45 of
the Rules of Court assailing the Decision of 19 November 2010 of the Court
of Tax Appeals (CTA) En Banc and its Resolution[2] of 1 March 2011 in
CTA Case No. 6746. This Court resolves this case on a pure question of
law, which involves the interpretation of Section 27(B) vis-à-vis Section
30(E) and (G) of the National Internal Revenue Code of the Philippines
(NIRC), on the income tax treatment of proprietary non-profit hospitals.
The Facts
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a
non-stock and non-profit corporation. Under its articles of incorporation,
among its corporate purposes are:
Page 109 of 151
(a) To establish, equip, operate and maintain a non-stock, non-profit
Christian, benevolent, charitable and scientific hospital which shall give
curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
(b) To provide a career of health science education and provide medical
services to the community through organized clinics in such specialties as
the facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and
promotion of health as well as provide facilities for scientific and medical
researches which, in the opinion of the Board of Trustees, may be justified
by the facilities, personnel, funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both
government and private sector; establish rules and regulations consistent
with the highest professional ethics;
x x x x[3]
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St.
Luke’s deficiency taxes amounting to P76,063,116.06 for 1998, comprised
of deficiency income tax, value-added tax, withholding tax on
compensation and expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the CTA. [4]
On 14 January 2003, St. Luke’s filed an administrative protest with the BIR
against the deficiency tax assessments. The BIR did not act on the protest
within the 180-day period under Section 228 of the NIRC. Thus, St. Luke’s
TAX REVIEW (CASE BATCH 1)
appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which
imposes a 10% preferential tax rate on the income of proprietary non-profit
hospitals, should be applicable to St. Luke’s. According to the BIR, Section
27(B), introduced in 1997, “is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-
stock, non-profit corporations under Section 26 of the 1997 Tax Code x x
x.”[5] It is a specific provision which prevails over the general exemption on
income tax granted under Section 30(E) and (G) for non-stock, non-profit
[6]
charitable institutions and civic organizations promoting social welfare.
The BIR claimed that St. Luke’s was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes.
Moreover, the hospital’s board of trustees, officers and employees directly
benefit from its profits and assets. St. Luke’s had total revenues of
P1,730,367,965 or approximately P1.73 billion from patient services in
1998.[7]
St. Luke’s contended that the BIR should not consider its total revenues,
because its free services to patients was P218,187,498 or 65.20% of its 1998
operating income (i.e., total revenues less operating expenses) of
P334,642,615. [8]
St. Luke’s also claimed that its income does not inure to
the benefit of any individual.
St. Luke’s maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income
tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its
Page 110 of 151
arguments before the CTA that Section 27(B) applies to St. Luke’s. The
petition raises the sole issue of whether the enactment of Section 27(B)
takes proprietary non-profit hospitals out of the income tax exemption
under Section 30 of the NIRC and instead, imposes a preferential rate of
10% on their taxable income. The BIR prays that St. Luke’s be ordered to
pay P57,659,981.19 as deficiency income and expanded withholding tax for
1998 with surcharges and interest for late payment.
The petition of St. Luke’s in G.R. No. 195960 raises factual matters on the
treatment and withholding of a part of its income, [9] as well as the payment
of surcharge and delinquency interest. There is no ground for this Court to
undertake such a factual review. Under the Constitution[10] and the Rules of
Court,[11] this Court’s review power is generally limited to “cases in which
only an error or question of law is involved.” [12] This Court cannot depart
from this limitation if a party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the
CTA First Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke’s] is
hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT
assessment issued by respondent against petitioner in the amount of
P110,000.00 is hereby CANCELLED and WITHDRAWN. However,
petitioner is hereby ORDERED to PAY deficiency income tax and
deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of P5,496,963.54 and P778,406.84 or in the sum of
P6,275,370.38, x x x.
xxxx
TAX REVIEW (CASE BATCH 1)
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%)
delinquency interest on the total amount of P6,275,370.38 counted from
October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3)
of the NIRC of 1997.
SO ORDERED. [13]
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc
to be paid, arose from the failure of St. Luke’s to prove that part of its
income in 1998 (declared as “Other Income-Net”) [14]
came from charitable
activities. The CTA cancelled the remainder of the P63,113,952.79
deficiency assessed by the BIR based on the 10% tax rate under Section
27(B) of the NIRC, which the CTA En Banc held was not applicable to St.
Luke’s. [15]
The CTA ruled that St. Luke’s is a non-stock and non-profit charitable
institution covered by Section 30(E) and (G) of the NIRC. This ruling
would exempt all income derived by St. Luke’s from services to its patients,
whether paying or non-paying. The CTA reiterated its earlier decision in St.
Luke’s Medical Center, Inc. v. Commissioner of Internal Revenue,
examined the primary purposes of St. Luke’s under its articles of
incorporation and various documents [17]
identifying St. Luke’s as a
charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay
City, [18]
which states that “a charitable institution does not lose its charitable
character and its consequent exemption from taxation merely because
recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the
institution x x x.” [19]
The generation of income from paying patients does
Page 111 of 151
not per se destroy the charitable nature of St. Luke’s.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of
Internal Revenue,[20] which ruled that the old NIRC (Commonwealth Act
No. 466, as amended)[21] “positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto,
because of the existence of x x x net income.”[22] The NIRC of 1997
substantially reproduces the provision on charitable institutions of the old
NIRC. Thus, in rejecting the argument that tax exemption is lost whenever
there is net income, the Court in Jesus Sacred Heart College declared:
“[E]very responsible organization must be run to at least insure its
existence, by operating within the limits of its own resources, especially its
regular income. In other words, it should always strive, whenever possible,
to have a surplus.”[23]
The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke’s.[24] The CTA explained that to apply the 10% preferential rate,
Section 27(B) requires a hospital to be “non-profit.” On the other hand,
Congress specifically used the word “non-stock” to qualify a charitable
“corporation or association” in Section 30(E) of the NIRC. According to the
[16]
which CTA, this is unique in the present tax code, indicating an intent to exempt
this type of charitable organization from income tax. Section 27(B) does not
require that the hospital be “non-stock.” The CTA stated, “it is clear that
non-stock, non-profit hospitals operated exclusively for charitable purpose
are exempt from income tax on income received by them as such, applying
the provision of Section 30(E) of the NIRC of 1997, as amended.”[25]
The Issue
The sole issue is whether St. Luke’s is liable for deficiency income tax in
TAX REVIEW (CASE BATCH 1)
1998 under Section 27(B) of the NIRC, which imposes a preferential tax
rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke’s Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke’s in G.R.
No. 195960 because the petition raises factual issues. Under Section 1, Rule
45 of the Rules of Court, “[t]he petition shall raise only questions of law
which must be distinctly set forth.” St. Luke’s cites Martinez v. Court of
Appeals [26]
which permits factual review “when the Court of Appeals [in
this case, the CTA] manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a
different conclusion.” [27]
This Court does not see how the CTA overlooked relevant facts. St. Luke’s
itself stated that the CTA “disregarded the testimony of [its] witness,
Romeo B. Mary, being allegedly self-serving, to show the nature of the
‘Other Income-Net’ x x x.” [28]
This is not a case of overlooking or failing to
consider relevant evidence. The CTA obviously considered the evidence
and concluded that it is self-serving. The CTA declared that it has “gone
through the records of this case and found no other evidence aside from the
self-serving affidavit executed by [the] witnesses [of St. Luke’s] x x x.” [29]
The deficiency tax on “Other Income-Net” stands. Thus, St. Luke’s is liable
to pay the 25% surcharge under Section 248(A)(3) of the NIRC. There is
“[f]ailure to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment[.]” [30]
St. Luke’s is also liable to pay
20% delinquency interest under Section 249(C)(3) of the NIRC. [31] As
explained by the CTA En Banc, the amount of P6,275,370.38 in the
Page 112 of 151
dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not
delinquency interest.[32]
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of
the introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section
30(E) and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically
pertains to proprietary educational institutions and proprietary non-profit
hospitals. The BIR argues that Congress intended to remove the exemption
that non-profit hospitals previously enjoyed under Section 27(E) of the
NIRC of 1977, which is now substantially reproduced in Section 30(E) of
the NIRC of 1997.[33] Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. —
xxxx
(B) Proprietary Educational Institutions and Hospitals. — Proprietary
educational institutions and hospitals which are non-profit shall pay a
tax of ten percent (10%) on their taxable income except those covered by
Subsection (D) hereof: Provided, That if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%) of the total
gross income derived by such educational institutions or hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term ‘unrelated
trade, business or other activity’ means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary
TAX REVIEW (CASE BATCH 1)
purpose or function. A ‘proprietary educational institution’ is any private
school maintained and administered by private individuals or groups with
an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the
case may be, in accordance with existing laws and regulations. (Emphasis
supplied)
St. Luke’s claims tax exemption under Section 30(E) and (G) of the NIRC.
It contends that it is a charitable institution and an organization promoting
social welfare. The arguments of St. Luke’s focus on the wording of Section
30(E) exempting from income tax non-stock, non-profit charitable
institutions. [34]
St. Luke’s asserts that the legislative intent of introducing
Section 27(B) was only to remove the exemption for “proprietary non-
profit” hospitals. [35]
The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated
Page 113 of 151
exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground.
We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G).
Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The
effect of the introduction of Section 27(B) is to subject the taxable income
of two specific institutions, namely, proprietary non-profit educational
institutions[36] and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. “Proprietary” means private,
following the definition of a “proprietary educational institution” as “any
private school maintained and administered by private individuals or
groups” with a government permit. “Non-profit” means no net income or
asset accrues to or benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and all its activities
TAX REVIEW (CASE BATCH 1)
conducted not for profit.
“Non-profit” does not necessarily mean “charitable.” In Collector of
[37]
Internal Revenue v. Club Filipino Inc. de Cebu, this Court considered as
non-profit a sports club organized for recreation and entertainment of its
stockholders and members. The club was primarily funded by membership
fees and dues. If it had profits, they were used for overhead expenses and
improving its golf course.[38] The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-making
enterprise.[39]
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was
not charitable. The Court defined “charity” in Lung Center of the
Philippines v. Quezon City[40] as “a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or [by] otherwise lessening
the burden of government.”[41] A non-profit club for the benefit of its
members fails this test. An organization may be considered as non-profit if
it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such
institution earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung Center
concerns exemption from real property tax and not income tax. However, it
provides for the test of charity in our jurisdiction. Charity is essentially a
gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free
goods and services to the public which would otherwise fall on the
Page 114 of 151
shoulders of government. Thus, as a matter of efficiency, the government
forgoes taxes which should have been spent to address public needs,
because certain private entities already assume a part of the burden. This is
the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the
Treasury.[42]
Charitable institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the law
granting it. The power of Congress to tax implies the power to exempt from
tax. Congress can create tax exemptions, subject to the constitutional
provision that “[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of Congress.”[43] The
requirements for a tax exemption are strictly construed against the
taxpayer[44] because an exemption restricts the collection of taxes necessary
for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines
is a charitable institution for the purpose of exemption from real property
taxes. This ruling uses the same premise as Hospital de San Juan[45] and
Jesus Sacred Heart College[46] which says that receiving income from
paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from
paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating
the institution.[47]
TAX REVIEW (CASE BATCH 1)
For real property taxes, the incidental generation of income is permissible
because the test of exemption is the use of the property. The Constitution
provides that “[c]haritable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from
taxation.” [48]
The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the
institution use the property in a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of the Philippines did not lose its
charitable character when it used a portion of its lot for commercial
purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to
charity.
The Constitution exempts charitable institutions only from real property
taxes. In the NIRC, Congress decided to extend the exemption to income
taxes. However, the way Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article VI of the Constitution.
Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the
institution “actually, directly and exclusively” use the property for a
charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
Page 115 of 151
(4) No part of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must
be devoted “exclusively” for charitable purposes. The organization of the
institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents. Section 30(E) of
the NIRC specifically requires that the corporation or association be non-
stock, which is defined by the Corporation Code as “one where no part of
its income is distributable as dividends to its members, trustees, or
officers”[49] and that any profit “obtain[ed] as an incident to its operations
shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized.” [50] However,
under Lung Center, any profit by a charitable institution must not only be
plowed back “whenever necessary or proper,” but must be “devoted or used
altogether to the charitable object which it is intended to achieve.”[51]
The operations of the charitable institution generally refer to its regular
activities. Section 30(E) of the NIRC requires that these operations be
exclusive to charity. There is also a specific requirement that “no part of
[the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.” The use of lands,
buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke’s is organized as a non-stock and non-
profit charitable institution. However, this does not automatically exempt
St. Luke’s from paying taxes. This only refers to the organization of St.
Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution
is not ipso facto tax exempt. To be exempt from real property taxes, Section
28(3), Article VI of the Constitution requires that a charitable institution use
the property “actually, directly and exclusively” for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a
TAX REVIEW (CASE BATCH 1) Page 116 of 151

