[G.R. No. 147188.

September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by
Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether
the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of
deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No.
57799 affirming the 3 January 2000 Decision[2] of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 5328,[3] which held
that the respondent Estate of Benigno P. Toda, Jr. is not
liable for the deficiency income tax of Cibeles Insurance
Corporation (CIC) in the amount of P79,099,999.22 for the
year 1989, and ordered the cancellation and setting aside of
the assessment issued by Commissioner of Internal
Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent
to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale
of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue,
Makati City.

On 29 March 1994, the Bureau of Internal Revenue (BIR)

sent an assessment notice[10] and demand letter to the CIC
for deficiency income tax for the year 1989 in the amount of
P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the
assessment should be directed against the old CIC, and not
against the new CIC, which is owned by an entirely different
set of stockholders; moreover, Toda had undertaken to hold
the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special co-administrators Lorna Kapunan
and Mario Luza Bautista, received a Notice of
Assessment[12] dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax
for the year 1989 in the amount of P79,099,999.22,
computed as follows:
Income Tax 1989
Net Income per return P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains

On 2 March 1989, CIC authorized Benigno P. Toda, Jr.,

President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an
amount of not less than P90 million.[4]

(P200M 100M) 100,000,000.00

On 30 August 1989, Toda purportedly sold the property for

P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI)
for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the
same notary public.[5]

Tax Due thereof at 35% P 61,595,703.75

Total Net Taxable Income P175,987,725.00

per investigation

Less: Payment already made

1. Per return P26,595,704.00
2. Thru Capital Gains

For the sale of the property to RMI, Altonaga paid capital

gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax
return[7] for the year 1989, declaring, among other things, its
gain from the sale of real property in the amount of
P75,728.021. After crediting withholding taxes of
P254,497.00, it paid P26,341,207[8] for its net taxable
income of P75,987,725.

Tax made by R.A.

Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94

On 12 July 1990, Toda sold his entire shares of stocks in

CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks.[9] Three and a half years
later, or on 16 January 1994, Toda died.

Total P 43,749,999.57
Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner
dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of
P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital gains,
thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for
review[15] with the CTA alleging that the Commissioner
erred in holding the Estate liable for income tax deficiency;
that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the
Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and
that Altonaga was neither the buyer of the property from CIC
nor the seller of the same property to RMI. The additional
gain of P100 million (the difference between the second
simulated sale for P200 million and the first simulated sale
for P100 million) realized by CIC was taxed at the rate of
only 5% purportedly as capital gains tax of Altonaga, instead
of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade
payment of the tax was thus false or fraudulent. Since such
falsity or fraud was discovered by the BIR only on 8 March
1991, the assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by Section 223 (a)
of the National Internal Revenue Code of 1986, which
provides that tax may be assessed within ten years from the
discovery of the falsity or fraud. With the sale being tainted
with fraud, the separate corporate personality of CIC should
be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of
the remaining 0.009% shares registered in the name of the
individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized
from the sale were withdrawn by him as cash advances or
paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the
Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even
assuming that a pre-conceived scheme was adopted by CIC,
the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the
applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is
three years after the last day prescribed by law for the filing
of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9

January 1995 was, therefore, no longer valid. The CTA also

ruled that the mere ownership by Toda of 99.991% of the
capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence,
the CTA declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner
on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner
insisted that the sale of the property owned by CIC was the
result of the connivance between Toda and Altonaga. She
further alleged that the latter was a representative, dummy,
and a close business associate of the former, having held his
office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by
Toda for representation services rendered. The CTA
denied[20] the motion for reconsideration, prompting the
Commissioner to file a petition for review[21] with the Court
of Appeals.
In its challenged Decision of 31 January 2001, the Court of
Appeals affirmed the decision of the CTA, reasoning that the
CTA, being more advantageously situated and having the
necessary expertise in matters of taxation, is better situated
to determine the correctness, propriety, and legality of the
income tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT COMMITTED NO FRAUD WITH INTENT
TO EVADE THE TAX ON THE SALE OF THE PROPERTIES
OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT
DISREGARDING
THE
SEPARATE
CORPORATE
PERSONALITY
OF
CIBELES
INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT
THE RIGHT OF PETITIONER TO ASSESS RESPONDENT
FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989
HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous
pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga,
who was financially incapable of purchasing it. She further
points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on
the same date, 30 August 1989; (2) the Deed of Absolute
Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and
the latter, as Doc. No. 92, Page 20, Book I, Series of 1989,
of the same Notary Public; (3) as early as 4 May 1989, CIC
received P40 million from RMI, and not from Altonaga. The

said amount was debited by RMI in its trial balance as of 30

June 1989 as investment in Cibeles Building. The substantial
portion of P40 million was withdrawn by Toda through the
declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the
Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of
purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the
following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax
for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency
income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on
the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the
end to be achieved, i.e., the payment of less than that known
by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due; (2) an accompanying
state of mind which is described as being evil, in bad faith,
willfull,or deliberate and not accidental; and (3) a course of
action or failure of action which is unlawful.[24]
All these factors are present in the instant case. It is
significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on
30 August 1989, CIC received P40 million from RMI,[25] and
not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance[26] as other inv. Cibeles Bldg.
Also, as of 31 July 1989, another P40 million was debited
and reflected in RMIs trial balance as other inv. Cibeles Bldg.
This would show that the real buyer of the properties was
RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that
Altonaga was a close business associate and one of the
many trusted corporate executives of Toda. This information
was revealed by Mr. Boy Prieto, the assistant accountant of
CIC and an old timer in the company. [27] But Mr. Prieto did
not testify on this matter, hence, that information remains to
be hearsay and is thus inadmissible in evidence. It was not

verified either, since the letter-request for investigation of

Altonaga was unserved,[28] Altonaga having left for the
United States of America in January 1990. Nevertheless,
that Altonaga was a mere conduit finds support in the
admission of respondent Estate that the sale to him was part
of the tax planning scheme of CIC. That admission is borne
by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a change of structure
of the proceeds of sale. Admitted one hundred percent. But
isnt this precisely the definition of tax planning? Change the
structure of the funds and pay a lower tax. Precisely, Sec. 40
(2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and
the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not
against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted for
wanting to reduce the tax from 35% to 5%.[29]
[Underscoring supplied].
The scheme resorted to by CIC in making it appear that
there were two sales of the subject properties, i.e., from CIC
to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is tainted
with fraud.
Fraud in its general sense, is deemed to comprise anything
calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty,
trust or confidence justly reposed, resulting in the damage to
another, or by which an undue and unconscionable
advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga
was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income
to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring
and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled
the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax
ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of
Altonaga, which was prompted more on the mitigation of tax
liabilities than for legitimate business purposes constitutes
one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income
tax incidence only when it is consummated.[32] The
incidence of taxation depends upon the substance of a
transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the

means employed to transfer legal title. Rather, the

transaction must be viewed as a whole, and each step from
the commencement of negotiations to the consummation of
the sale is relevant. A sale by one person cannot be
transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit
the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would
seriously impair the effective administration of the tax
policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that
the sale was made through another and distinct entity when
it is proved that the latter was merely a conduit is to sanction
a circumvention of our tax laws. Hence, the sale to Altonaga
should be disregarded for income tax purposes.[34] The two
sale transactions should be treated as a single direct sale by
CIC to RMI.
Accordingly, the tax liability of CIC is governed by then
Section 24 of the NIRC of 1986, as amended (now 27 (A) of
the Tax Reform Act of 1997), which stated as follows:

Put differently, in cases of (1) fraudulent returns; (2) false

returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the
case may be.
It is true that in a query dated 24 August 1989, Altonaga,
through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions.[36] Thus, the BIR
was amply informed of the transactions even prior to the
execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes
for 1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two
transactions were tainted with fraud. And even assuming
arguendo that there was no fraud, we find that the income
tax return filed by CIC for the year 1989 was false. It did not
reflect the true or actual amount gained from the sale of the
Cibeles property. Obviously, such was done with intent to
evade or reduce tax liability.

Sec. 24. Rates of tax on corporations. (a) Tax on domestic

corporations.- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources
by every corporation organized in, or existing under the laws
of the Philippines, and partnerships, no matter how created
or organized but not including general professional
partnerships, in accordance with the following:

As stated above, the prescriptive period to assess the

correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April
1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.[37] The assessment for
the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the
prescriptive period.

Twenty-five percent upon the amount by which the taxable

net income does not exceed one hundred thousand pesos;
and

Is respondent Estate liable

for the 1989 deficiency

Thirty-five percent upon the amount by which the taxable net

income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its
taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 1986[35]
(now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of
the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment
and collection of taxes.-(a) In the case of a false or
fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court
after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery
of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in the civil or
criminal action for collection thereof .

income tax of Cibeles

Insurance Corporation?
A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners
or stockholders of a corporation may not generally be made
to answer for the liabilities of a corporation and vice versa.
There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that
personal liability of a corporate director, trustee, or officer
along, albeit not necessarily, with the corporation may validly
attach when:
1. He assents to the (a) patently unlawful act of the
corporation, (b) bad faith or gross negligence in directing its
affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable
with the corporation; or

4. He is made, by specific provision of law, to personally

answer for his corporate action.[38]

stock was actually a deed of sale which violated a right of

first refusal under a lease contract.

It is worth noting that when the late Toda sold his shares of
stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and
the buyer for the years 1987, 1988, and 1989. Paragraph g
of the Deed of Sale of Shares of Stocks specifically provides:

Briefly, the facts of the case are summarized as follows:

g. Except for transactions occurring in the ordinary course of

business, Cibeles has no liabilities or obligations, contingent
or otherwise, for taxes, sums of money or insurance claims
other than those reported in its audited financial statement
as of December 31, 1989, attached hereto as Annex B and
made a part hereof. The business of Cibeles has at all times
been conducted in full compliance with all applicable laws,
rules and regulations. SELLER undertakes and agrees to
hold the BUYER and Cibeles free from any and all income
tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.[39] [Underscoring Supplied].
When the late Toda undertook and agreed to hold the
BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989, he
thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation
arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is
hereby GRANTED. The decision of the Court of Appeals of
31 January 2001 in CA-G.R. SP No. 57799 is REVERSED
and SET ASIDE, and another one is hereby rendered
ordering respondent Estate of Benigno P. Toda Jr. to pay
P79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest
from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. L-69259

January 26, 1988

DELPHER TRADES CORPORATION,

PACHECO, petitioners,

and

DELPHIN

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco,

were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of Bulacan
(now Metro Manila) which is covered by Transfer Certificate
of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and
providing that during the existence or after the term of this
lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the
priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components
International, Inc. assigned its rights and obligations under
the contract of lease in favor of Hydro Pipes Philippines, Inc.
with the signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease
were annotated at he back of the title, as per stipulation of
the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed
between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed to
the latter the leased property (TCT No.T-4240) together with
another parcel of land also located in Malinta Estate,
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares
of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed
an amended complaint for reconveyance of Lot. No. 1095 in
its favor under conditions similar to those whereby Delpher
Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in
favor of the plaintiff. The dispositive portion of the decision
reads:

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES
PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate
Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin
Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of

ACCORDINGLY, the judgment is hereby rendered declaring

the valid existence of the plaintiffs preferential right to
acquire the subject property (right of first refusal) and
ordering the defendants and all persons deriving rights
therefrom to convey the said property to plaintiff who may
offer to acquire the same at the rate of P14.00 per square
meter, more or less, for Lot 1095 whose area is 27,169
square meters only. Without pronouncement as to attorney's
fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's
Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the

Intermediate Appellate Court.