charitable institution must be “organized and operated exclusively” for
charitable purposes. Likewise, to be exempt from income taxes, Section
30(G) of the NIRC requires that the institution be “operated exclusively” for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
“organized and operated exclusively” by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt
charitable institution conducts “any” activity for profit, such activity is not
tax exempt even as its not-for-profit activities remain tax exempt. This
paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock
corporation or association [must be] organized and operated exclusively
for x x x charitable x x x purposes x x x.” It likewise qualifies the
requirement in Section 30(G) that the civic organization must be “operated
exclusively” for the promotion of social welfare.
ordinary corporate rate under Section 27(A). With the introduction of
Section 27(B), the tax rate is now 10%.
In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to
paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution
“operated exclusively” for charitable purposes. Clearly, revenues from
paying patients are income received from “activities conducted for
profit.”[52] Indeed, St. Luke’s admits that it derived profits from its paying
patients. St. Luke’s declared P1,730,367,965 as “Revenues from Services to
Patients” in contrast to its “Free Services” expenditure of P218,187,498. In
its Comment in G.R. No. 195909, St. Luke’s showed the following
“calculation” to support its claim that 65.20% of its “income after expenses
was allocated to free or charitable services” in 1998. [53]
REVENUES FROM SERVICES TO P1,730,367,965.00
PATIENTS
OPERATING EXPENSES
Professional care of patients P1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00

Thus, even if the charitable institution must be “organized and operated P1,395,725,350.00
exclusively” for charitable purposes, it is nevertheless allowed to engage in
“activities conducted for profit” without losing its tax exempt status for its INCOME FROM OPERATIONS P334,642,615.00 100%
not-for-profit activities. The only consequence is that the “income of Free Services -218,187,498.00 -65.20%
whatever kind and character” of a charitable institution “from any of its INCOME FROM OPERATIONS, Net of P116,455,117.00 34.80%
activities conducted for profit, regardless of the disposition made of FREE SERVICES
such income, shall be subject to tax.” Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the
TAX REVIEW (CASE BATCH 1) Page 117 of 151

OTHER INCOME 17,482,304.00 such income.”

EXCESS OF REVENUES OVER P133,937,421.00 Jesus Sacred Heart College declared that there is no official legislative
EXPENSES record explaining the phrase “any activity conducted for profit.” However,
it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member
of the Committee of Conference for the Senate, which introduced the phrase
In Lung Center, this Court declared:
“or from any activity conducted for profit.”

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

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un
debarred from participation or enjoyment; and “exclusively” is defined, “in
hospital, no cree Vd. que es una actividad esencial dicho hospital para el
a manner to exclude; as enjoying a privilege exclusively.” x x x The words
funcionamiento del colegio de medicina de dicha universidad?
“dominant use” or “principal use” cannot be substituted for the words “used
exclusively” without doing violence to the Constitution and the law. Solely
xxxx
is synonymous with exclusively.[54]

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

The Court cannot expand the meaning of the words “operated exclusively”
afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los
without violating the NIRC. Services to paying patients are activities
mismos generalmente van enfermos de buena posición social económica, lo
conducted for profit. They cannot be considered any other way. There
que se paga por estos enfermos debe estar sujeto a ‘income tax’, y es una de
is a “purpose to make profit over and above the cost” of services.[55] The
las razones que hemos tenido para insertar las palabras o frase ‘or from any
P1.73 billion total revenues from paying patients is not even incidental to
activity conducted for profit.’[57]
St. Luke’s charity expenditure of P218,187,498 for non-paying patients.

The question was whether having a hospital is essential to an educational

St. Luke’s claims that its charity expenditure of P218,187,498 is 65.20% of
institution like the College of Medicine of the University of Santo Tomas.
its operating income in 1998. However, if a part of the remaining 34.80% of
Senator Cuenco answered that if the hospital has paid rooms generally
the operating income is reinvested in property, equipment or facilities used
occupied by people of good economic standing, then it should be subject to
for services to paying and non-paying patients, then it cannot be said that
income tax. He said that this was one of the reasons Congress inserted the
the income is “devoted or used altogether to the charitable object which it
phrase “or any activity conducted for profit.”
is intended to achieve.”[56] The income is plowed back to the corporation
not entirely for charitable purposes, but for profit as well. In any case, the
The question in Jesus Sacred Heart College involves an educational
last paragraph of Section 30 of the NIRC expressly qualifies that income
institution.[58] However, it is applicable to charitable institutions because
from activities for profit is taxable “regardless of the disposition made of
Senator Cuenco’s response shows an intent to focus on the activities of
TAX REVIEW (CASE BATCH 1)
charitable institutions. Activities for profit should not escape the reach of
taxation. Being a non-stock and non-profit corporation does not, by this
reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar as its revenues
from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC
requires that an institution be “operated exclusively” for charitable or
social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it
earns income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because
an exempt institution is spared from sharing in the expenses of government
and yet benefits from them. Tax exemptions for charitable institutions
should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed
to exploit this subsidy to the detriment of the government and other
taxpayers.
St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the
NIRC to be completely tax exempt from all its income. However, it remains
a proprietary non-profit hospital under Section 27(B) of the NIRC as long
as it does not distribute any of its profits to its members and such profits are
Page 118 of 151
reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
St. Luke’s is therefore liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC. However, St. Luke’s has good reasons to rely
on the letter dated 6 June 1990 by the BIR, which opined that St. Luke’s is
“a corporation for purely charitable and social welfare purposes”59 and thus
exempt from income tax.[60] In Michael J. Lhuillier, Inc. v. Commissioner of
Internal Revenue,[61] the Court said that “good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and interest.”[62]
WHEREFORE, the petition of the Commissioner of Internal Revenue in
G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of
Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1
March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke’s Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998
based on the 10% preferential income tax rate under Section 27(B) of the
National Internal Revenue Code. However, it is not liable for surcharges
and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and
Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke’s Medical Center, Inc. in G.R. No. 195960 is
DENIED for violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.
TAX REVIEW (CASE BATCH 1) Page 119 of 151
TAX REVIEW (CASE BATCH 1) Page 120 of 151

Supreme Court of the Philippines

The deficiency was computed on the basis of (a) disallowed interest
expenses for being unsupported; (b) disallowed salary expenses for not
being subjected to withholding tax on compensation; (c) imputation of
alleged undeclared sales; and (d) disallowed brokerage fees for not being
subjected to expanded withholding tax.[6] The Commissioner of Internal
SECOND DIVISION Revenue computed the deficiency as follows:[7]

Net Business Income P105,639,471.00

G.R. No. 165451, December 03, 2014
Add:Discrepancies
LG ELECTRONICS PHILIPPINES, INC., PETITIONER, VS. Interest Expense-lack of 24,515,117.00
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. proofs
Salaries Expense- 9,586,097.35
DECISION unreconciled
Undeclared Sales
LEONEN, J.: Sales per investigation P844,238,605.12
Sales per return 836,509,217.00 7,729,388.12
This case involves the determination of whether petitioner LG Electronics Brokerage, other charges-
Philippines, Inc. is entitled to the immunities and privileges granted under not
Tax Amnesty Act of 1997. subjected to EWT 346,091,296.47
Taxable Income P493,561,369.94
This is a Petition for Review on Certiorari [1]
assailing the Court of Tax Tax Due P172,746,479.48
Appeals’ Decision [2]
dated May 11, 2004 and Resolution [3]
dated September Less: Tax Paid 36,235,307.00
22, 2004. Deficiency Tax P136,511,172.48
Add:25% Surcharge 34,127,793.12
LG Electronics Philippines, Inc. (LG) is a corporation duly organized and Interest 4-16-95 to 2-16-98 96,701,101.81
existing under the laws of the Philippines. [4] Compromise 25,000.00
TOTAL AMOUNT DUE & P267,365,067.41
On March 21, 1998, LG received a formal assessment notice and demand COLLECTIBLE
letter from the Bureau of Internal Revenue. LG was assessed deficiency
income tax of P267,365,067.41 for the taxable year of 1994.[5] LG, through its external auditor, Sycip Gorres Velayo & Company (SGV),
TAX REVIEW (CASE BATCH 1) Page 121 of 151

filed on April 17, 1998 an administrative protest with the Bureau of Internal documents to substantiate its interest expense by bank statements, bank
Revenue against the tax assessment.[8] debit memoranda and letters of authority to debit its account, computations
of interest and bank reconciliation, it failed to submit in evidence a vital
On June 16, 1998, LG filed a supplemental protest. It requested for a document, which is the loan agreement. Except for a photocopy of a pre-
reconsideration and reinvestigation of the tax assessment. It claimed that marked document . . . [,]the court is unable to find any document purporting
the assessment did not have factual and legal bases. LG also subsequently to be a loan agreement.”[14]
[9]
submitted supporting documents.
The Court of Tax Appeals summarized LG’s deficiency income tax:[15]
Without waiting for the Commissioner of Internal Revenue’s resolution of
Net Business Income P 105,639,471.00
the protest, LG filed a Petition for Review before the Court of Tax Appeals
Add:Discrepancies
on January 11, 1999.[10]
Interest Expense-lack of 24,515,117.00
proofs
The Commissioner of Internal Revenue argued before the Court of Tax
Salaries Expense- 8,746,877.00
Appeals that the assessment issued was in accordance with law since the
unreconciled
interest expenses claimed by LG were unsupported by sufficient proof. LG
Brokerage, other 4,292,200.43
had undeclared income. Brokerage fees and other charges were not
charges not
subjected to expanded withholding tax. Moreover, the details in the
subjected to EWT
assessment notice substantially complied with the provisions of Section 228
Taxable Income P 143,193,665.43
of the Tax Code, the taxpayer having been informed in writing of the law
and the facts on which the assessment was based.[11]
Tax Due P 50,117,782.90
Less: Tax Paid 36,235,307.00
Meanwhile, the Commissioner of Internal Revenue issued the Report dated
Deficiency Tax P 13,882,475.90
March 3, 1999, which recommended the reduction of LG’s liability for
Add:25% Surcharge 3,470,618.98
deficiency income tax to P10,557,736.28.[12]
Interest 4-16-95 to 2- 9,828,792.94
16-98
In its Decision dated May 11, 2004, the Court of Tax Appeals ruled that LG
TOTAL AMOUNT DUE & P 27,181,887.82
was liable for the payment of P27,181,887.82, representing deficiency
COLLECTIBLE
income tax for taxable year 1994, including 20% delinquency interest
computed from March 18, 1998.[13]
The dispositive portion of the Court of Tax Appeals’ decision reads:

According to the Court of Tax Appeals, “[w]hile petitioner submitted

TAX REVIEW (CASE BATCH 1) Page 122 of 151

Accordingly, petitioner is ORDERED to PAY the respondent Interest 4-16-95 to 2-16-96 9,782,867.42
Commissioner of Internal Revenue the amount of P27,181,887.82 [sic]
representing petitioner’s deficiency income tax for the taxable year 1994, TOTAL AMOUNT DUE & P 27,054,879.11
plus 20% delinquency interest from March 18, 1998 until the amount is COLLECTIBLE
fully paid pursuant to Section 249(c)(3) of the 1994 Tax Code.
On November 18, 2004, LG filed the present Petition for Review on
[16]
SO ORDERED. Certiorari.[21] On January 19, 2005, the Commissioner of Internal Revenue
was required to file its Comment.[22] This Comment[23] was noted on March
1, 2006.[24] Petitioner was then required to submit its Reply. [25] After
LG filed a Motion for Partial Reconsideration[17] on June 4, 2004. On
receipt of its Reply,[26] this court resolved to require the parties to submit
September 22, 2004, the Court of Tax Appeals partially granted the
their Memoranda.[27]
Motion.[18] It reduced LG’s liability to P27,054,879.11.[19] The liability
was reduced as follows:[20]
Petitioner filed a Manifestation dated January 29, 2008 stating that it
Net Business Income P105,639,471.00 availed itself of the tax amnesty provided under Republic Act No. 9480 [28]
Add:Discrepancies by paying the total amount of P8,647,565.50. [29] In addition, the Bureau of
Interest Expense-lack of 24,515,117.00 Internal Revenue, through Assistant Commissioner James Roldan, issued a
proofs ruling[30] on January 25, 2008, which held that petitioner complied with the
Salaries Expense- 8,746,877.00 provisions of Republic Act No. 9480.[31] Petitioner is, thus, entitled to the
unreconciled immunities and privileges provided for under the law including “civil,
Brokerage, Other Charges P 4,292,200.43 criminal or administrative penalties under the National Internal Revenue
not subjected to EWT Code of 1997 . . . arising from the failure to pay any and all internal revenue
Less: Charges that should 185,333.01 4,106,867.42 taxes for taxable year 2005 and prior years.”[32]
not be
subjected to EWT The following documents were attached to petitioner’s manifestation: (1)
Taxable Income P 143,008,332.42 Notice of Availment of Tax Amnesty;[33] (2) Tax Amnesty Return (BIR
Form No. 2116);[34] (3) Tax Amnesty Payment Form (BIR Form No.
Tax Due P 50,052,916.35 0617);[35] (4) Statement of Assets, Liabilities and Net Worth (SALN);[36]
Less: Tax Paid 36,235,307.00 and (5) BTR-BIR deposit slip.[37]
Deficiency Tax 13,817,609.35
Add:25% Surcharge 3,454,402.34 Respondent was required to comment on the Manifestation within 10 days
from notice.[38] According to respondent, petitioner cannot claim the tax
TAX REVIEW (CASE BATCH 1) Page 123 of 151

amnesty provided under Republic Act No. 9480 for the following reasons:
(1) accounts receivable by the Bureau of Internal Revenue as of the date of
amnesty are not covered since these constitute government property; (2)
cases that have already been favorably ruled upon by the trial court or
appellate courts prior to the availment of tax amnesty are not covered; and
(3) petitioner’s case involves withholding taxes that are not covered by the
Tax Amnesty Act.[39]
However, in view of petitioner’s Manifestation stating that it availed of the
tax amnesty provided under Republic Act No. 9480, the only issue for
disposition is whether petitioner is entitled to the immunities and privileges
under the Tax Amnesty Law or Republic Act No. 9480.
We deny the Petition for being moot and academic.