Philippines. In the petitioners' motion for reconsideration,

they refer to this scheme as "estate planning." (p. 252, Rollo)

The defendants-appellants, now the petitioners, filed a

petition for certiorari to review the appellate court's decision.

Under this factual backdrop, the petitioners contend that

there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the
property. Thus, the petitioners allege: "Considering that the
beneficial ownership and control of petitioner corporation
remained in the hands of the original co-owners, there was
no transfer of actual ownership interests over the land when
the same was transferred to petitioner corporation in
exchange for the latter's shares of stock. The transfer of
ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter
ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the
same, there being in substance and in effect an Identity of
interest." (p. 254, Rollo)

We initially denied the petition but upon motion for

reconsideration, we set aside the resolution denying the
petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the
petitioners, in that:
1.
Respondent Hydro Pipes Philippines, Inc, ("private
respondent") will acquire from petitioners a parcel of
industrial land consisting of 27,169 square meters or 2.7
hectares (located right after the Valenzuela, Bulacan exit of
the toll expressway) for only P14/sq. meter, or a total of
P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2.
Private respondent is allowed to exercise its right
of first refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and
3.
Assuming arguendo that there has been a transfer
of actual ownership interests, private respondent will acquire
the land not under "similar conditions" by which it was
transferred to petitioner Delpher Trades Corporation, as
provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the
"Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale
which, in effect, prejudiced the private respondent's right of
first refusal over the leased property included in the "deed of
exchange."
Eduardo Neria, a certified public accountant and son-in-law
of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was
organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common
the parcel of land leased to Hydro Pipes Philippines in order
to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish
this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of
exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000
shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes

The petitioners maintain that the Pachecos did not sell the
property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own
corporation. "Hence, such transfer is not within the letter, or
even spirit of the contract. There is a sale when ownership is
transferred for a price certain in money or its equivalent (Art.
1468, Civil Code) while there is a barter or exchange when
one thing is given in consideration of another thing (Art.
1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that
Delpher Trades Corporation is a corporate entity separate
and distinct from the Pachecos. Thus, it contends that it
cannot be said that Delpher Trades Corporation is the
Pacheco's same alter ego or conduit; that petitioner Delfin
Pacheco, having treated Delpher Trades Corporation as
such a separate and distinct corporate entity, is not a party
who may allege that this separate corporate existence
should be disregarded. It maintains that there was actual
transfer of ownership interests over the leased property
when the same was transferred to Delpher Trades
Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a
corporation by subscription or by purchasing stock directly
from the corporation or from individual owners thereof
(Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v.
Fulton [1912], 233 Pa., 609). In the case at bar, in exchange
for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher
Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence
of the stock subscription is an agreement to take and pay for
original unissued shares of a corporation, formed or to be
formed." (Rohrlich 243, cited in Agbayani, Commentaries
and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that
the Pachecos took no par value shares in exchange for their
properties.

A no-par value share does not purport to represent any

stated proportionate interest in the capital stock measured
by value, but only an aliquot part of the whole number of
such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an
aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing
only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a
stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value
they may have, to the extent of 100/1,000 or 1/10. Thus, by
removing the par value of shares, the attention of persons
interested in the financial condition of a corporation is
focused upon the value of assets and the amount of its
debts. (Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. III, 1980 Edition, p.
107).
Moreover, there was no attempt to state the true or current
market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for
only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no
par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of
the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business
conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties
and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any
benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on the
properties for no par value shares of the defendant
corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in
entering in the deed of exchange.
ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these

benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits,
and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the
point of view of taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law,
providing for tax free exchange of property, they were able to
execute the deed of exchange free from income tax and
acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code
under par. C-sub-par. (2) Exceptions regarding the provision
which I quote: "No gain or loss shall also be recognized if a
person exchanges his property for stock in a corporation of
which as a result of such exchange said person alone or
together with others not exceeding four persons gains
control of said corporation."
Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision
to have no par value share in the defendant corporation was
for the purpose of flexibility. Can you explain flexibility in
connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value
is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility
in the holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to
hold on to the property indefinitely for a period of at least 50
years. On the other hand, if the property is held by the
spouse the property will be tied up in succession
proceedings and the consequential payments of estate and
inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to
ownership by a particular person of certain properties in
respect to taxation?
A The property is not subjected to taxes on succession as
the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable
about this "estate planning" scheme resorted to by the

Pachecos. "The legal right of a taxpayer to decrease the

amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be
doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S.
465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos
and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership
interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to
another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a
light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The
questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The
amended complaint in Civil Case No. 885-V-79 of the then
Court of First Instance of Bulacan is DISMISSED. No costs.

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;

SO ORDERED.
d) exemption from training fees for socioeconomic programs
undertaken by the OSCA as part of its work;

EN BANC
G.R. No. 175356

December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZSUCAT, INC., Petitioners,

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;

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL
WELFARE AND DEVELOPMENT and THE SECRETARY
OF THE DEPARTMENT OF FINANCE, Respondents.

f) to the extent practicable and feasible, the continuance of

the same benefits and privileges given by the Government
Service Insurance System (GSIS), Social Security System
(SSS) and PAG-IBIG, as the case may be, as are enjoyed by
those in actual service.

DECISION

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:

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the
burden of proof rests upon him.
Before us is a Petition for Prohibition2 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

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.
x x x x 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.
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.
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.
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.

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.
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 92578 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;
The establishment may claim the discounts granted under
(a), (f), (g) and (h) as tax deduction based on the net cost of
the goods sold or services rendered: Provided, That the cost
of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and
to the provisions of the National Internal Revenue Code, as
amended.
To implement the tax provisions of RA 9257, the Secretary of
Finance issued RR No. 4-2006, the pertinent provision of
which provides:

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.

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.

applicable, shall be included in their gross sales receipts for

tax purposes and shall be subject to proper documentation
and to the provisions of the National Internal Revenue Code,
as amended; 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

(4) The discount can only be allowed as deduction from

gross income for the same taxable year that the discount is
granted.

Petitioners raise the following issues:

(5) The business establishment giving sales discounts to

qualified senior citizens is required to keep separate and
accurate record[s] of sales, 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.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE

OR CONTROVERSY.

(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:
(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
ESTABLISHMENTS

AS

TAX

DEDUCTION

OF

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

A.

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
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 Corporation16 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 421 and Article XIII, Section 1122
of the Constitution because it shifts the States constitutional
mandate or duty of improving the welfare of the elderly to the
private sector.23
Under the tax deduction scheme, the 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 constitutionality.30
More important, respondents maintain that the tax deduction
scheme is a legitimate exercise of the States 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]; (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:
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. 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 takers gain but the
owners 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 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 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. 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 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 the ruling in Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central
Luzon Drug Corporation37 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 Corporation38 which
allegedly reversed the ruling in Central Luzon Drug
Corporation.39

They also point out that Carlos Superdrug Corporation40

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 Corporation41 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 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 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, profitgenerating 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 Corporation43 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. 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 takers gain but the
owners 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 Corporation45 that the 20% discount and tax

deduction scheme is a valid exercise of the police power of

the State. The present case, thus, affords an opportunity for
us to clarify the above-quoted statements in Central Luzon
Drug Corporation46 and Carlos Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent
domain in Central Luzon Drug Corporation48 is obiter dicta
and, thus, not binding precedent. As stated earlier, in Central
Luzon Drug Corporation,49 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
Corporation50 in our ruling in Carlos Superdrug
Corporation,51 this referred only to preliminary matters. A
fair reading of Carlos Superdrug Corporation52 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
Corporation53 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
Nonetheless, we deem it proper, in what follows, to amplify
our explanation in Carlos Superdrug Corporation56 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

In 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.

Eminent domain, on the other hand, is the inherent power of

the State to take or appropriate private property for public
use.63

The 20% senior citizen discount is an exercise of police

power.

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 restricted66 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 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 interest
of public morals)67 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 citys
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 is appropriated for use
by or for the benefit of the public.69
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 eminent domain to be present.70
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 lines constructed above his property71 or the
compelled interconnection of the telephone system between
the government and a private company.72

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 conditions73 as well
as the evolving meaning and scope of public use74 and just
compensation75 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. 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 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 which are traditionally regarded as
police power measures.77

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. The obiter in Central
Luzon Drug Corporation,78 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 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
establishments profits or income/gross sales, yet there is no
provision for payment of just compensation. It would also
mean that overnment 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 octrine 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 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 few persons subject to the public
action.81
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.
In Alalayan v. National Power Corporation,83 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 confiscatory in view of the presumption of
constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug
Corporation85 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 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 Corporation86 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 laws 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 regulations 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 Corporation88 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.
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 Carpios Dissent may be
summarized as follows: (1) the discussion on eminent
domain in Central Luzon Drug Corporation89 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 990
of the Constitution; and (4) the permanent reduction in a
private establishments 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 Corporation91 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 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
Corporation94 by comparing the wording of the previous law
vis--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. A
close reading of Central Luzon Drug Corporation95 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 Corporation96 resulting in that
unfortunate statement that the tax credit "can be deemed" as
just compensation. This, in 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. 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
Dissents 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 face, is arbitrary,
oppressive or confiscatory.97
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% 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 profit98 is P5.0099 or a profit margin100 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 P3.00102 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 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 sales would still be P20.00105
(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 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 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 as illustrated above),108 and not all
private establishments make a 20% profit margin (which
conversely implies that there are those who make more and,
thus, would not be greatly affected by this regulation).109
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 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 loss111 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. 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 sales114 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.
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 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 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 x116

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

The above paragraph, in full, states

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. 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 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

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--vis the senior 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

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 and enhance
the right of all the people to human dignity.118

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 income/gross sales)120 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 latters prices and/or profits or income/gross
sales.123
If the Court were to sustain the Dissents 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. There is nothing sacrosanct about profits or
income/gross sales. This, we made clear in Carlos
Superdrug Corporation:124

unconscionably detrimental to petitioners, the Court will

refrain form 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
Corporation126 and followed in Carlos Superdurg
Corporation127 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.
G.R. No. 92585

May 8, 1992

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.