The parties raised the following original issues in their pleadings: I

(1) Whether questions of fact may be touched upon in a Petition for Review
Petitioner claimed that it perfected the availment of tax amnesty under
on Certiorari under Rule 45 of the Rules of Court;
Republic Act No. 9480 when it paid the correct amount and submitted the
i. Whether . . . the Honorable Court of Tax Appeals, while holding the
required documents. It also relied on the Bureau of Internal Revenue’s
amount of P120,985.99 as a valid deduction representing a portion
ruling dated January 25, 2008, which categorically ruled on petitioner’s tax
of employees benefits, erred in disallowing the amount of
amnesty. Pertinent provisions of the ruling state:
P1,754,860.36 as deduction from the gross income for alleged
failure of the petitioner to properly and substantially support the
On the basis of the foregoing, LGE should pay a tax amnesty rate
same by evidence[;] [and]
equivalent to five percent (5%) of its total declared networth as of Balance
ii. Whether . . . the Honorable Court of Tax Appeals, while holding the
Sheet dated December 31, 2005. Per attached certified true copy of Balance
amount of P185,333.01 as a valid deduction representing brokerage
Sheet of LGE dated December 31, 2005, LGE has a total declared networth
fees not subject to 5% withholding tax, erred in disallowing
of One Hundred Seventy Two Million Nine Hundred Fifty One Thousand
expenses for allege[d] failure of the petitioner to duly support the
Three Hundred Ten Pesos (P172,951,310.00). As such, LGE is liable for
claim with official receipts[40]
the amount of Eight Million Six Hundred Forty Seven Thousand Five
(2) Whether the Court of Tax Appeals erred in ruling that interest expense
Hundred Sixty Five Pesos and Fifty Centavos (P8,647,565.50).
is deductible from gross income only if supported by a written
agreement of the indebtedness, which includes a stipulation for the
It appears that LGE initially paid the amount of Five Hundred Thousand
payment of interest; and
Pesos (P500,000.00) on October 26, 2007 when it first availed of the tax
(3) Whether the Court of Tax Appeals erred in ruling that LG Electronics
amnesty and it subsequently paid the amount of Eight Million One Hundred
cannot claim the amount of P6,989,338.00 as deduction from its gross
Forty Seven Thousand Five Hundred Sixty Five Pesos and Fifty Centavos
income for alleged failure to withhold income tax on accrued bonuses.
(P8,147,565.50) on January 11, 2008 when it amended its tax amnesty
returns. As such, LGE has fully paid its liabilities under the Act.
TAX REVIEW (CASE BATCH 1)
....
Considering that LGE has paid the amnesty tax due for corporation and has
submitted its tax amnesty forms to Revenue District Office No. 47 of the
BIR of Pasig City, there is deemed full compliance with the provisions of
the Act. As such, LGE is entitled to the immunities and privileges provided
for under Section 6 of the Act and Section 10 of RMC No. 55-2007 which
provides, among others, immunity from payment of tax liabilities, as well as
additions thereto, and the appurtenant civil, criminal or administrative
penalties under the National Internal Revenue Code of 1997, as amended,
arising from its failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years. This includes immunity from payment of any
internal revenue tax liability except those provided for under Section 5 of
the Act.[41]
On the other hand, respondent’s counsel from BIR Revenue Region No. 7
Legal Division argued that petitioner cannot avail itself of the tax amnesty
program under Republic Act No. 9480. In its Comment on the
Manifestation dated January 29, 2008, it said that:
Under Question No. 47 of Revenue Memorandum Circular 69-2007,
delinquent accounts/ accounts receivable, including unpaid self assessed
taxes, in the records of the BIR which are already accounts receivable of
the BIR/assets of the government as of date of amnesty are NOT COVERED
by the tax amnesty because the same are already properties of the
government prior to/upon taxpayer’s date of amnesty availment. Further,
Question No. 49 of the same revenue issuance likewise states that tax
assessments that are disputed administratively or judicially are, as a general
rule, covered by the tax amnesty, except those cases excluded from the
Page 124 of 151
coverage of the Tax Amnesty Program as discussed in this Circular and
those cases involving issues that have already been ruled by the trial
court/appellate court in favor of the BIR/Government prior to the
taxpayer’s availment of the amnesty law. It is to be emphasized that the
case of the herein Petitioner had already been resolved by the Court of Tax
Appeals under CTA Case No. 5715 as early as 11 May 2004[.]
Further, Section 8 of Republic Act No. 9480 specifically provides for the
exception to the coverage of the Tax Amnesty Program, one of which is the
withholding agents with respect to their withholding tax liabilities. . . .
It is crystal clear from the foregoing provisions of Republic Act No. 9480
that withholding taxes are not covered by the amnesty program. Since the
case of the Petitioner also involves withholding taxes, the Respondent could
not claim immunity under Republic Act No. 9480. The Bureau of Internal
Revenue does not have the power to grant immunity for those types of taxes
which are not covered by the tax amnesty law.[42] (Emphasis in the original,
underscoring supplied)
This court finds that petitioner has properly availed itself of the tax amnesty
granted under Republic Act No. 9480.
The pertinent provisions on the grant and availment of tax amnesty state:
SECTION 1. Coverage. – There is hereby authorized and granted a tax
amnesty which shall cover all national internal revenue taxes for the taxable
year 2005 and prior years, with or without assessments duly issued
therefore, that have remained unpaid as of December 31, 2005: Provided,
however, That the amnesty hereby authorized and granted shall not cover
persons or cases enumerated under Section 8 hereof.
TAX REVIEW (CASE BATCH 1)
SEC. 2. Availment of the Amnesty. – Any person, natural or juridical, who
wishes to avail himself of the tax amnesty authorized and granted under this
Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax
Amnesty Return accompanied by a Statement of Assets, Liabilities and
Networth (SALN) as of December 31, 2005, in such form as may be
prescribed in the implementing rules and regulations (IRR) of this Act, and
pay the applicable amnesty tax within six months from the effectivity of the
IRR.
....
SEC. 5. Grant of Tax Amnesty. – Except for the persons or cases covered in
Section 8 hereof, any person, whether natural or juridical, may avail himself
of the benefits of tax amnesty under this Act, and pay the amnesty tax due
thereon, based on his networth as of December 31, 2005 as declared in the
SALN as of said period, in accordance with the following schedule of
amnesty tax rates and minimum amnesty tax payments required:
....
(b) Corporations
(1) With subscribed
capital of above 5% or P500,000
P50 Million whichever is higher
....
(d) Taxpayers who filed their balance sheet/SALN, together with their
income tax returns for 2005, and who desire to avail of the tax amnesty
under this Act shall amend such previously filed statements by including
Page 125 of 151
still undeclared assets and/or liabilities and pay an amnesty tax equal to five
percent (5%) based on the resulting increase in networth: Provided, That
such taxpayers shall likewise be categorized in accordance with, and
subjected to the minimum amounts of amnesty tax prescribed under the
provisions of this Section. (Emphasis supplied)
Taxpayers who availed themselves of the tax amnesty program are entitled
to the immunities and privileges under Section 6 of the law:
SEC. 6. Immunities and Privileges. – Those who availed themselves of the
tax amnesty under Section 5 hereof, and have fully complied with all its
conditions shall be entitled to the following immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as
additions thereto, and the appurtenant civil, criminal or administrative
penalties under the National Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years.
(b) The taxpayer's Tax Amnesty Return and the SALN as of December 31,
2005 shall not be admissible as evidence in all proceedings that pertain to
taxable year 2005 and prior years, insofar as such proceedings relate to
internal revenue taxes, before judicial, quasi-judicial or administrative
bodies in which he is a defendant or respondent, and except for the purpose
of ascertaining the networth beginning January 1, 2006, the same shall not
be examined, inquired or looked into by any person or government
office. However, the taxpayer may use this as a defense, whenever
appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years
TAX REVIEW (CASE BATCH 1)
covered by the tax amnesty availed of shall not be examined: Provided,
That the Commissioner of Internal Revenue may authorize in writing the
examination of the said books of accounts and other records to verify the
validity or correctness of a claim for any tax refund, tax credit (other than
refund or credit of taxes withheld on wages), tax incentives, and/or
exemptions under existing laws.
All these immunities and privileges shall not apply where the person failed
to file a SALN and the Tax Amnesty Return, or where the amount of
networth as of December 31, 2005 is proven to be understated to the extent
of thirty percent (30%) or more, in accordance with the provisions of
Section 3 hereof.
In addition to the above provisions of law, BIR Revenue Memorandum
Circular (RMC) No. 55-2007,[43] which reproduces the Department of
Finance Department Order 29-07,[44] provides:
SEC. 3. Taxes Covered. – The tax amnesty shall cover all national internal
revenue taxes imposed by the National Government for the taxable year
2005 and prior years, with or without assessments duly issued therefor, that
have remained unpaid as of December 31, 2005.
SEC. 4. Who May Avail of Tax Amnesty. – The following may avail of the
tax amnesty under RA 9480:
1. Individuals, whether resident or nonresident
citizens, or resident or nonresident aliens;
2. Estates and trusts;
Page 126 of 151
3. Corporations;
4. Cooperatives and tax exempt entities that have
become taxable as of December 31, 2005; and
5. Other juridical entities including partnerships.
For this purpose, an individual taxpayer in his/her own capacity shall be
treated as a different taxpayer when he acts as administrator/executor of the
estate of a deceased taxpayer. The pertinent provisions of Sec. 236 of the
Tax Code on the registration of the estate of the decedent by the
administrator or executor and the issuance of new TIN shall be complied
with. Therefore, an individual taxpayer, seeking to avail of the tax amnesty
and who at the same time is an executor or administrator of the estate of a
deceased taxpayer who would also like to avail of the tax amnesty, shall file
two (2) separate amnesty tax returns, one for himself as a taxpayer and the
other in his capacity as executor or administrator of the estate of the
decedent with respect to the revenue and other income earned or received
by the estate.
....
RULE III
AVAILMENT AND PAYMENT OF AMNESTY
SEC. 6. Method of Availment of Tax Amnesty. –
1. Forms/Documents to be filed. – To avail of the
general tax amnesty, concerned taxpayers shall
file the following documents/requirements:
TAX REVIEW (CASE BATCH 1)
a. Notice of Availment in such form as
may be prescribed by the BIR.
b. Statements of Assets, Liabilities and
Networth (SALN) as of December 31,
2005 in such form, as may be
prescribed by the BIR.
c. Tax Amnesty Return in such form as
may be prescribed by the BIR.
3.
2. Place of Filing of Amnesty Tax Return. – The
Tax Amnesty Return, together with the other
documents stated in Sec. 6 (1) hereof, shall be
filed as follows:
a. Residents shall file with the Revenue
District Officer (RDO)/Large Taxpayer
District Office of the BIR which has
jurisdiction over the legal residence or
principal place of business of the
taxpayer, as the case may be.
b. Non-residents shall file with the office
of the Commissioner of the BIR, or
with any RDO.
c. At the option of the taxpayer, the RDO
may assist the taxpayer in
Page 127 of 151
accomplishing the forms and
computing the taxable base and the
amnesty tax payable, but may not look
into, question or examine the veracity
of the entries contained in the Tax
Amnesty Return, Statement of Assets,
Liabilities and Networth, or such other
documents submitted by the taxpayer.
Payment of Amnesty Tax and Full Compliance.
– Upon filing of the Tax Amnesty Return in
accordance with Sec. 6(2) hereof, the taxpayer
shall pay the amnesty tax to the authorized agent
bank or in the absence thereof, the Collection
Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal
residence or principal place of business.
The RDO shall issue sufficient Acceptance of
Payment Forms, as may be prescribed by the
BIR for the use of – or to be accomplished by –
the bank, the collection agent or the Treasurer,
showing the acceptance of the amnesty tax
payment. In case of the authorized agent bank,
the branch manager or the assistant branch
manager shall sign the acceptance of payment
form.
The Acceptance of Payment Form, the Notice of
TAX REVIEW (CASE BATCH 1)
Availment, the SALN, and the Tax Amnesty
Return shall be submitted to the RDO, which
shall be received only after complete payment.
The completion of these requirements shall be
deemed full compliance with the provisions of
RA 9480.
....
RULE V
IMMUNITIES AND PRIVILEGES
SEC. 10. Immunities and Privileges. – Taxpayers who have fully complied
with the conditions under RA 9480 and these rules shall be entitled to the
following immunities and privileges:
1. The taxpayer shall be immune from the payment
of taxes, as well as additions thereto, and the
appurtenant civil, criminal or administrative
penalties under the National Internal Revenue
Code of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes
for taxable year 2005 and prior years.
2. The taxpayer’s Tax Amnesty Return and the
SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that
pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal
revenue taxes, before judicial, quasi-judicial or
Page 128 of 151
administrative bodies in which he is a defendant
or respondent and, except for the purpose of
ascertaining the networth beginning January 1,
2006, the same shall not be examined, inquired
or looked into by any person or government
office. However, the taxpayer may use this as a
defense, whenever appropriate, in cases brought
against him.
3. The books of accounts and other records of the
taxpayer for the years covered by the tax
amnesty availed of shall not be examined by the
BIR. However, the Commissioner of Internal
Revenue may authorize in writing the
examination of the said books of accounts and
other records to verify the validity or correctness
of a claim for any tax refund, tax credit (other
than refund or credit of taxes withheld on
wages), tax incentives, and/or exemptions under
existing laws.
The above-stated immunities and privileges shall not apply where the
person failed to file a SALN and the Tax Amnesty Return, or where the
amount of networth as of December 31, 2005 is proven to be understated to
the extent of thirty percent (30%) or more, in accordance with the
provisions of Section 4 of RA 9480 and Section 9, Rule IV hereof.
(Emphasis supplied)
In several cases, this court explained the nature of a tax amnesty. In
Metropolitan Bank and Trust Co. v. Commissioner of Internal Revenue:[45]
TAX REVIEW (CASE BATCH 1) Page 129 of 151

A tax amnesty is a general pardon or the intentional overlooking by the

State of its authority to impose penalties on persons otherwise guilty of
violation of a tax law. It partakes of an absolute waiver by the government
of its right to collect what is due it and to give tax evaders who wish to
relent a chance to start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored or presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. [46]
Meanwhile, Section 6 of BIR Revenue Memorandum Circular No. 55-2007
and Department of Finance Department Order 20-07 provide:
SEC. 6. Method of Availment of Tax Amnesty. –
1. Forms/Documents to be filed. – To avail of the
general tax amnesty, concerned taxpayers shall
file the following documents/requirements:

This court in Commissioner of Internal Revenue v. Gonzalez[47] further

a. Notice of Availment in such form as
described the role of tax amnesties in the government’s collection of taxes:
may be prescribed by the BIR.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax
b. Statements of Assets, Liabilities and
slate. It also gives the government a chance to collect uncollected tax from
Networth (SALN) as of December 31,
tax evaders without having to go through the tedious process of a tax
2005 in such form, as may be
case.[48]
prescribed by the BIR.

Under Republic Act No. 9480 and BIR Revenue Memorandum Circular No. c. Tax Amnesty Return in such form as
55-2007, the qualified taxpayer may immediately avail of the immunities may be prescribed by the BIR.
and privileges upon submission of the required documents. This is clear
from Section 2 of Republic Act No. 9480:

SEC. 2. Availment of the Amnesty. – Any person, natural or juridical, who 2. Place of Filing of Amnesty Tax Return. – The
wishes to avail himself of the tax amnesty authorized and granted under this Tax Amnesty Return, together with the other
Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax documents stated in Sec. 6 (1) hereof, shall be
Amnesty Return accompanied by a Statement of Assets, Liabilities and filed as follows:
Networth (SALN) as of December 31, 2005, in such form as may be
prescribed in the implementing rules and regulations (IRR) of this Act, and a. Residents shall file with the Revenue
pay the applicable amnesty tax within six months from the effectivity of the District Officer (RDO)/Large Taxpayer
IRR. (Emphasis supplied) District Office of the BIR which has
TAX REVIEW (CASE BATCH 1)
jurisdiction over the legal residence or
principal place of business of the
taxpayer, as the case may be.
b. Non-residents shall file with the office
of the Commissioner of the BIR, or
with any RDO.
c. At the option of the taxpayer, the RDO
may assist the taxpayer in
accomplishing the forms and
computing the taxable base and the
amnesty tax payable, but may not look
into, question or examine the veracity
of the entries contained in the Tax
Amnesty Return, Statement of Assets,
Liabilities and Networth, or such other
documents submitted by the taxpayer.
3. Payment of Amnesty Tax and Full Compliance.
– Upon filing of the Tax Amnesty Return in
accordance with Sec. 6(2) hereof, the taxpayer
shall pay the amnesty tax to the authorized agent
bank or in the absence thereof, the Collection
Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal
residence or principal place of business.
The RDO shall issue sufficient Acceptance of
Page 130 of 151
Payment Forms, as may be prescribed by the
BIR for the use of – or to be accomplished by –
the bank, the collection agent or the Treasurer,
showing the acceptance of the amnesty tax
payment. In case of the authorized agent bank,
the branch manager or the assistant branch
manager shall sign the acceptance of payment
form.
The Acceptance of Payment Form, the Notice of
Availment, the SALN, and the Tax Amnesty
Return shall be submitted to the RDO, which
shall be received only after complete
payment. The completion of these requirements
shall be deemed full compliance with the
provisions of RA 9480. (Emphasis supplied)
In Philippine Banking Corporation (Now: Global Business Bank, Inc.) v.
Commissioner of Internal Revenue,[49] this court ruled that the completion
of the requirements and compliance with the procedure laid down in the law
and the implementing rules entitle the taxpayer to the privileges and
immunities under the tax amnesty program.[50]
In this case, petitioner showed that it complied with the requirements laid
down in Republic Act No. 9480. Pertinent documents were submitted to
the Bureau of Internal Revenue and attached to the records of this
case. Petitioner’s compliance was also affirmed by the Bureau of Internal
Revenue in its ruling dated January 25, 2008. Petitioner is, therefore,
entitled to the immunities and privileges granted under Section 6 of
Republic Act No. 9480.
TAX REVIEW (CASE BATCH 1)
We now proceed to the arguments against petitioner’s availment of tax
amnesty raised by respondent.
II
Respondent erred when it relied on the answers to questions numbered 47
and 49 of BIR Revenue Memorandum Circular No. 69-2007[51] reproduced
below:
Q-47 Are Delinquent Accounts/Accounts Receivable, including unpaid
self-assessed taxes, in the records of the BIR which are already
Accounts Rec[ei]vable of the BIR/assets of the Government as of
date of amnesty availment by the taxpayer still covered by such
amnesty availment?
A-47 No. This is so because these are already properties/assets of the
Government prior to/upon taxpayer’s date of amnesty availment.
....
Q-49 Are tax assessments that are disputed administratively or judicially
still covered by the tax amnesty law?
A-49 As a rule yes, except those cases excluded from the coverage of the
Tax Amnesty Program as discussed in this CIRCULAR and those
cases involving issues that have already been ruled by the trial
court/appellate court in favor of the BIR/Government prior to
taxpayer’s availment of the amnesty law. (Emphasis supplied)
The law is clear. Only final and executory judgments are excluded from the
coverage of the tax amnesty program, hence:
SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall
not extend to the following persons or cases existing as of the effectivity of
Page 131 of 151
this Act:
....
(f) Tax cases subject of final and executory judgment by the courts.[52]
(Emphasis supplied)
This exception was reproduced in the Implementing Rules and Regulations
of the law:
SEC. 5. Exceptions. – The tax amnesty shall not extend to the following
persons or cases existing as of the effectivity of RA 9480:
....
7. Tax cases subject of final and executory judgment by the courts. [53]
We hold that only cases that involve final and executory judgments are
excluded from the tax amnesty program.
This court has already ruled on the Bureau of Internal Revenue’s unjustified
expansion of cases not covered under the tax amnesty program.
In Philippine Banking Corporation (Now: Global Business Bank, Inc.), this
court categorically found that “BIR’s inclusion of ‘issues and cases which
were ruled by any court (even without finality) in favor of the BIR prior to
amnesty availment of the taxpayer’ as one of the exceptions . . . is
misplaced.”[54] This court said that:
TAX REVIEW (CASE BATCH 1)
RA 9480 is specifically clear that the exceptions to the tax amnesty program
include “tax cases subject of final and executory judgment by the
courts.” The present case has not become final and executory when
Metrobank availed of the tax amnesty program. [55]
In the recent case of CS Garment Inc., v. Commissioner of Internal
Revenue[56] we declared that:
While tax amnesty, similar to a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority, it is also a
well-settled doctrine that the rule-making power of administrative agencies
cannot be extended to amend or expand statutory requirements or to
embrace matters not originally encompassed by the law. Administrative
regulations should always be in accord with the provisions of the statute
they seek to carry into effect, and any resulting inconsistency shall be
resolved in favor of the basic law. We thus definitively declare that the
exception “[i]ssues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer”
under BIR RMC 19-2008 is invalid, as the exception goes beyond the scope
of the provisions of the 2007 Tax Amnesty Law.[57] (Emphasis supplied,
citations omitted)
BIR Revenue Memorandum Circular No. 19-2008, declared by this court as
erroneous, is substantially the same as the answers to the questions
numbered 47 and 49 in BIR Revenue Memorandum Circular No. 69-2007,
which respondent relied upon in the present case. Pertinent provisions of
BIR Revenue Memorandum Circular No. 19-2008 are the following:
A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007
Page 132 of 151
The following is a basic guide for taxpayers who wish to avail of tax
amnesty pursuant of Republic Act No. 9480 (Tax Amnesty Act of 2007).
Who may avail of the amnesty?
....
EXCEPT:
x Issues and cases which were ruled by any court (even without finality)
in favor of the BIR prior to amnesty availment of the taxpayer. (e.g.
Taxpayers who have failed to observe or follow BOI and/or PEZA rules
on entitlement to Income Tax Holiday Incentives and other incentives)
...
.
x Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax
Accordingly, answers to the questions numbered 47 and 49 of BIR Revenue
Memorandum Circular No. 69-2007 are declared invalid for going beyond
the text of the law.
III
Furthermore, contrary to respondent’s argument, the case does not involve
withholding taxes. This is readily seen in Republic Act No. 9480 and BIR
Revenue Memorandum Circular No. 55-2007. Section 8 of Republic Act
No. 9480 provides:
SEC. 8. Exceptions. – The tax amnesty provided in Section 5 hereof shall
not extend to the following persons or cases existing as of the effectivity of
this Act:
TAX REVIEW (CASE BATCH 1)
(a) Withholding agents with respect to their withholding tax liabilities[.]
(Emphasis supplied)
Similarly, BIR Revenue Memorandum Circular No. 55-2007 states:
SEC. 5. Exceptions. – The tax amnesty shall not extend to the following
persons or cases existing as of the effectivity of RA 9480:
1. Withholding agents with respect to their withholding tax liabilities[.]
Income tax is different from withholding tax, with both operating in distinct
systems.
In the seminal case of Fisher v. Trinidad,[58] this court defined income tax
as “a tax on the yearly profits arising from property, professions, trades, and
offices.”[59] Otherwise stated, income tax is the “tax on all yearly profits
arising from property, professions, trades or offices, or as a tax on a
person’s income, emoluments, profits and the like.” [60]
On the other hand, withholding tax is a method of collecting income tax in
advance.[61] “In the operation of the withholding tax system, the payee is
the taxpayer, the person on whom the tax is imposed, while the payor, a
separate entity, acts no more than an agent of the government for the
collection of the tax in order to ensure its payment. Obviously, the amount
thereby used to settle the tax liability is deemed sourced from the proceeds
constitutive of the tax base.”[62]
There are three reasons for the utilization of the withholding tax system:
“first, to provide the taxpayer a convenient manner to meet his probable
Page 133 of 151
income tax liability; second, to ensure the collection of income tax which
can otherwise be lost or substantially reduced through failure to file the
corresponding returns[;] and third, to improve the government’s cash
flow.”[63]
In Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue,[64] this court ruled that “the liability of the withholding agent is
independent from that of the taxpayer.”[65] Further:
The [withholding agent] cannot be made liable for the tax due because it is
the [taxpayer] who earned the income subject to withholding tax. The
withholding agent is liable only insofar as he failed to perform his duty to
withhold the tax and remit the same to the government. The liability for the
tax, however, remains with the taxpayer because the gain was realized and
received by him.[66]
The cause of action for failure to withhold taxes is different from the cause
of action arising from non-payment of income taxes.[67] “Indeed, the
revenue officers generally disallow the expenses claimed as deductions
from gross income, if no withholding of tax as required by law or the
regulations was withheld and remitted to the BIR within the prescribed
dates.”[68]
In Asia International Auctioneers, Inc. v. Commissioner of Internal
Revenue,[69] respondent therein argued that petitioner was not entitled to the
grant of tax amnesty under Republic Act No. 9480 as petitioner was deemed
a withholding agent of the assessed deficiency value added tax and
deficiency excise tax.[70] Petitioner was, thus, disqualified under Section 8
of the law.[71] This court rejected such contention:
TAX REVIEW (CASE BATCH 1)
The CIR did not assess AIA as a withholding agent that failed to withhold
or remit the deficiency VAT and excise tax to the BIR under relevant
provisions of the Tax Code. Hence, the argument that AIA is “deemed” a
withholding agent for these deficiency taxes is fallacious.
Indirect taxes, like VAT and excise tax, are different from withholding
taxes. To distinguish, in indirect taxes, the incidence of taxation falls on
one person but the burden thereof can be shifted or passed on to another
person, such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it. On the other hand, in case of
withholding taxes, the incidence and burden of taxation fall on the same
entity, the statutory taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by withholding, the tax due from
income payments to entities arising from certain transactions and remits the
same to the government. Due to this difference, the deficiency VAT and
excise tax cannot be “deemed” as withholding taxes merely because they
constitute indirect taxes. Moreover, records support the conclusion that
AIA was assessed not as a withholding agent but, as the one directly liable
for the said deficiency taxes.[72] (Citations omitted)
In this case, petitioner was assessed for its deficiency income taxes due to
the disallowance of several items for deduction. Petitioner was not assessed
for its liability as withholding agent. The two liabilities are distinct from
and must not be confused with each other.
The main reason for the disallowance of the deductions was that petitioner
was not able to fully substantiate its claim of remittance through receipts or
relevant documents.
IV
Page 134 of 151
Furthermore, we find it appropriate to pronounce that the Bureau of
Internal Revenue Legal Division is not the proper representative of
respondent.
We observe that respondent is represented by a lawyer from the Legal
Division of Revenue Region No. 7 of the Bureau of Internal Revenue and
not by the Office of the Solicitor General.
We are mindful of Section 220 of Republic Act No. 8424 or the Tax
Reform Act of 1997, which provides that legal officers of the Bureau of
Internal Revenue are the ones tasked to institute the necessary civil or
criminal proceedings on behalf of the government:
Section 220. Form and Mode of Proceeding in Actions Arising under this
Code. – Civil and criminal actions and proceedings instituted in behalf of
the Government under the authority of this Code or other law enforced by
the Bureau of Internal Revenue shall be brought in the name of the
Government of the Philippines and shall be conducted by legal officers of
the Bureau of Internal Revenue but no civil or criminal action for the
recovery of taxes or the enforcement of any fine, penalty or forfeiture under
this Code shall be filed in court without the approval of the
Commissioner. (Emphasis supplied)
Nonetheless, this court has previously ruled on the issue of the Bureau of
Internal Revenue’s representation in appellate proceedings, particularly
before this court:
The institution or commencement before a proper court of civil and criminal
actions and proceedings arising under the Tax Reform Act which “shall be
TAX REVIEW (CASE BATCH 1)
conducted by legal officers of the Bureau of Internal Revenue” is not in
dispute. An appeal from such court, however, is not a matter of right.
Section 220 of the Tax Reform Act must not be understood as overturning
the long established procedure before this Court in requiring the Solicitor
General to represent the interest of the Republic. This Court continues to
maintain that it is the Solicitor General who has the primary responsibility
to appear for the government in appellate proceedings. This
pronouncement finds justification in the various laws defining the Office of
the Solicitor General, beginning with Act No. 135, which took effect on 16
June 1901, up to the present Administrative Code of 1987. Section 35,
Chapter 12, Title III, Book IV, of the said Code outlines the powers and
functions of the Office of the Solicitor General which includes, but not
limited to, its duty to —
(1) Represent the Government in the Supreme Court and the Court of
Appeals in all criminal proceedings; represent the Government and its
officers in the Supreme Court, the Court of Appeals, and all other courts or
tribunals in all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a party.
....
(3) Appear in any court in any action involving the validity of any treaty,
law, executive order or proclamation, rule or regulation when in his
judgment his intervention is necessary or when requested by the Court.
In Gonzales vs. Chavez, the Supreme Court has said that, from the historical
and statutory perspectives, the Solicitor General is the “principal law officer
and legal defender of the government.”[73] (Emphasis in the original,
citations omitted)
From the foregoing, we find that the Office of the Solicitor General is the
Page 135 of 151
proper party to represent the interests of the government through the Bureau
of Internal Revenue. The Legal Division of the Bureau of Internal Revenue
should be mindful of this procedural lapse in the future.
However, records show that the Office of the Solicitor General has been
apprised of developments in the case since the beginning of the
proceedings. We, thus, rule that the interests of the government have been
duly protected.
As petitioner is found entitled to the immunities and privileges granted
under the tax amnesty program, the issue on the assessed deficiency income
taxes is, thus, moot and academic.
WHEREFORE, in view of petitioner LG Electronics Philippines, Inc.’s
availment of the tax amnesty program under Republic Act No. 9480, the
petition is DENIED for being MOOT and ACADEMIC. Petitioner’s
deficiency taxes for taxable year 2005 and prior years are deemed fully
settled.
SO ORDERED.
TAX REVIEW (CASE BATCH 1)
G.R. No. 172509, February 04, 2015
CHINA BANKING CORPORATION, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, C.J.:
This Rule 45 Petition[1] requires this Court to address the question of
prescription of the government’s right to collect taxes. Petitioner China
Banking Corporation (CBC) assails the Decision[2] and Resolution[3] of the
Court of Tax Appeals (CTA) En Banc in CTA En Banc Case No. 109. The
CTA En Banc affirmed the Decision[4] 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 P11,383,165.50, 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
Page 136 of 151
sales of foreign bills of exchange to the Central Bank. The deficiency DST
was computed as follows:
Deficiency Documentary Stamp
Tax
Amount
For the years 1982 to 1985 P 8,280,696.00
For calendar year 1986 P 2,481 ,975.60
Add : Surcharge P 620,493.90 P 3,102.469.50
P11 ,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 paid the 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
tax-exempt 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
TAX REVIEW (CASE BATCH 1)
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 denied in 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, respondent CIR 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
[13]
file their respective Memoranda. Petitioner CBC filed its Memorandum
on 26 April 2007. The CIR, on the other hand, filed on 17 April 2007 a
Manifestation stating that it was adopting the allegations and authorities in
[14]
its Comment in lieu of the required Memorandum.
Page 137 of 151
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 is barred by prescription. [15]
RULING OF THE COURT
We grant the Petition on the ground that the 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, when the 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 within the 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 or sent 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
TAX REVIEW (CASE BATCH 1)
a warrant of distraint or levy served on 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) of the 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 its Answer, the regular courts, and not
the CTA, had jurisdiction over judicial actions for collection of internal
revenue taxes. It was only on 23 April 2004, when Republic Act Number
[17]
9282 took effect, 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:
Page 138 of 151
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 Revenue[18] 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 gave appellee until April 1, 1949, within which to
TAX REVIEW (CASE BATCH 1)
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 and levy 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 that the 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 or his 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
Page 139 of 151
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, denied the 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:
TAX REVIEW (CASE BATCH 1)
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.
xxxx
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
Page 140 of 151
ruled that the CA may motu proprio dismiss 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
TAX REVIEW (CASE BATCH 1)
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 time on 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
Page 141 of 151
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 meet the challenge when this Court
ordered both parties to file their respective memoranda. The CIR, however,
merely filed a Manifestation that it 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 estoppel does not prevent the
government from collecting taxes; it is not bound by the mistake or
negligence of its agents. The rule is based 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 a final 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
TAX REVIEW (CASE BATCH 1) Page 142 of 151