CALTEX PHILIPPINES, INC., petitioner,

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 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.

DAVIDE, JR., J.:

Moreover, the right to property has a social dimension. While

Article XIII of the Constitution provides the percept for the
protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of
contracts and public utilities, continously serve as a reminder
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

vs.
THE
HONORABLE
COMMISSION
ON
AUDIT,
HONORABLE
COMMISSIONER
BARTOLOME
C.
FERNANDEZ
and
HONORABLE
COMMISSIONER
ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the

Rules of Court 1 questioning the authority of the Commission
on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF)
and seeking the reversal of said Commission's decision
denying its claims for recovery of financing charges from the
Fund and reimbursement of underrecovery arising from
sales to the National Power Corporation, Atlas Consolidated
Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MAR-COPPER), preventing
it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims
which are still pending resolution before the Office of Energy
Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or

ruling of the Constitutional Commissions 3 may be brought
to this Court on certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The certiorari
referred to is the special civil action for certiorari under Rule
65 of the Rules of Court. 4

Considering, however, that the allegations that the COA

acted with:
(a) total lack of jurisdiction in completely ignoring and
showing absolutely no respect for the findings and rulings of
the administrator of the fund itself and in disallowing a claim
which is still pending resolution at the OEA level, and (b)
"grave abuse of discretion and completely without
jurisdiction" 5 in declaring that petitioner cannot avail of the
right to offset any amount that it may be required under the
law to remit to the OPSF against any amount that it may
receive by way of reimbursement therefrom are sufficient to
bring this petition within Rule 65 of the Rules of Court, and,
considering further the importance of the issues raised, the
error in the designation of the remedy pursued will, in this
instance, be excused.
The issues raised revolve around the OPSF created under
Section 8 of Presidential Decree (P.D.) No. 1956, as
amended by Executive Order (E.O.) No. 137. As amended,
said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the
books of accounts of the Ministry of Energy to be designated
as Oil Price Stabilization Fund (OPSF) for the purpose of
minimizing frequent price changes brought about by
exchange rate adjustments and/or changes in world market
prices of crude oil and imported petroleum products. The Oil
Price Stabilization Fund may be sourced from any of the
following:
a)
Any increase in the tax collection from ad valorem
tax or customs duty imposed on petroleum products subject
to tax under this Decree arising from exchange rate
adjustment, as may be determined by the Minister of
Finance in consultation with the Board of Energy;
b)
Any increase in the tax collection as a result of the
lifting of tax exemptions of government corporations, as may
be determined by the Minister of Finance in consultation with
the Board of Energy;
c)
Any additional amount to be imposed on
petroleum products to augment the resources of the Fund
through an appropriate Order that may be issued by the
Board of Energy requiring payment by persons or companies
engaged in the business of importing, manufacturing and/or
marketing petroleum products;
d)
Any resulting peso cost differentials in case the
actual peso costs paid by oil companies in the importation of
crude oil and petroleum products is less than the peso costs
computed using the reference foreign exchange rate as fixed
by the Board of Energy.
The Fund herein created shall be used for the following:
1)
To reimburse the oil companies for cost increases
in crude oil and imported petroleum products resulting from
exchange rate adjustment and/or increase in world market
prices of crude oil;

2)
To reimburse the oil companies for possible cost
under-recovery incurred as a result of the reduction of
domestic prices of petroleum products. The magnitude of the
underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:
i.
Reduction in oil company take as directed by the
Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil
companies at the time of the price change;
ii.
Reduction in internal ad valorem taxes as a result
of foregoing government mandated price reductions;
iii.
Other factors as may be determined by the
Ministry of Finance to result in cost underrecovery.
The Oil Price Stabilization Fund
administered by the Ministry of Energy.

(OPSF)

shall

be

The material operative facts of this case, as gathered from

the pleadings of the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex
Philippines, Inc. (CPI), hereinafter referred to as Petitioner,
directing the latter to remit to the OPSF its collection,
excluding that unremitted for the years 1986 and 1988, of
the additional tax on petroleum products authorized under
the aforesaid Section 8 of P.D. No. 1956 which, as of 31
December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner
informing it that partial verification with the OEA showed that
the grand total of its unremitted collections of the above tax
is P1,287,668,820.00, broken down as follows:
1986

P233,190,916.00

1987

335,065,650.00

1988

719,412,254.00;

directing it to remit the same, with interest and surcharges

thereon, within sixty (60) days from receipt of the letter;
advising it that the COA will hold in abeyance the audit of all
its claims for reimbursement from the OPSF; and directing it
to desist from further offsetting the taxes collected against
outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for

an early release of its reimbursement certificates from the
OPSF covering claims with the Office of Energy Affairs since
June 1987 up to March 1989, invoking in support thereof
COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies
and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's

request for the early release of the reimbursement
certificates from the OPSF and repeated its earlier directive
to petitioner to forward payment of the latter's unremitted
collections to the OPSF to facilitate COA's audit action on
the reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989,
submitted to the COA a proposal for the payment of the
collections and the recovery of claims, since the outright
payment of the sum of P1.287 billion to the OEA as a
prerequisite for the processing of said claims against the
OPSF will cause a very serious impairment of its cash
position. 10 The proposal reads:
We, therefore, very respectfully propose the following:
(1)
Any procedural arrangement acceptable to COA to
facilitate monitoring of payments and reimbursements will be
administered by the ERB/Finance Dept./OEA, as agencies
designated by law to administer/regulate OPSF.
(2)
For the retroactive period, Caltex will deliver to
OEA, P1.287 billion as payment to OPSF, similarly OEA will
deliver to Caltex the same amount in cash reimbursement
from OPSF.
(3)
The COA audit will commence immediately and
will be conducted expeditiously.
(4)
The review of current claims (1989) will be
conducted expeditiously to preclude further accumulation of
reimbursement from OPSF.
On 7 June 1989, the COA, with the Chairman taking no part,
handed down Decision No. 921 accepting the above-stated
proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing
years. 11 Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel
A. Estrella, President, Petron Corporation, and Mr. Francis
Ablan, President and Managing Director, Caltex (Philippines)
Inc., for reconsideration of this Commission's adverse action
embodied in its letters dated February 2, 1989 and March 9,
1989, the former directing immediate remittance to the Oil
Price Stabilization Fund of collections made by the firms
pursuant to P.D. 1956, as amended by E.O. No. 137, S.
1987, and the latter reiterating the same directive but further
advising the firms to desist from offsetting collections against
their claims with the notice that "this Commission will hold in
abeyance the audit of all . . . claims for reimbursement from
the OPSF."
It appears that under letters of authority issued by the
Chairman, Energy Regulatory Board, the aforenamed oil
companies were allowed to offset the amounts due to the Oil
Price Stabilization Fund against their outstanding claims
from the said Fund for the calendar years 1987 and 1988,
pending with the then Ministry of Energy, the government
entity charged with administering the OPSF. This
Commission, however, expressing serious doubts as to the

propriety of the offsetting of all types of reimbursements from

the OPSF against all categories of remittances, advised
these oil companies that such offsetting was bereft of legal
basis. Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly manifest their
intent to make arrangements for the remittance to the Office
of Energy Affairs of the amount of collections equivalent to
what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to
prepare
the
corresponding
checks
representing
reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the
remittance of collections due to the OPSF and the
reimbursement of claims from the Fund shall be made within
a period of not more than one week from each other, will
benefit the Fund and not unduly jeopardize the continuing
daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein
obtaining, this Commission perceives no further
objectionable feature in the proposed arrangement, provided
that 15% of whatever amount is due from the Fund is
retained by the Office of Energy Affairs, the same to be
answerable for suspensions or disallowances, errors or
discrepancies which may be noted in the course of audit and
surcharges for late remittances without prejudice to similar
future retentions to answer for any deficiency in such
surcharges, and provided further that no offsetting of
remittances and reimbursements for the current and ensuing
years shall be allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent
the following letter to Executive Director Wenceslao R. De la
Paz of the Office of Energy Affairs: 12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921
dated June 7, 1989, and based on our initial verification of
documents submitted to us by your Office in support of
Caltex (Philippines), Inc. offsets (sic) for the year 1986 to
May 31, 1989, as well as its outstanding claims against the
Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we
are pleased to inform your Office that Caltex (Philippines),
Inc. shall be required to remit to OPSF an amount of
P1,505,668,906, representing remittances to the OPSF
which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby
authorize (sic) the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex, representing claims
initially allowed in audit, the details of which are presented
hereunder: . . .

As presented in the foregoing computation the disallowances

totalled P387,683,535, which included P130,420,235
representing those claims disallowed by OEA, details of
which is (sic) shown in Schedule 1 as summarized as
follows:

Disallowance of COA
Particulars

therefore are not tax paid inventories of Caltex subject to

reimbursements but those of the borrower. Hence, we
recommend reduction of the claim for July, August, and
November, 1987 amounting to P14,034,786.

Amount

Recovery of financing chargesP162,728,475 /a

d.
Product sales

LOI No. 1416 dated July 17, 1984 provides that "I hereby
order and direct the suspension of payment of all taxes,
duties, fees, imposts and other charges whether direct or
indirect due and payable by the copper mining companies in
distress to the national and local governments." It is our
opinion that LOI 1416 which implements the exemption from
payment of OPSF imposts as effected by OEA has no legal
basis.

Inventory losses
Borrow loan arrangement

14,034,786 /c

Sales to Atlas/Marcopper

32,097,083 /d

Sales to NPC

558

Furthermore, we wish to emphasize that payment to Caltex

(Phil.) Inc., of the amount as herein authorized shall be
subject to availability of funds of OPSF as of May 31, 1989
and applicable auditing rules and regulations. With regard to
the disallowances, it is further informed that the aggrieved
party has 30 days within which to appeal the decision of the
Commission in accordance with law.

P257,263,300
Disallowances of OEA

130,420,235

Total

P387,683,535

The reasons for the disallowances are discussed hereunder:

a.

Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O.

137 seems to indicate that recovery of financing charges by
oil companies is not among the items for which the OPSF
may be utilized. Therefore, it is our view that recovery of
financing charges has no legal basis. The mechanism for
such claims is provided in DOF Circular 1-87.
b.
Product
Vessels/Airlines

Sales

Sales

to

International

BOE Resolution No. 87-01 dated February 7, 1987 as

implemented by OEA Order No. 87-03-095 indicating that
(sic) February 7, 1987 as the effectivity date that (sic) oil
companies should pay OPSF impost on export sales of
petroleum products. Effective February 7, 1987 sales to
international vessels/airlines should not be included as part
of its domestic sales. Changing the effectivity date of the
resolution from February 7, 1987 to October 20, 1987 as
covered by subsequent ERB Resolution No. 88-12 dated
November 18, 1988 has allowed Caltex to include in their
domestic sales volumes to international vessels/airlines and
claim the corresponding reimbursements from OPSF during
the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.
c.

Sales to Atlas/Marcopper

48,402,398 /b

Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA)

transactions including the related BLA agreement, as they
affect the claims for reimbursements of ad valorem taxes.
We observed that oil companies immediately settle ad
valorem taxes for BLA transaction (sic). Loan balances

On 8 September 1989, petitioner filed an Omnibus Request

for the Reconsideration of the decision based on the
following grounds: 13
A)
COA-DISALLOWED CLAIMS ARE AUTHORIZED
UNDER EXISTING RULES, ORDERS, RESOLUTIONS,
CIRCULARS ISSUED BY THE DEPARTMENT OF
FINANCE AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.
B)
ADMINISTRATIVE INTERPRETATIONS IN THE
COURSE OF EXERCISE OF EXECUTIVE POWER BY
DEPARTMENT OF FINANCE AND ENERGY REGULATORY
BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.
C)
LEGAL BASIS FOR RETENTION OF OFFSET
ARRANGEMENT, AS AUTHORIZED BY THE EXECUTIVE
BRANCH OF GOVERNMENT, REMAINS VALID.
On 6 November 1989, petitioner filed with the COA a
Supplemental Omnibus Request for Reconsideration. 14
On 16 February 1990, the COA, with Chairman Domingo
taking no part and with Commissioner Fernandez dissenting
in part, handed down Decision No. 1171 affirming the
disallowance for recovery of financing charges, inventory
losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from
export sales. 15 Decision No. 1171 reads as follows:
Anent the recovery of financing charges you contend that
Caltex Phil. Inc. has the .authority to recover financing
charges from the OPSF on the basis of Department of
Finance (DOF) Circular 1-87, dated February 18, 1987,
which allowed oil companies to "recover cost of financing
working capital associated with crude oil shipments," and

provided a schedule of reimbursement in terms of peso per

barrel. It appears that on November 6, 1989, the DOF issued
a memorandum to the President of the Philippines explaining
the nature of these financing charges and justifying their
reimbursement as follows:
As part of your program to promote economic recovery, . . .
oil companies (were authorized) to refinance their imports of
crude oil and petroleum products from the normal trade
credit of 30 days up to 360 days from date of loading . . .
Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their
import bills from the normal 30-day payment term up to the
desired 360 days. This refinancing of importations carried
additional costs (financing charges) which then became, due
to government mandate, an inherent part of the cost of the
purchases of our country's oil requirement.
We beg to disagree with such contention. The justification
that financing charges increased oil costs and the schedule
of reimbursement rate in peso per barrel (Exhibit 1) used to
support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the
same formula which the DOF used in arriving at the
reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil
companies are actually gaining rather than losing from the
extension of credit because such extension enables them to
invest the collections in marketable securities which have
much higher rates than those they incur due to the
extension. The Data we used were obtained from CPI
(CALTEX) Management and can easily be verified from our
records.
With respect to product sales or those arising from sales to
international vessels or airlines, . . ., it is believed that export
sales (product sales) are entitled to claim refund from the
OPSF.
As regard your claim for underrecovery arising from
inventory losses, . . . It is the considered view of this
Commission that the OPSF is not liable to refund such
surtax on inventory losses because these are paid to BIR
and not OPSF, in view of which CPI (CALTEX) should seek
refund from BIR. . . .
Finally, as regards the sales to Atlas and Marcopper, it is
represented that you are entitled to claim recovery from the
OPSF pursuant to LOI 1416 issued on July 17, 1984, since
these copper mining companies did not pay CPI (CALTEX)
and OPSF imposts which were added to the selling price.
Upon a circumspect evaluation, this Commission believes
and so holds that the CPI (CALTEX) has no authority to
claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts
distressed mining companies from "all taxes, duties, import
fees and other charges" was issued when OPSF was not yet
in existence and could not have contemplated OPSF
imposts at the time of its formulation. Moreover, it is evident
that OPSF was not created to aid distressed mining

companies but rather to help the domestic oil industry by

stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March
1990 the present petition wherein it imputes to the COA the
commission of the following errors: 16
I
RESPONDENT COMMISSION ERRED IN DISALLOWING
RECOVERY OF FINANCING CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's
17
CLAIM
FOR
REIMBURSEMENT
UNDERRECOVERY ARISING FROM SALES TO NPC.

OF

III
RESPONDENT COMMISSION ERRED IN DENYING CPI's
CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS
AND MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING
CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET
ITS REMITTANCES AGAINST ITS REIMBURSEMENT VISA-VIS THE OPSF.
V
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION
BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the
respondents to comment on the petition within ten (10) days
from notice. 18
On 6 September 1990, respondents COA and
Commissioners Fernandez and Cruz, assisted by the Office
of the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30
May 1991 and required the parties to file their respective
Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the

Solicitor General prays that the Comment filed on 6
September 1990 be considered as the Memorandum for
respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14
August 1991.
I.
Petitioner dwells lengthily on its first assigned error
contending, in support thereof, that:

(1)
In view of the expanded role of the OPSF pursuant
to Executive Order No. 137, which added a second purpose,
to wit:

Pesos per Barrel

2)
To reimburse the oil companies for possible cost
underrecovery incurred as a result of the reduction of
domestic prices of petroleum products. The magnitude of the
underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:

180 days to 239 days

1.90

241 (sic) days to 299

4.02

300 days to 369 (sic) days

6.16

i.
Reduction in oil company take as directed by the
Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil
companies at the time of the price change;

360 days or more

ii.
Reduction in internal ad valorem taxes as a result
of foregoing government mandated price reductions;
iii.
Other factors as may be determined by the
Ministry of Finance to result in cost underrecovery.
the "other factors" mentioned therein that may be
determined by the Ministry (now Department) of Finance
may include financing charges for "in essence, financing
charges constitute unrecovered cost of acquisition of crude
oil incurred by the oil companies," as explained in the 6
November 1989 Memorandum to the President of the
Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement
rates decline and at the same time the tax on interest
income increases. The relationship is such that the presence
of underrecovery or overrecovery is directly dependent on
the amount and extent of financing charges."
(2)
The claim for recovery of financing charges has
clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:
To allow oil companies to recover the costs of financing
working capital associated with crude oil shipments, the
following guidelines on the utilization of the Oil Price
Stabilization Fund pertaining to the payment of the foregoing
(sic) exchange risk premium and recovery of financing
charges will be implemented:
1.
The OPSF foreign exchange premium shall be
reduced to a flat rate of one (1) percent for the first (6)
months and 1/32 of one percent per month thereafter up to a
maximum period of one year, to be applied on crude oil'
shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged
on the basis of the fee applicable to the remaining period of
financing.
2.
In addition, for shipments loaded after January
1987, oil companies shall be allowed to recover financing
charges directly from the OPSF per barrel of crude oil based
on the following schedule:
Financing Period Reimbursement Rate

Less than 180 days None

8.28

The above rates shall be subject to review every sixty

days. 22
Pursuant to this circular, the Department of Finance, in its
letter of 18 February 1987, advised the Office of Energy
Affairs as follows:
HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December
4, 1986 and February 5, 1987 and subsequent discussions
held by the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of
Finance recognizes the necessity to reduce the foreign
exchange risk premium accruing to the Oil Price Stabilization
Fund (OPSF). Such a reduction would allow the industry to
recover partly associated financing charges on crude oil
imports. Accordingly, the OPSF foreign exchange risk fee
shall be reduced to a flat charge of 1% for the first six (6)
months plus 1/32% of 1% per month thereafter up to a
maximum period of one year, effective January 1, 1987. In
addition, since the prevailing company take would still leave
unrecovered financing charges, reimbursement may be
secured from the OPSF in accordance with the provisions of
the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order

No. 87-05-096 which contains the guidelines for the
computation of the foreign exchange risk fee and the
recovery of financing charges from the OPSF, to wit:
B.

FINANCE CHARGES

1.
Oil companies shall be allowed to recover
financing charges directly from the OPSF for both crude and

product shipments loaded after January 1, 1987 based on

the following rates:

petitioner is gaining, instead of losing, from the extension of

credit, is belatedly raised and not supported by expert
analysis.

Financing Period Reimbursement Rate

In impeaching the validity of petitioner's assertions, the
respondents argue that:

(PBbl.)
Less than 180 days None
180 days to 239 days

1.90

240 days to 229 (sic) days

4.02

300 days to 359 days

6.16

360 days to more

8.28

2.
The above rates shall be subject to review every
sixty days. 24
Then on 22 November 1988, the Department of Finance
issued Circular No. 4-88 imposing further guidelines on the
recoverability of financing charges, to wit:
Following are the supplemental rules to Department of
Finance Circular No. 1-87 dated February 18, 1987 which
allowed the recovery of financing charges directly from the
Oil Price Stabilization Fund. (OPSF):
1.
The Claim for reimbursement shall be on a per
shipment basis.
2.
The claim shall be filed with the Office of Energy
Affairs together with the claim on peso cost differential for a
particular shipment and duly certified supporting documents
provided for under Ministry of Finance No. 11-85.
3.
The reimbursement shall be on the form of
reimbursement certificate (Annex A) to be issued by the
Office of Energy Affairs. The said certificate may be used to
offset against amounts payable to the OPSF. The oil
companies may also redeem said certificates in cash if not
utilized, subject to availability of funds. 25
The OEA disseminated this Circular to all oil companies in its
Memorandum Circular No. 88-12-017. 26
The COA can neither ignore these issuances nor formulate
its own interpretation of the laws in the light of the
determination of executive agencies. The determination by
the Department of Finance and the OEA that financing
charges are recoverable from the OPSF is entitled to great
weight and consideration. 27 The function of the COA,
particularly in the matter of allowing or disallowing certain
expenditures, is limited to the promulgation of accounting
and auditing rules for, among others, the disallowance of
irregular,
unnecessary,
excessive,
extravagant,
or
unconscionable expenditures, or uses of government funds
and properties. 28
(3)
would