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 P11,383,165.50.

SO ORDERED.
TAX REVIEW (CASE BATCH 1)
G.R. No. 196415, December 02, 2015
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
TOLEDO POWER COMPANY, RESPONDENT.
[G.R. No. 196451]
TOLEDO POWER COMPANY, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
DEL CASTILLO, J.:
The burden of proving entitlement to a tax refund rests on the taxpayer.
[1]
Before this Court are Consolidated Petitions for Review on Certiorari
[2]
assailing the November 22, 2010 Decision and the April 6, 2011
Resolution[3] of the Court of Tax Appeals (CTA) in CTA EB Nos. 623 and
629.
Factual Antecedents
Toledo Power Corporation (TPC) is a general partnership principally
engaged in the business of power generation and sale of electricity to the
National Power Corporation (NPC), Cebu Electric Cooperative III
(CEBECO), Atlas Consolidated Mining and Development Corporation
(ACMDC), and Atlas Fertilizer Corporation (AFC). [4]
On December 22, 2003, TPC filed with the Bureau of Internal Revenue
(BIR) Regional District Office (RDO) No. 83 an administrative claim for
Page 143 of 151
refund or credit of its unutilized input Value Added Tax (VAT) for the
taxable year 2002 in the total amount of P14,254,013.27 under Republic
Act No. 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA)
and the National Internal Revenue Code of 1997 (NIRC).[5]
On April 22, 2004, due to the inaction of the Commissioner of Internal
Revenue (OR), TPC filed with the CTA a Petition for Review, docketed as
CTA Case No. 6961 and raffled to the CTA First Division (CTA
Division).[6]
In response to the Petition for Review, the CIR argued that TPC failed to
prove its entitlement to a tax refund or credit.[7]
Ruling of the CTA Division
On November 11, 2009, the CTA Division rendered a Decision[8] partially
granting TPC's claim in the reduced amount of P7,598,279.29. [9] Since NPC
is exempt from the payment of all taxes, including VAT, the CTA Division
allowed TPC to claim a refund or credit of its unutilized input VAT
attributable to its zero-rated sales of electricity to NPC for the taxable year
2002.[10] The CTA Division, however, denied the claim attributable to
TPC's sales of electricity to CEBECO, ACMDC and AFC due to the failure
of TPC to prove that it is a generation company under the EPIRA. [11] The
CTA Division did not consider the said sales as valid zero-rated sales
because TPC did not submit a Certificate of Compliance (COC) from the
Energy Regulatory Commission (ERC).[12] Although TPC filed an
application for a COC on June 20, 2002 with the ERC, the CTA Division
found this insufficient to prove that TPC is a generation company under the
EPIRA.[13] The pertinent portions of the Decision read:
Therefore, out of the P439,660,958.77 zero-rated sales declared by [TPC] in
its Quarterly VAT Returns for the four quarters of 2002, only the amount of
TAX REVIEW (CASE BATCH 1)
P280,337,939.83 pertaining to [TPC's] sales of electricity to NPC shall be
considered as valid zero-rated sales. x x x
xxxx
[TPC's] sales of electricity to companies other than NPC worth
P159,323,018.94 shall be denied VAT zero-rating for [TPC's] failure to
present Certificate of Compliance from the ERC, as stated earlier. x x x
xxxx
After finding that [TPC] had VAT zero-rated sales for the four quarters of
2002 in the amount of P280,337,939.83, the Court now determines the
amount of input VAT attributable thereto.
[TPC] submitted its summary lists of purchases and corresponding
suppliers' invoices/official receipts, Bureau of Customs (BOC) Import
Entries and Internal Revenue Declarations (IEIRDs), BOC official receipts,
and other documentary evidence in support of the following input taxes
reported in its Quarterly VAT Returns for the four quarters of 2002:
xxxx
Upon examination of the supporting documents of [TPC], the Court[-
]Commissioned Independent CPA recommended that out of the total
reported input VAT of P14,558,043.30, only the amount of P11,347,363.55
represents [TPC's] valid claim, while the remaining amount of
P3,210,679.75 should be disallowed. x x x
xxxx
Page 144 of 151
The Court finds the disallowance of the above input taxes proper except for
input taxes classified under Nos. 3 and 10 in the respective amounts of
P6,568.00 and P3,121,787.60.
The input VAT of P6,568.00 represents [TPC's] valid claim because the
same is duly supported by BOC official receipt. As to the input taxes of
P3,121,787.60, [TPC] submitted documents marked as Exhibits "SS-3" top
"SS-28" but only with respect to the claimed amount of P1,106,820.84 as
summarized in Exhibit "SS." Out of the P1,106,820.84 input VAT claim,
only the amount of P969,369.59 is valid, while the remaining input VAT of
P137,451.25 shall be denied. x x x
xxxx
Therefore, the P3,121,787.60 input VAT disallowed by the Independent
CPA for not having supporting documents shall now be reduced to
P2,152,418.01 (P3,121,787.60 less P969,369.59).
In addition to the disallowances found by the Independent CPA, the amount
of P102,700.85, representing out-of-period claim, shall be denied.
In sum, only the input VAT claim of P12,220,600.29 is duly substantiated
in accordance with Sections 110(A) and 113(A) of the NIRC of 1997, as
implemented by Sections 4.104-1, 4.104-5, and 4.108-1 of Revenue
Regulations No. 7-95. The amount of P12,220,600.29 is computed below:
Input VAT per 2002 Quarterly VAT Returns P14,558,043.30
Less: Disallowances
Per Independent CPA P3,210,679.75
TAX REVIEW (CASE BATCH 1) Page 145 of 151

Less: Valid Claim Excess Input VAT attributable to

P 7,598,279.29
Input VAT on Importation Substantiated Zero-Rated Sales
6,568.00
of Goods
Input VAT per add'l As evidenced by its Quarterly VAT Returns from the first quarter of 2003 to
969,369.59 2,234,742.16
documents submitted the second quarter of 2004, [TPC] was able to prove that the input VAT of
Per this Court's further P7,598,279.29 was not applied against any output VAT in the succeeding
102,700.85 quarters.
verification
Substantiated
P12,220,600.29 xxxx
Input VAT

WHEREFORE, premises considered, the instant Petition for Review is

A portion of the substantiated input VAT of P12,220,600.29, however, shall
hereby PARTIALLY GRANTED. Accordingly, respondent is hereby
be applied against [TPC's] reported output VAT liability of P304,030.03. x
ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE
xx
in favor of [TPC] the amount of SEVEN MILLION FIVE HUNDRED
NINETY EIGHT THOUSAND TWO HUNDRED SEVENTY NINE
xxxx
PESOS AND 29/100 (P7,598,279.29), representing its unutilized input
taxes attributable to zero-rated sales for taxable year 2002.
Hence, only the remaining input VAT of P11,916,570.26 can be attributed
to the entire zero-rated sales declared by [TPC] in the amount of
SO ORDERED.[14]
P439,660,958.77, and only the input VAT of P7,598,279.29 is attributable
to the substantiated zero-rated sales of P280,337,939.83, as computed TPC moved for partial reconsideration contending that as an existing
below: generation company, it was not required to obtain a COC from the ERC as a
prerequisite for its operations, and that the issue of whether it is a
Substantiated Input VAT P 12,220,600.29 generation company was never raised during the trial.[15] In any case, it
Less: Output VAT 304,030.03 attached photocopies of its application for a COC dated June 20, 2002 and
Excess Input VAT P 11,916,570.26 its COC dated June 23, 2004.[16]
Substantiated Zero-Rated Sales P 280,337,939.83
Divided by Total Reported Zero- The CIR, likewise, sought partial reconsideration arguing that the
/439,660.958.77
Rated Sales administrative claim was merely pro forma since TPC failed to submit the
Multiplied by Substantiated Excess complete documents required under Revenue Memorandum Order (RMO)
x 11,916,570.26 No. 53-98,[17] which were necessary to ascertain the correct amount to be
Input VAT
TAX REVIEW (CASE BATCH 1)
refunded in the administrative claim.[18]
On April 13, 2010, the CTA Division issued a Resolution[19] denying both
motions for lack of merit. It maintained that TPC timely filed its
administrative claim for refund and that its failure to comply with RMO No.
53-98 was not fatal.[20] The CTA Division also said that in claiming a refund
under the EPIRA, the taxpayer must prove that it was duly authorized by
the ERC to operate a generation facility and that it derived its sales from
power generation.[21] In this case, TPC failed to present a COC to prove that
it was duly authorized by the ERC to operate as a generation facility in
2002.[22] As to the attached photocopy of the COC, the CTA Division gave
no credence to it as it was not formally offered in evidence and no valid
reason was offered by TPC to justify its late submission.[23]
Unfazed, both parties elevated the case before the CTA En Banc.
Ruling of the CTA En Banc
On November 22, 2010, the CTA En Banc rendered a Decision dismissing
both Petitions. It sustained the findings of the CTA Division that both the
administrative and the judicial claims were timely filed and that TPC's non-
compliance with RMO No. 53-98 was not fatal to its claim.[24] Also, since
TPC was not yet issued a COC in 2002, the CTA En Banc agreed with the
CTA Division that TPC's sales of electricity to CEBECO, ACMDC, and
AFC for the taxable year 2002 could not qualify for a VAT zero-rating
under the EPIRA.[25] The CTA En Banc likewise noted that contrary to the
claim of TPC, there is no stipulation in the Joint Stipulation of Facts and
Issues (JSFI) that TPC is a generation company under the EPIRA. [26] Thus:
WHEREFORE, premises considered, the above-captioned petitions are
hereby DISMISSED. Hie assailed Decision dated November 11/2009 and
Resolution dated April 13, 2010 rendered by the Former First Division in
Page 146 of 151
CTA Case No. 6961 are hereby AFFIRMED.
SO ORDERED.[27]
Both parties moved for partial reconsideration but the CTA En Banc denied
both motions for lack of merit in its April 6, 2011 Resolution. [28]
Issues
Hence, the instant Petitions with the following issues:
G.R. No. 196415
Whether x x x the [CTA] En Banc committed reversible error in holding
that TPC is entitled to a refund or tax credit certificate in the reduced
amount of P7,598,279.29, representing alleged unutilized input tax,
considering that -
A. TPC did not comply with the rule on exhaustion
of administrative remedies.
B. TPC is liable for deficiency VAT for those sales
of electricity to companies other than NPC that
failed to qualify as VAT zero-rated sales under
the EPIRA x x x, hence, considered subject to
VAT under Section 108 of the [NIRC], as
amended.
C. x x x TPC did not comply with the pertinent
provisions of Section 112 (A) of the MRC x x x,
as amended.[29]
G.R. No. 196451
TAX REVIEW (CASE BATCH 1)
A. Whether TPC established that it is a generation
company during the period of its claim for
refund.
B. Whether the fact of TPC being a generation
company was raised as an issue by the parties
for the CTA to resolve.
C. Whether TPC is entitled to the rights of a
generation company under the EPIRA prior to
the issuance of its COC.[30]
Simply put, the issues raised in the Petitions can be grouped into two:
A. Whether the administrative and the judicial claims for tax refund or
credit were timely and validly filed.
B. Whether the TPC is entitled to the full amount of its claim for tax refund
or credit.
The CIR 's Arguments
The CIR contends that TPC is not entitled to a refund or credit in the
reduced amount of P7,598,279.29, representing its alleged unutilized input
VAT for taxable year 2002 because it failed to comply with the rules on
exhaustion of administrative remedies.[31] She insists that the BIR was
deprived of the opportunity to determine the truthfulness of the claim as
TPC failed to submit the complete documents set out in RMO No. 53-98.[32]
And since TPC failed to present all relevant documents, it failed to prove
that it did not apply its unutilized input VAT against output VAT as
provided in Section 112 (A) of the NIRC.[33] Thus, the pro forma
Page 147 of 151
administrative claim filed by TPC has no effect.[34] Moreover, since TPC's
sales of electricity to companies other than NPC were denied VAT zero-
rating, TPC should be held liable for deficiency VAT in the amount of
P4,015,731.63.[35]
TPC's Arguments
TPC, on the other hand, argues that its administrative claim was not pro
forma as it submitted relevant supporting documents, to wit: (a) its Articles
of Partnership; (b) ERC Registration and Compliance Certificate; (c) VAT
Registration Certificate; (d) Quarterly VAT Returns for the 1 st to 4th
quarters of 2002; (e) Summary of Input Tax Payments for the 1 st to 4th
quarters of 2002 showing the details of TPC's purchases of goods and
services as well as the corresponding input taxes paid, and the pertinent
supporting VAT invoices and official receipts; and (f) application for zero
rating for 2002.[36] It also complied with the rule on exhaustion of
administrative remedies as it waited for the CIR to rule on its administrative
claim before filing the judicial claim.[37]
Citing VAT Ruling No. 011-5,[38] TPC further claims that it is entitled to the
full amount of tax refund or credit because it became entitled to the rights of
a generation company under the EPIRA when it filed its application with
the ERC on June 20, 2002.[39] Thus, the belated issuance of the COC has no
effect on its claim for tax refund or credit. Besides, in the JSFI, the parties
already agreed that TPC is a generation company under the EPIRA. [40] In
addition, it is not liable for deficiency VAT, even if, for the sake of
argument, its sales of electricity to CEBECO, ACMDC, and AFC are not
zero-rated, as an assessment cannot be issued in a refund case, not to
mention that the BIR's period to assess had already prescribed. [41]
Our Ruling
TAX REVIEW (CASE BATCH 1)
The Petitions are bereft of merit.
Both the administrative and the judicial claims were timely and validly
filed.
[42] [43]
Pursuant to Section 112 (A) and (D) of the NIRC, a taxpayer has two
(2) years from the close of the taxable quarter when the zero-rated sales
were made within which to file with the CIR an administrative claim for
refund or credit of unutilized input VAT attributable to such sales. The CIR,
on the other hand, has 120 days from receipt of the complete documents
within which to act on the administrative claim. Upon receipt of the
decision, a taxpayer has 30 days within which to appeal the decision to the
CTA. However, if the 120-day period expires without any decision from the
CIR, the taxpayer may appeal the, inaction to the CTA within 30 days from
the expiration of the 120-day period.
In Commissioner of Internal Revenue v. San Roque Power Corporation,[44]
we said that the 120+30-day period must be strictly observed except from
the date of issuance of BIR Ruling No. DA-489-03 on December 10, 2003,
which allowed taxpayers to file a judicial claim without waiting for the end
of the 120-day period, up to the date of promulgation of Commissioner of
[45]
Internal Revenue v. Aichi Forging Company of Asia, Inc. on October 6,
2010, where we declared that compliance with the 120+30-day period is
mandatory and jurisdictional.
In this case, TPC applied for a claim for refund or credit of its unutilized
input VAT for the taxable year 2002 on December 22, 2003. Since the CIR
did not act on its application within the 120-day period, TPC appealed the
inaction on April 22, 2004. Clearly, both the administrative and the judicial
claims were filed within the prescribed period provided in Section 112 of
Page 148 of 151
the NIRC.
Also, the administrative claim was not pro forma as TPC submitted
documents to support its claim for refund and even manifested its
willingness to submit additional documents if necessary.[46] The CIR,
however, never requested TPC to submit additional documents. Thus, she
cannot now raise the issue that TPC failed to submit the complete
documents.
Neither do we find the alleged failure of TPC to submit all relevant
documents set out in RMO No. 53-98 fatal to its claim. In Commissioner of
Internal Revenue v. Team Sual Corporation (formerly Mirant Sual
Corporation),[47] we said that:
The CIR's reliance on RMO 53-98 is misplaced. There is nothing in Section
112 of the NIRC, RR 3-88 or RMO 53-98 itself that requires submission of
the complete documents enumerated in RMO 53-98 for a grant of a refund
or credit of input VAT. The subject of RMO 53-98 states that it is a
"Checklist of Documents to be Submitted by a Taxpayer upon Audit of his
Tax Liabilities ...." In this case, TSC was applying for a grant of refund or
credit of its input tax. There was no allegation of an audit being conducted
by the CIR. Even assuming that RMO 53-98 applies, it specifically states
that some documents are required to be submitted by the taxpayer "if
applicable."
Moreover, if TSC indeed failed to submit the complete documents in
support of its application, the CIR could have informed TSC of its failure,
consistent with Revenue Memorandum Circular No. (RMC) 42-03.
However, the CIR did not inform TSC of the document it failed to submit,
even up to the present petition. The CIR likewise raised the issue of TSC's
alleged failure to submit the complete documents only in its motion for
reconsideration of the CTA Special First Division's 4 March 2010 Decision.
TAX REVIEW (CASE BATCH 1) Page 149 of 151