Denial of petitioner's claim for reimbursement

be inequitable. Additionally, COA's claim that

1.
The Constitution gives the COA discretionary
power to disapprove irregular or unnecessary government
expenditures and as the monetary claims of petitioner are
not allowed by law, the COA acted within its jurisdiction in
denying them;
2.
P.D. No. 1956 and E.O. No. 137 do not allow
reimbursement of financing charges from the OPSF;
3.
Under the principle of ejusdem generis, the "other
factors" mentioned in the second purpose of the OPSF
pursuant to E.O. No. 137 can only include "factors which are
of the same nature or analogous to those enumerated;"
4.
In allowing reimbursement of financing charges
from OPSF, Circular No. 1-87 of the Department of Finance
violates P.D. No. 1956 and E.O. No. 137; and
5.
Department of Finance rules and regulations
implementing P.D. No. 1956 do not likewise allow
reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in
view of its primacy, We find the theory of petitioner that
such does not extend to the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable
expenditures, or use of government funds and properties,
but only to the promulgation of accounting and auditing rules
for, among others, such disallowance to be untenable in
the light of the provisions of the 1987 Constitution and
related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution
expressly provides:
Sec. 2(l). The Commission on Audit shall have the power,
authority, and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures
or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned
and controlled corporations with original charters, and on a
post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities;
(c) other government-owned or controlled corporations and
their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or
through the government, which are required by law or the
granting institution to submit to such audit as a condition of
subsidy or equity. However, where the internal control

system of the audited agencies is inadequate, the

Commission may adopt such measures, including temporary
or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts,
of the Government and, for such period as may be provided
by law, preserve the vouchers and other supporting papers
pertaining thereto.
(2)
The Commission shall have exclusive authority,
subject to the limitations in this Article, to define the scope of
its audit and examination, establish the techniques and
methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or, unconscionable expenditures, or
uses of government funds and properties.
These present powers, consistent with the declared
independence of the Commission, 30 are broader and more
extensive than that conferred by the 1973 Constitution.
Under the latter, the Commission was empowered to:
Examine, audit, and settle, in accordance with law and
regulations, all accounts pertaining to the revenues, and
receipts of, and expenditures or uses of funds and property,
owned or held in trust by, or pertaining to, the Government,
or any of its subdivisions, agencies, or instrumentalities
including government-owned or controlled corporations,
keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers
pertaining thereto; and promulgate accounting and auditing
rules and regulations including those for the prevention of
irregular,
unnecessary,
excessive,
or
extravagant
expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power
and authority of the COA's precursor, the General Auditing
Office, were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereof provided:
Sec. 2. The Auditor General shall examine, audit, and
settle all accounts pertaining to the revenues and receipts
from whatever source, including trust funds derived from
bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or
property pertaining to or held in trust by the Government or
the provinces or municipalities thereof. He shall keep the
general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor
General to bring to the attention of the proper administrative
officer expenditures of funds or property which, in his
opinion, are irregular, unnecessary, excessive, or
extravagant. He shall also perform such other functions as
may be prescribed by law.
As clearly shown above, in respect to irregular, unnecessary,
excessive or extravagant expenditures or uses of funds, the
1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same.
His was merely to bring that matter to the attention of the
proper administrative officer.

The ruling on this particular point, quoted by petitioner from

the cases of Guevarra vs. Gimenez 32 and Ramos vs.
Aquino, 33 are no longer controlling as the two (2) were
decided in the light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the
Auditor General under the 1935 Constitution and the
Commission on Audit under the 1973 Constitution authorized
them to disallow illegal expenditures of funds or uses of
funds and property. Our present Constitution retains that
same power and authority, further strengthened by the
definition of the COA's general jurisdiction in Section 26 of
the Government Auditing Code of the Philippines 34 and
Administrative Code of 1987. 35 Pursuant to its power to
promulgate accounting and auditing rules and regulations for
the prevention of irregular, unnecessary, excessive or
extravagant expenditures or uses of funds, 36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55.
Since the COA is responsible for the enforcement of the
rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment
of the proposed expenditure. As observed by one of the
Commissioners of the 1986 Constitutional Commission, Fr.
Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI,
Section 2, of the 1935 Constitution the Auditor General could
not correct "irregular, unnecessary, excessive or
extravagant" expenditures of public funds but could only
"bring [the matter] to the attention of the proper
administrative officer," under the 1987 Constitution, as also
under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations
including those for the prevention and disallowance of
irregular,
unnecessary,
excessive,
extravagant,
or
unconscionable expenditures or uses of government funds
and properties." Hence, since the Commission on Audit must
ultimately be responsible for the enforcement of these rules
and regulations, the failure to comply with these regulations
can be a ground for disapproving the payment of a proposed
expenditure.
Indeed, when the framers of the last two (2) Constitutions
conferred upon the COA a more active role and invested it
with broader and more extensive powers, they did not intend
merely to make the COA a toothless tiger, but rather
envisioned a dynamic, effective, efficient and independent
watchdog of the Government.

The issue of the financing charges boils down to the validity

of Department of Finance Circular No. 1-87, Department of
Finance Circular No. 4-88 and the implementing circulars of
the OEA, issued pursuant to Section 8, P.D. No. 1956, as
amended by E.O. No. 137, authorizing it to determine "other
factors" which may result in cost underrecovery and a
consequent reimbursement from the OPSF.
The Solicitor General maintains that, following the doctrine of
ejusdem generis, financing charges are not included in "cost

underrecovery" and, therefore, cannot be considered as one

of the "other factors." Section 8 of P.D. No. 1956, as
amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes.
Thus:
. . . "Cost underrecovery" shall include the following:
i.
Reduction in oil company takes as directed by the
Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil
companies at the time of the price change;
ii.
Reduction in internal ad valorem taxes as a result
of foregoing government mandated price reductions;
iii.
Other factors as may be determined by the
Ministry of Finance to result in cost underrecovery.
These "other factors" can include only those which are of the
same class or nature as the two specifically enumerated in
subparagraphs (i) and (ii). A common characteristic of both is
that they are in the nature of government mandated price
reductions. Hence, any other factor which seeks to be a part
of the enumeration, or which could qualify as a cost
underrecovery, must be of the same class or nature as those
specifically enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to
grant the Department of Finance broad and unrestricted
authority to determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general
words follow an enumeration of persons or things, by words
of a particular and specific meaning, such general words are
not to be construed in their widest extent, but are held to be
as applying only to persons or things of the same kind or
class as those specifically mentioned. 38 A reading of
subparagraphs (i) and (ii) easily discloses that they do not
have a common characteristic. The first relates to price
reduction as directed by the Board of Energy while the
second refers to reduction in internal ad valorem taxes.
Therefore, subparagraph (iii) cannot be limited by the
enumeration in these subparagraphs. What should be
considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the
Section which explicitly allows cost underrecovery only if
such were incurred as a result of the reduction of domestic
prices of petroleum products.
Although petitioner's financing losses, if indeed incurred,
may constitute cost underrecovery in the sense that such
were incurred as a result of the inability to fully offset
financing expenses from yields in money market
placements, they do not, however, fall under the foregoing
provision of P.D. No. 1956, as amended, because the same
did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the
decree, as amended, is further amended by Congress, this
Court can do nothing. The duty of this Court is not to

legislate, but to apply or interpret the law. Be that as it may,

this Court wishes to emphasize that as the facts in this case
have shown, it was at the behest of the Government that
petitioner refinanced its oil import payments from the normal
30-day trade credit to a maximum of 360 days. Petitioner
could be correct in its assertion that owing to the extended
period for payment, the financial institution which refinanced
said payments charged a higher interest, thereby resulting in
higher financing expenses for the petitioner. It would appear
then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any,
which may have been sustained because it accommodated
the request of the Government. Although under Section 29 of
the National Internal Revenue Code such losses may be
deducted from gross income, the effect of that loss would be
merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some
positive measures to help petitioner and others similarly
situated to obtain substantial relief. An amendment, as
aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of
"unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an
undue delegation of legislative power, it clearly appearing
that the subject provision does not provide any standard for
the exercise of the authority. It is a fundamental rule that
delegation of legislative power may be sustained only upon
the ground that some standard for its exercise is provided
and that the legislature, in making the delegation, has
prescribed the manner of the exercise of the delegated
authority. 39
Finally, whether petitioner gained or lost by reason of the
extensive credit is rendered irrelevant by reason of the
foregoing disquisitions. It may nevertheless be stated that
petitioner failed to disprove COA's claim that it had in fact
gained in the process. Otherwise stated, petitioner failed to
sufficiently show that it incurred a loss. Such being the case,
how can petitioner claim for reimbursement? It cannot have
its cake and eat it too.
II.
Anent the claims arising from sales to the National
Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that
underrecovery arising from sales to NPC are reimbursable
because NPC was granted full exemption from the payment
of taxes; to prove this, respondents trace the laws providing
for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24
June 1987 which provides, in part, "that the tax and duty
exemption privileges of the National Power Corporation,
including those pertaining to its domestic purchases of
petroleum and petroleum products . . . are restored effective
March 10, 1987." In a Memorandum issued on 5 October
1987 by the Office of the President, NPC's tax exemption
was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to
exempt sales of petroleum products to the NPC is evident in
the recently passed Republic Act No. 6952 establishing the

Petroleum Price Standby Fund to support the OPSF. 41 The

pertinent part of Section 2, Republic Act No. 6952 provides:

adjustments and/or changes in world market prices of crude

oil and imported petroleum product's; and

Sec. 2. Application of the Fund shall be subject to the

following conditions:

c.
LOI 1416 caused the "suspension of all taxes,
duties, fees, imposts and other charges, whether direct or
indirect, due and payable by the copper mining companies in
distress to the Notional and Local Governments . . ." On the
other hand, OPSF dues are not payable by (sic) distressed
copper companies but by oil companies. It is to be noted that
the copper mining companies do not pay OPSF dues.
Rather, such imposts are built in or already incorporated in
the prices of oil products. 44

(1)
That the Fund shall be used to reimburse the oil
companies for (a) cost increases of imported crude oil and
finished petroleum products resulting from foreign exchange
rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel
oil sales to the National Power Corporation (NPC); and (c)
other cost underrecoveries incurred as may be finally
decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of
petroleum products to the National Power Corporation.
III.
With respect to its claim for reimbursement on
sales to ATLAS and MARCOPPER, petitioner relies on Letter
of Instruction (LOI) 1416, dated 17 July 1984, which ordered
the suspension of payments of all taxes, duties, fees and
other charges, whether direct or indirect, due and payable by
the copper mining companies in distress to the national
government. Pursuant to this LOI, then Minister of Energy,
Hon. Geronimo Velasco, issued Memorandum Circular No.
84-11-22 advising the oil companies that Atlas Consolidated
Mining Corporation and Marcopper Mining Corporation are
among those declared to be in distress.
In denying the claims arising from sales to ATLAS and
MARCOPPER, the COA, in its 18 August 1989 letter to
Executive Director Wenceslao R. de la Paz, states that "it is
our opinion that LOI 1416 which implements the exemption
from payment of OPSF imposts as effected by OEA has no
legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI
(CALTEX) (Caltex) has no authority to claim reimbursement
for this uncollected impost because LOI 1416 dated July 17,
1984, . . . was issued when OPSF was not yet in existence
and could not have contemplated OPSF imposts at the time
of its formulation." 43 It is further stated that: "Moreover, it is
evident that OPSF was not created to aid distressed mining
companies but rather to help the domestic oil industry by
stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain
that LOI 1416 could not have intended to exempt said
distressed mining companies from the payment of OPSF
dues for the following reasons:
a.
LOI 1416 granting the alleged exemption was
issued on July 17, 1984. P.D. 1956 creating the OPSF was
promulgated on October 10, 1984, while E.O. 137, amending
P.D. 1956, was issued on February 25, 1987.
b.
LOI 1416 was issued in 1984 to assist distressed
copper mining companies in line with the government's effort
to prevent the collapse of the copper industry. P.D No. 1956,
as amended, was issued for the purpose of minimizing
frequent price changes brought about by exchange rate

Lastly, respondents allege that while LOI 1416 suspends the

payment of taxes by distressed mining companies, it does
not accord petitioner the same privilege with respect to its
obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside
from such reasons, however, it is apparent that LOI 1416
was never published in the Official Gazette 45 as required by
Article 2 of the Civil Code, which reads:
Laws shall take effect after fifteen days following the
completion of their publication in the Official Gazette, unless
it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of
Taada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to
publish in the Official Gazette all unpublished presidential
issuances which are of general application, and unless so
published they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision,
this Court, in its Resolution promulgated on 29 December
1986, 47 ruled:
We hold therefore that all statutes, including those of local
application and private laws, shall be published as a
condition for their effectivity, which shall begin fifteen days
after publication unless a different effectivity date is fixed by
the legislature.

Covered by this rule are presidential decrees and executive

orders promulgated by the President in the exercise of
legislative powers whenever the same are validly delegated
by the legislature or, at present, directly conferred by the
Constitution. Administrative rules and regulations must also
be published if their purpose is to enforce or implement
existing laws pursuant also to a valid delegation.
WHEREFORE, it is hereby declared that all laws as above
defined shall immediately upon their approval, or as soon
thereafter as possible, be published in full in the Official
Gazette, to become effective only after fifteen days from
their publication, or on another date specified by the
legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was

never published in the Official Gazette after its issuance or at
any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by
Executive Order No. 200, issued on 18 June 1987. As
amended, the said provision now reads:
Laws shall take effect after fifteen days following the
completion of their publication either in the Official Gazette
or in a newspaper of general circulation in the Philippines,
unless it is otherwise provided.
We are not aware of the publication of LOI 1416 in any
newspaper of general circulation pursuant to Executive
Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has
force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against
the grantee and liberally in favor of the taxing authority. 48
The burden of proof rests upon the party claiming exemption
to prove that it is in fact covered by the exemption so
claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be
within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled,

as a consequence of its sales to ATLAS and MARCOPPER,
to claim reimbursement from the OPSF under LOI 1416.
Though LOI 1416 may suspend the payment of taxes by
copper mining companies, it does not give petitioner the
same privilege with respect to the payment of OPSF dues.
IV.
As to COA's disallowance of the amount of
P130,420,235.00, petitioner maintains that the Department
of Finance has still to issue a final and definitive ruling
thereon; accordingly, it was premature for COA to disallow it.
By doing so, the latter acted beyond its jurisdiction. 49
Respondents, on the other hand, contend that said amount
was already disallowed by the OEA for failure to substantiate
it. 50 In fact, when OEA submitted the claims of petitioner for
pre-audit, the abovementioned amount was already
excluded.
An examination of the records of this case shows that
petitioner failed to prove or substantiate its contention that
the amount of P130,420,235.00 is still pending before the
OEA and the DOF. Additionally, We find no reason to doubt
the submission of respondents that said amount has already
been passed upon by the OEA. Hence, the ruling of
respondent COA disapproving said claim must be upheld.
V.
The last issue to be resolved in this case is
whether or not the amounts due to the OPSF from petitioner
may be offset against petitioner's outstanding claims from
said fund. Petitioner contends that it should be allowed to
offset its claims from the OPSF against its contributions to
the fund as this has been allowed in the past, particularly in
the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the

provisions of the New Civil Code on compensation and
Section 21, Book V, Title I-B of the Revised Administrative
Code which provides for "Retention of Money for Satisfaction
of Indebtedness to Government." 52 Petitioner also mentions
communications from the Board of Energy and the
Department of Finance that supposedly authorize
compensation.
Respondents, on the other hand, citing Francia vs. IAC and
Fernandez, 53 contend that there can be no offsetting of
taxes against the claims that a taxpayer may have against
the government, as taxes do not arise from contracts or
depend upon the will of the taxpayer, but are imposed by
law. Respondents also allege that petitioner's reliance on
Section 21, Book V, Title I-B of the Revised Administrative
Code, is misplaced because "while this provision empowers
the COA to withhold payment of a government indebtedness
to a person who is also indebted to the government and
apply the government indebtedness to the satisfaction of the
obligation of the person to the government, like authority or
right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner
of Internal Revenue vs. Algue, Inc., 55 is that money due the
government, either in the form of taxes or other dues, is its
lifeblood and should be collected without hindrance. Thus,
instead of giving petitioner a reason for compensation or setoff, the Revised Administrative Code makes it the
respondents' duty to collect petitioner's indebtedness to the
OPSF.
Refuting respondents' contention, petitioner claims that the
amounts due from it do not arise as a result of taxation
because "P.D. 1956, amended, did not create a source of
taxation; it instead established a special fund . . .," 56 and
that the OPSF contributions do not go to the general fund of
the state and are not used for public purpose, i.e., not for the
support of the government, the administration of law, or the
payment of public expenses. This alleged lack of a public
purpose behind OPSF exactions distinguishes such from a
tax. Hence, the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum

Price Standby Fund to support the OPSF; the said law
provides in part that:
Sec. 2. Application of the fund shall be subject to the
following conditions:
(3)
That no amount of the Petroleum Price Standby
Fund shall be used to pay any oil company which has an
outstanding obligation to the Government without said
obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.
We find no merit in petitioner's contention that the OPSF
contributions are not for a public purpose because they go to
a special fund of the government. Taxation is no longer
envisioned as a measure merely to raise revenue to support

the existence of the government; taxes may be levied with a

regulatory purpose to provide means for the rehabilitation
and stabilization of a threatened industry which is affected
with public interest as to be within the police power of the
state. 57 There can be no doubt that the oil industry is
greatly imbued with public interest as it vitally affects the
general welfare. Any unregulated increase in oil prices could
hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in
terms of, among others, demands for wage increases and
upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the
state, via its police power, may properly address.

offset their claims against their OPSF contributions. Instead,

it prohibits the government from paying any amount from the
Petroleum Price Standby Fund to oil companies which have
outstanding obligations with the government, without said
obligation being offset first subject to the rules on
compensation in the Civil Code.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly

provides that the source of OPSF is taxation. No amount of
semantical juggleries could dim this fact.

With costs against petitioner.

It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. 58 Taxes
cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be setoff. 59
We may even further state that technically, in respect to the
taxes for the OPSF, the oil companies merely act as agents
for the Government in the latter's collection since the taxes
are, in reality, passed unto the end-users the consuming
public. In that capacity, the petitioner, as one of such
companies, has the primary obligation to account for and
remit the taxes collected to the administrator of the OPSF.
This duty stems from the fiduciary relationship between the
two; petitioner certainly cannot be considered merely as a
debtor. In respect, therefore, to its collection for the OPSF
vis-a-vis its claims for reimbursement, no compensation is
likewise legally feasible. Firstly, the Government and the
petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that
petitioner's claim is already due and liquidated. Under Article
1279 of the Civil Code, in order that compensation may be
proper, it is necessary that:
(1)
each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2)
both debts consist in a sum of :money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3)

the two (2) debts be due;

(4)

they be liquidated and demandable;

(5)
over neither of them there be any retention or
controversy,
commenced
by
third
persons
and
communicated in due time to the debtor.
That compensation had been the practice in the past can set
no valid precedent. Such a practice has no legal basis.
Lastly, R.A. No. 6952 does not authorize oil companies to

WHEREFORE, in view of the foregoing, judgment is hereby

rendered AFFIRMING the challenged decision of the
Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising
from sales to the National Power Corporation, which is
hereby allowed.

SO ORDERED.

G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal

Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of
the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate
Estate of the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for
petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the
Judge of the Court of First Instance of Leyte, Ron. Lorenzo
C. Garlitos, presiding, seeking to annul certain orders of the
court and for an order in this Court directing the respondent
court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for
internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court
declared as final and executory the order for the payment by
the estate of the estate and inheritance taxes, charges and
penalties, amounting to P40,058.55, issued by the Court of
First Instance of Leyte in, special proceedings No. 14
entitled "In the matter of the Intestate Estate of the Late
Walter Scott Price." In order to enforce the claims against
the estate the fiscal presented a petition dated June 21,
1961, to the court below for the execution of the judgment.
The petition was, however, denied by the court which held
that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of

P262,200. The orders of the court below dated August 20,

1960 and September 28, 1960, respectively, are as follows:

contained in Rule 90, section 7, should be complied

with.1wph1.t

Atty. Benedicto submitted a copy of the contract between

Mrs. Simeona K. Price, Administratrix of the estate of her
late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacaang to Executive Secretary De Leon
dated December 14, 1956, the note of His Excellency, Pres.
Carlos P. Garcia, to Director Castrillo dated August 2, 1958,
directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act
No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by
the administratrix Simeona K. Price, as directed in the above
note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in accordance
with the order of the Supreme Court promulgated July 30,
1960 in G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona
K. Price, in this estate, the balance to be paid by the
Government to her without further delay. (Order of August
20, 1960)

Execution may issue only where the devisees, legatees or

heirs have entered into possession of their respective
portions in the estate prior to settlement and payment of the
debts and expenses of administration and it is later
ascertained that there are such debts and expenses to be
paid, in which case "the court having jurisdiction of the estate
may, by order for that purpose, after hearing, settle the
amount of their several liabilities, and order how much and in
what manner each person shall contribute, and may issue
execution if circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.

The Court has nothing further to add to its order dated

August 20, 1960 and it orders that the payment of the claim
of the Collector of Internal Revenue be deferred until the
Government shall have paid its accounts to the
administratrix herein amounting to P262,200.00. It may not
be amiss to repeat that it is only fair for the Government, as
a debtor, to its accounts to its citizens-creditors before it can
insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the
Government draws interests while the credit due to the
present state does not accrue any interest. (Order of
September 28, 1960)
The petition to set aside the above orders of the court below
and for the execution of the claim of the Government against
the estate must be denied for lack of merit. The ordinary
procedure by which to settle claims of indebtedness against
the estate of a deceased person, as an inheritance tax, is for
the claimant to present a claim before the probate court so
that said court may order the administrator to pay the
amount thereof. To such effect is the decision of this Court in
Aldamiz vs. Judge of the Court of First Instance of Mindoro,
G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed
by the Rules of Court for the payment of debts and expenses
of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of
real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs
legatees and devisees residing in the Philippines, according
to Rule 89, section 3, and Rule 90, section 2. And when sale
or mortgage of real estate is to be made, the regulations

The legal basis for such a procedure is the fact that in the
testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are
under the jurisdiction of the court and such jurisdiction
continues until said properties have been distributed among
the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court
judgment, to seize the properties but to ask the court for an
order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial
fiscal is the fact that the court having jurisdiction of the estate
had found that the claim of the estate against the
Government has been recognized and an amount of
P262,200 has already been appropriated for the purpose by
a corresponding law (Rep. Act No. 2700). Under the above
circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable is
well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279
are present, compensation takes effect by operation of law,
and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the
compensation.
It is clear, therefore, that the petitioner has no clear right to
execute the judgment for taxes against the estate of the
deceased Walter Scott Price. Furthermore, the petition for
certiorari and mandamus is not the proper remedy for the
petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

G.R. No. L-10405

December 29, 1960

WENCESLAO PASCUAL, in his official capacity

Provincial Governor of Rizal, petitioner-appellant,

as

vs.
THE
SECRETARY
OF
PUBLIC
WORKS
COMMUNICATIONS, ET AL., respondents-appellees.