Accordingly, we affirm the CTA EB's finding that TSC filed its generation company and that it became entitled to the rights under the
administrative claim on 21 December 2005, and submitted the complete EPIRA when it filed its application with the ERC on June 20, 2002.
documents in support of its application for refund or credit of its input tax at
the same time.[48] We find the arguments raised by TPC unavailing.

In view of the foregoing, we find that both the administrative and the
There is nothing in the JSFI to show that the parties agreed that TPC is a
judicial claims were timely and validly filed.
generation company under the EPIRA. The pertinent portions of the JSFI
read:
Now, as to the validity of TPC's claim, there is no question that TPC is
JOINTLY STIPULATED FACTS
entitled to a refund or credit of its unutilized input VAT attributable to its
zero-rated sales of electricity to NPC for the taxable year 2002 pursuant to
1. [TPC] is principally engaged in the business of power generation and
Section 108 (B) (3)[49] of the NIRC, as amended, in relation to Section 13 [50]
subsequent sale thereof to the [NPC, CEBECO, ACMDC, and AFC].[52]
of the Revised Charter of the NPC, as amended. Hence, the only issue to be
resolved is whether TPC is entitled to a refund of its unutilized input VAT
2. On 20 June 2002, petitioner filed an application with the Energy
attributable to its sales of electricity to CEBECO, ACMDC, and AFC.
Regulatory Commission (ERC) for the issuance of a Certificate of
Compliance pursuant to the Implementing Rules and Regulations of the
TPC is not entitled to a refund or credit of unutilized input VAT
EPIRA.
attributable to its sales of electricity to CEBECO, ACMDC, and AFC.

xxxx
Section 6[51] of the EPIRA provides that the sale of generated power by
generation companies shall be zero-rated. Section 4(x) of the same law
ADMITTED FACTS
states that a generation company "refers to any person or entity authorized
by the ERC to operate facilities used in the generation of electricity."
xxxx
Corollarily, to be entitled to a refund or credit of unutilized input VAT
attributable to the sale of electricity under the EPIRA, a taxpayer must
3. Effective 26 June 2001, sales of generated power by generation
establish: (1) that it is a generation company, and (2) that it derived sales
companies became VAT zero-rated by virtue of Section 4(x) in relation to
from power generation.
Section 6 of the EPIRA and Rule 5, Section 6 of the Rules and Regulations
to Implement the EPIRA.[53]
In this case, TPC failed to present a COC from the ERC during the trial. On
partial reconsideration, TPC argued that there was no need for it to present a Obviously, the parties did not stipulate that TPC is a generation company.
COC because the parties already stipulated in the JSFI that TPC is a They only stipulated that TPC is engaged in the business of power
TAX REVIEW (CASE BATCH 1)
generation and that it filed an application with the ERC on June 20, 2002.
However, being engaged in the business of power generation does not make
TPC a generation company under the EPIRA. Neither did TPC's filing of an
application for COC with the ERC automatically entitle TPC to the rights of
a generation company under the EPIRA.
At this point, a distinction must be made between a generation facility and a
generation company. A generation facility is defined under the EPIRA
[54]
Rules and Regulations as "a facility for the production of electricity."
While a generation company, as previously mentioned, "refers to any
person or entity authorized by the ERC to operate facilities used in the
generation of electricity." Based on the foregoing definitions, what
differentiates a generation facility from a generation company is that the
latter is authorized by the ERC to operate, as evidenced by a COC.
Under the EPIRA, all new generation companies and existing generation
facilities are required to obtain a COC from the ERC. New generation
companies must show that they have complied with the requirements,
[55]
standards, and guidelines of the ERC before they can operate. As for
existing generation facilities, they must submit to the ERC an application
for a COC together with the required documents within ninety (90) days
from the effectivity of the EPIRA Rules and Regulations. [56] Based on the
documents submitted, the ERC will determine whether the applicant has
complied with the standards and requirements for operating a generation
company. If the applicant is found compliant, only then will the ERC issue
a COC.
In this case, when the EPIRA took effect in 2001, TPC was an existing
generation facility. And at the time the sales of electricity to CEBECO,
ACMDC, and AFC were made in 2002, TPC was not yet a generation
company under EPIRA. Although it filed an application for a COC on June
Page 150 of 151
20, 2002, it did not automatically become a generation company. It was
only on June 23,2005, when the ERC issued a COC in favor of TPC, that it
became a generation company under EPIRA. Consequently, TPC's sales of
electricity to CEBECO, ACMDC, and AFC cannot qualify for VAT zero-
rating under the EPIRA.
Neither can TPC rely on VAT Ruling No. 011-5, which considered the sales
of electricity of Hedcor effectively zero-rated from the effectivity of the
EPIRA despite the fact that it was issued a COC only on November 5, 2003,
as this is a specific ruling, issued in response to the query made by Hedcor
to the CIR. As such, it is applicable only to a particular taxpayer, which is
Hedcor. Thus, it is not a general interpretative rule that can be applied to all
taxpayers similarly situated.[57]
All told, we find no error on the part of the CTA En Banc, in considering
TPC's sales of electricity to CEBECO, ACMDC, and AFC for taxable year
2002 as invalid zero-rated sales, and in consequently denying TPC's claim
for refund or credit of unutilized input VAT attributable to the said sales of
electricity.
TPC is not liable for deficiency VAT.
But while TPC's sales of electricity to CEBECO, ACMDC, and AFC are
not zero-rated, we cannot hold it liable for deficiency VAT by imposing
10% VAT on said sales of electricity as what the CIR wants us to do.
As a rule, taxes cannot be subject to compensation because the government
and the taxpayer are not creditors and debtors of each other.[58] However,
we are aware that in several cases, we have allowed the determination of a
taxpayer's liability in a refund case, thereby allowing the offsetting of taxes.
TAX REVIEW (CASE BATCH 1) Page 151 of 151

In Commissioner of Internal Revenue v. Court of Tax Appeals,[59] we
allowed offsetting of taxes in a tax refund case because there was an
existing deficiency income and business tax assessment against the
taxpayer. We said that "[t]o award such refund despite the existence of that
deficiency assessment is an absurdity and a polarity in conceptual effects"
and that "to grant the refund without determination of the proper assessment
and the tax due would inevitably result in multiplicity of proceedings or
[60]
suits."
Similarly, in South African Airways v. Commissioner of Internal
[61]
Revenue, we permitted offsetting of taxes because the correctness of the
return filed by the taxpayer was put in issue.
In the recent case of SMI-ED Philippines Technology, Inc. v. Commissioner
[62]
of Internal Revenue, we also allowed offsetting because there was a need
for the court to determine if a taxpayer claiming refund of erroneously paid
taxes is more properly liable for taxes other than that paid. We explained
that the determination of the proper category of tax that should have been
paid is not an assessment but is an incidental issue that must be resolved in
order to determine whether there should be a refund. [63] However, we
clarified that while offsetting may be allowed, the BIR can no longer assess
the taxpayer for deficiency taxes in excess of the amount claimed for refund
if prescription has already set in.[64]
the NIRC, where the issue to be resolved is whether TPC is entitled to a
refund or credit of its unutilized input VAT for the taxable year 2002. And
since it is not a claim for refund under Section 229 of the NIRC, the
correctness of TPC s VAT returns is not an issue. Thus, there is no need for
the court to determine whether TPC is liable for deficiency VAT.
Besides, it would be unfair to allow the CIR to use a claim for refund under
Section 112 of the NIRC as a means to assess a taxpayer for any deficiency
VAT, especially if the period to assess had already prescribed. As we have
said, the courts have no assessment powers, and therefore, cannot issue
assessments against taxpayers.[66] The courts can only review the
assessments issued by the CIR, who under the law is vested with the powers
to assess and collect taxes and the duty to issue tax assessments within the
prescribed period.[67]
WHEREFORE, the Petitions are hereby DENIED. The November 22,
2010 Decision and the April 6, 2011 Resolution of the Court of Tax
Appeals in CTA EB Nos. 623 and 629 are hereby AFFIRMED.
SO ORDERED.

But in all these cases, we allowed offsetting of taxes only because the
determination of the taxpayer's liability is intertwined with the resolution of
the claim for tax refund of erroneously or illegally collected taxes under
Section 229[65] of the NIRC. A situation that is not present in the instant
case.

In this case, TPC filed a claim for tax refund or credit under Section 112 of