AND

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and
Solicitor A. A. Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of
the Court of First Instance of Rizal, dismissing the above
entitled case and dissolving the writ of preliminary injunction
therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as
Provincial Governor of Rizal, instituted this action for
declaratory relief, with injunction, upon the ground that
Republic Act No. 920, entitled "An Act Appropriating Funds
for Public Works", approved on June 20, 1953, contained, in
section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the
construction,
reconstruction,
repair, extension
and
improvement" of Pasig feeder road terminals (Gen. Roxas
Gen. Araneta Gen. Lucban Gen. Capinpin Gen.
Segundo Gen. Delgado Gen. Malvar Gen. Lim)";
that, at the time of the passage and approval of said Act, the
aforementioned feeder roads were "nothing but projected
and planned subdivision roads, not yet constructed, . . .
within the Antonio Subdivision . . . situated at . . . Pasig,
Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from
the intersection between the latter and Highway 54), which
projected feeder roads "do not connect any government
property or any important premises to the main highway";
that the aforementioned Antonio Subdivision (as well as the
lands on which said feeder roads were to be construed)
were private properties of respondent Jose C. Zulueta, who,
at the time of the passage and approval of said Act, was a
member of the Senate of the Philippines; that on May, 1953,
respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected
feeder roads to the municipality of Pasig, Rizal; that, on June
13, 1953, the offer was accepted by the council, subject to
the condition "that the donor would submit a plan of the said
roads and agree to change the names of two of them"; that
no deed of donation in favor of the municipality of Pasig was,
however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention
to the approval of Republic Act. No. 920, and the sum of
P85,000.00 appropriated therein for the construction of the
projected feeder roads in question; that the municipal council
of Pasig endorsed said letter of respondent Zulueta to the
District Engineer of Rizal, who, up to the present "has not
made any endorsement thereon" that inasmuch as the
projected feeder roads in question were private property at
the time of the passage and approval of Republic Act No.
920, the appropriation of P85,000.00 therein made, for the
construction,
reconstruction,
repair, extension
and
improvement of said projected feeder roads, was illegal and,

therefore, void ab initio"; that said appropriation of

P85,000.00 was made by Congress because its members
were made to believe that the projected feeder roads in
question were "public roads and not private streets of a
private subdivision"'; that, "in order to give a semblance of
legality, when there is absolutely none, to the
aforementioned
appropriation",
respondents
Zulueta
executed on December 12, 1953, while he was a member of
the Senate of the Philippines, an alleged deed of donation
copy of which is annexed to the petition of the four (4)
parcels of land constituting said projected feeder roads, in
favor of the Government of the Republic of the Philippines;
that said alleged deed of donation was, on the same date,
accepted by the then Executive Secretary; that being subject
to an onerous condition, said donation partook of the nature
of a contract; that, such, said donation violated the provision
of our fundamental law prohibiting members of Congress
from being directly or indirectly financially interested in any
contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the
construction of the projected feeder roads in question with
public funds would greatly enhance or increase the value of
the aforementioned subdivision of respondent Zulueta,
"aside from relieving him from the burden of constructing his
subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that,
unless restrained by the court, the respondents would
continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable
damage, detriment and prejudice not only to the petitioner
but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of
Republic Act No. 920 be declared null and void; that the
alleged deed of donation of the feeder roads in question be
"declared unconstitutional and, therefor, illegal"; that a writ of
injunction be issued enjoining the Secretary of Public Works
and Communications, the Director of the Bureau of Public
Works and Highways and Jose C. Zulueta from ordering or
allowing the continuance of the above-mentioned feeder
roads project, and from making and securing any new and
further releases on the aforementioned item of Republic Act
No. 920, and the disbursing officers of the Department of
Public Works and Highways from making any further
payments out of said funds provided for in Republic Act No.
920; and that pending final hearing on the merits, a writ of
preliminary
injunction
be
issued
enjoining
the
aforementioned parties respondent from making and
securing any new and further releases on the aforesaid item
of Republic Act No. 920 and from making any further
payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground
that petitioner had "no legal capacity to sue", and that the
petition did "not state a cause of action". In support to this
motion, respondent Zulueta alleged that the Provincial Fiscal
of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised
Administrative Code; that said respondent is " not aware of
any law which makes illegal the appropriation of public funds

for the improvements of . . . private property"; and that, the

constitutional provision invoked by petitioner is inapplicable
to the donation in question, the same being a pure act of
liberality, not a contract. The other respondents, in turn,
maintained that petitioner could not assail the appropriation
in question because "there is no actual bona fide case . . . in
which the validity of Republic Act No. 920 is necessarily
involved" and petitioner "has not shown that he has a
personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court
rendered the aforementioned decision, dated October 29,
1953, holding that, since public interest is involved in this
case, the Provincial Governor of Rizal and the provincial
fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed
item of Republic Act No. 920; that "the legislature is without
power appropriate public revenues for anything but a public
purpose", that the instructions and improvement of the
feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject
to the following condition:
The within donation is hereby made upon the condition that
the Government of the Republic of the Philippines will use
the parcels of land hereby donated for street purposes only
and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of
the Philippines violate the condition hereby imposed upon it,
the title to the land hereby donated shall, upon such
violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that
said donation or contract is "absolutely forbidden by the
Constitution" and consequently "illegal", for Article 1409 of
the Civil Code of the Philippines, declares in existence and
void from the very beginning contracts "whose cause,
objector purpose is contrary to law, morals . . . or public
policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his
"interest are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld"
and the case dismissed.
At the outset, it should be noted that we are concerned with
a decision granting the aforementioned motions to dismiss,
which as much, are deemed to have admitted hypothetically
the allegations of fact made in the petition of appellant
herein. According to said petition, respondent Zulueta is the
owner of several parcels of residential land situated in Pasig,
Rizal, and known as the Antonio Subdivision, certain
portions of which had been reserved for the projected feeder
roads aforementioned, which, admittedly, were private
property of said respondent when Republic Act No. 920,
appropriating
P85,000.00
for
the
"construction,
reconstruction, repair, extension and improvement" of said
roads, was passed by Congress, as well as when it was
approved by the President on June 20, 1953. The petition
further alleges that the construction of said roads, to be

undertaken with the aforementioned appropriation of

P85,000.00, would have the effect of relieving respondent
Zulueta of the burden of constructing his subdivision streets
or roads at his own expenses, 1and would "greatly enhance
or increase the value of the subdivision" of said respondent.
The lower court held that under these circumstances, the
appropriation in question was "clearly for a private, not a
public purpose."
Respondents do not deny the accuracy of this conclusion,
which is self-evident. 2However, respondent Zulueta
contended, in his motion to dismiss that:
A law passed by Congress and approved by the President
can never be illegal because Congress is the source of all
laws . . . Aside from the fact that movant is not aware of any
law which makes illegal the appropriation of public funds for
the improvement of what we, in the meantime, may assume
as private property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it
being inconsistent with the nature of the Government
established under the Constitution of the Republic of the
Philippines and the system of checks and balances
underlying our political structure. Moreover, it is refuted by
the decisions of this Court invalidating legislative enactments
deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds
for a public purpose, the principle according to Ruling Case
Law, is this:
It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose.
. . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interest to be affected nor
the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately
benefited by their promotion. Incidental to the public or to the
state, which results from the promotion of private interest
and the prosperity of private enterprises or business, does
not justify their aid by the use public money. (25 R.L.C. pp.
398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the
following language:
In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed supra sec. 14,
money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals.
(85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris
Secundum states:
Generally, under the express or implied provisions of the
constitution, public funds may be used only for public
purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and

prohibiting the collection of a tax for one purpose and the

devotion thereof to another purpose, no appropriation of
state funds can be made for other than for a public purpose.
The test of the constitutionality of a statute requiring the use
of public funds is whether the statute is designed to promote
the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to
individuals might incidentally serve the public. (81 C.J.S. pp.
1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the
foregoing views which, apart from being patently sound, are
a necessary corollary to our democratic system of
government, which, as such, exists primarily for the
promotion of the general welfare. Besides, reflecting as they
do, the established jurisprudence in the United States, after
whose constitutional system ours has been patterned, said
views and jurisprudence are, likewise, part and parcel of our
own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to
uphold the appropriation in question, upon the ground that
petitioner may not contest the legality of the donation above
referred to because the same does not affect him directly.
This conclusion is, presumably, based upon the following
premises, namely: (1) that, if valid, said donation cured the
constitutional infirmity of the aforementioned appropriation;
(2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3)
that the rule set forth in Article 1421 of the Civil Code is
absolute, and admits of no exception. We do not agree with
these premises.
The validity of a statute depends upon the powers of
Congress at the time of its passage or approval, not upon
events occurring, or acts performed, subsequently thereto,
unless the latter consists of an amendment of the organic
law, removing, with retrospective operation, the constitutional
limitation infringed by said statute. Referring to the
P85,000.00 appropriation for the projected feeder roads in
question, the legality thereof depended upon whether said
roads were public or private property when the bill, which,
latter on, became Republic Act 920, was passed by
Congress, or, when said bill was approved by the President
and the disbursement of said sum became effective, or on
June 20, 1953 (see section 13 of said Act). Inasmuch as the
land on which the projected feeder roads were to be
constructed belonged then to respondent Zulueta, the result
is that said appropriation sought a private purpose, and
hence, was null and void. 4 The donation to the
Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the
purpose of giving a "semblance of legality", or legalizing, the
appropriation in question, did not cure its aforementioned
basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other
statutory enactments, is subject to exceptions. For instance,

the creditors of a party to an illegal contract may, under the

conditions set forth in Article 1177 of said Code, exercise the
rights and actions of the latter, except only those which are
inherent in his person, including therefore, his right to the
annulment of said contract, even though such creditors are
not affected by the same, except indirectly, in the manner
indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be
contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many
decisions nullifying, at the instance of taxpayers, laws
providing for the disbursement of public funds, 5upon the
theory that "the expenditure of public funds by an officer of
the State for the purpose of administering an unconstitutional
act constitutes a misapplication of such funds," which may
be enjoined at the request of a taxpayer. 6Although there are
some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as
follows:
In the determination of the degree of interest essential to
give the requisite standing to attack the constitutionality of a
statute, the general rule is that not only persons individually
affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by
taxation and may therefore question the constitutionality of
statutes requiring expenditure of public moneys. (11 Am. Jur.
761; emphasis supplied.)
However, this view was not favored by the Supreme Court of
the U.S. in Frothingham vs. Mellon (262 U.S. 447), insofar
as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal
Government is different from that of a taxpayer of a
municipal corporation to its government. Indeed, under the
composite system of government existing in the U.S., the
states of the Union are integral part of the Federation from
an international viewpoint, but, each state enjoys internally a
substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was
made by representatives of each state of the Union, not of
the people of the U.S., except insofar as the former
represented the people of the respective States, and the
people of each State has, independently of that of the
others, ratified said Constitution. In other words, the Federal
Constitution and the Federal statutes have become binding
upon the people of the U.S. in consequence of an act of,
and, in this sense, through the respective states of the Union
of which they are citizens. The peculiar nature of the relation
between said people and the Federal Government of the
U.S. is reflected in the election of its President, who is
chosen directly, not by the people of the U.S., but by electors
chosen by each State, in such manner as the legislature
thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net
The relation between the people of the Philippines and its
taxpayers, on the other hand, and the Republic of the
Philippines, on the other, is not identical to that obtaining
between the people and taxpayers of the U.S. and its

Federal Government. It is closer, from a domestic viewpoint,

to that existing between the people and taxpayers of each
state and the government thereof, except that the authority
of the Republic of the Philippines over the people of the
Philippines is more fully direct than that of the states of the
Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those
imposed by the Federal Constitution upon the states of the
Union, and those imposed upon the Federal Government in
the interest of the Union. For this reason, the rule
recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state
public funds which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601)
has greater application in the Philippines than that adopted
with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257),
involving the expropriation of a land by the Province of
Tayabas, two (2) taxpayers thereof were allowed to intervene
for the purpose of contesting the price being paid to the
owner thereof, as unduly exorbitant. It is true that in Custodio
vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer
and employee of the Government was not permitted to
question the constitutionality of an appropriation for backpay
of members of Congress. However, in Rodriguez vs.
Treasurer of the Philippines and Barredo vs. Commission on
Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained
the action of taxpayers impugning the validity of certain
appropriations of public funds, and invalidated the same.
Moreover, the reason that impelled this Court to take such
position in said two (2) cases the importance of the issues
therein raised is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner
herein is not merely a taxpayer. The Province of Rizal, which
he represents officially as its Provincial Governor, is our most
populated political subdivision, 8and, the taxpayers therein
bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the circumstances
surrounding this case sufficiently justify petitioners action in
contesting the appropriation and donation in question; that
this action should not have been dismissed by the lower
court; and that the writ of preliminary injunction should have
been maintained.
Wherefore, the decision appealed from is hereby reversed,
and the records are remanded to the lower court for further
proceedings not inconsistent with this decision, with the
costs of this instance against respondent Jose C. Zulueta. It
is so ordered.

G.R. No. 165109

December 14, 2009

MANUEL N. MAMBA, RAYMUND

LEONIDES N. FAUSTO, Petitioners,

P. GUZMAN

and

vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O.
PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A.
AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA,
BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS,
PREFERRED VENTURES CORP., ASSET BUILDERS
CORP., RIZAL COMMERCIAL BANKING CORPORATION,
MALAYAN INSURANCE CO., and LAND BANK OF THE
PHILIPPINES, Respondents.
DECISION
DEL CASTILLO, J.:
The decision to entertain a taxpayers suit is discretionary
upon the Court. It can choose to strictly apply the rule or take
a liberal stance depending on the controversy involved.
Advocates for a strict application of the rule believe that
leniency would open floodgates to numerous suits, which
could hamper the government from performing its job. Such
possibility, however, is not only remote but also negligible
compared to what is at stake - "the lifeblood of the State".
For this reason, when the issue hinges on the illegal
disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a
Temporary Restraining Order/Writ of Preliminary Injunction,
under Rule 45 of the Rules of Court, seeks to set aside the
April 27, 2004 Order 1 of the Regional Trial Court (RTC),
Branch 5, Tuguegarao City, dismissing the Petition for
Annulment of Contracts and Injunction with prayer for the
issuance of a Temporary Restraining Order/Writ of
Preliminary Injunction, 2 docketed as Civil Case No. 6283.
Likewise assailed in this Petition is the August 20, 2004
Resolution 3 of RTC, Branch 1, Tuguegarao City denying the
Motion for Reconsideration of the dismissal.
Factual Antecedents

On November 5, 2001, the Sangguniang Panlalawigan of

Cagayan passed Resolution No. 2001-272 4 authorizing
Governor Edgar R. Lara (Gov. Lara) to engage the services
of and appoint Preferred Ventures Corporation as financial
advisor or consultant for the issuance and flotation of bonds
to fund the priority projects of the governor without cost and
commitment.
On November 19, 2001, the Sangguniang Panlalawigan,
through Resolution No. 290-2001, 5 ratified the
Memorandum of Agreement (MOA) 6 entered into by Gov.
Lara and Preferred Ventures Corporation. The MOA
provided that the provincial government of Cagayan shall
pay Preferred Ventures Corporation a one-time fee of 3% of
the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan
approved Resolution No. 2002-061-A 7 authorizing Gov.
Lara to negotiate, sign and execute contracts or agreements

pertinent to the flotation of the bonds of the provincial

government in an amount not to exceed P500 million for the
construction and improvement of priority projects to be
approved by the Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the
Sangguniang Panlalawigan of Cagayan approved Ordinance
No. 19-2002, 8 authorizing the bond flotation of the
provincial government in an amount not to exceed P500
million to fund the construction and development of the new
Cagayan Town Center. The Resolution likewise granted
authority to Gov. Lara to negotiate, sign and execute
contracts and agreements necessary and related to the bond
flotation subject to the approval and ratification by the
Sangguniang Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan
approved Resolution No. 350-2003 9 ratifying the Cagayan
Provincial Bond Agreements entered into by the provincial
government, represented by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking
Corporation (RCBC) Trust and Investment Division and
Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC
and the Land Bank of the Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC
Trust and Investment Division.
d. Guarantee Agreement with the RCBC Trust and
Investment Division and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved
Resolution No. 351-2003, 10 ratifying the Agreement for the
Planning, Design, Construction, and Site Development of the
New Cagayan Town Center 11 entered into by the provincial
government, represented by Gov. Lara and Asset Builders
Corporation, represented by its President, Mr. Rogelio P.
Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to
Asset Builders Corporation, giving to the latter the planning,
design, construction and site development of the town center
project for a fee of P213,795,732.39. 12
Proceedings before the Regional Trial Court
On December 12, 2003, petitioners Manuel N. Mamba,
Raymund P. Guzman and Leonides N. Fausto filed a Petition
for Annulment of Contracts and Injunction with prayer for a
Temporary Restraining Order/Writ of Preliminary Injunction
13 against Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O.
Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep,
Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui,
Cecilia Maeve T. Layos, Preferred Ventures Corporation,
Asset Builders Corporation, RCBC, MICO and LBP.1avvphi1

At the time of the filing of the petition, Manuel N. Mamba was

the Representative of the 3rd Congressional District of the
province of Cagayan 14 while Raymund P. Guzman and
Leonides N. Fausto were members of the Sangguniang
Panlalawigan of Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of
Cagayan, 16 while Jenerwin C. Bacuyag, Wilson O.
Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep,
Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui
and Cecilia Maeve T. Layos were sued as members of the
Sangguniang Panlalawigan of Cagayan. 17 Respondents
Preferred Ventures Corporation, Asset Builders Corporation,
RCBC, MICO and LBP were all impleaded as indispensable
or necessary parties.
Respondent Preferred Ventures Corporation is the financial
advisor of the province of Cagayan regarding the bond
flotation undertaken by the province. 18 Respondent Asset
Builders Corporation was awarded the right to plan, design,
construct and develop the proposed town center. 19
Respondent RCBC, through its Trust and Investment
Division, is the trustee of the seven-year bond flotation
undertaken by the province for the construction of the town
center, 20 while respondent MICO is the guarantor. 21
Lastly, respondent LBP is the official depositary bank of the
province. 22
In response to the petition, public respondents filed an
Answer with Motion to Dismiss, 23 raising the following
defenses: a) petitioners are not the proper parties or they
lack locus standi in court; b) the action is barred by the rule
on state immunity from suit and c) the issues raised are not
justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed
a Motion to Dismiss 24 on the following grounds: a)
petitioners have no cause of action for injunction; b) failure to
join an indispensable party; c) lack of personality to sue and
d) lack of locus standi. Respondent MICO likewise filed a
Motion to Dismiss 25 raising the grounds of lack of cause of
action and legal standing. Respondent RCBC similarly
argued in its Motion to Dismiss 26 that: a) petitioners are not
the real parties-in-interest or have no legal standing to
institute the petition; b) petitioners have no cause of action
as the flotation of the bonds are within the right and power of
both respondent RCBC and the province of Cagayan and c)
the viability of the construction of a town center is not a
justiciable question but a political question.
Respondent Asset Builders Corporation, on the other hand,
filed an Answer 27 interposing special and affirmative
defenses of lack of legal standing and cause of action.
Respondent LBP also filed an Answer 28 alleging in the
main that petitioners have no cause of action against it as it
is not an indispensable party or a necessary party to the
case.
Two days after the filing of respondents respective
memoranda on the issues raised during the hearing of the
special and/or affirmative defenses, petitioners filed a Motion

to Admit Amended Petition 29 attaching thereto the amended

petition. 30 Public respondents opposed the motion for the
following reasons: 1) the motion was belatedly filed; 2) the
Amended Petition is not sufficient in form and in substance;
3) the motion is patently dilatory and 4) the Amended
Petition was filed to cure the defect in the original petition. 31
Petitioners also filed a Consolidated Opposition to the
Motion to Dismiss 32 followed by supplemental pleadings 33
in support of their prayer for a writ of preliminary injunction.
On April 27, 2004, the RTC issued the assailed Order
denying the Motion to Admit Amended Petition and
dismissing the petition for lack of cause of action. It ruled
that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of
Civil Procedure dealing on the filing of an amended pleading
is quite clear. As such, the Court rules that the motion was
belatedly filed. The granting of leave to file amended
pleadings is a matter peculiarly within the sound discretion of
the trial court. But the rule allowing amendments to
pleadings is subject to the general but inflexible limitation
that the cause of action or defense shall not be substantially
changed or the theory of the case altered to the prejudice of
the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable
issues which this Court may take cognizance of, petitioners
in the present case who presumably presented legitimate
interests in the controversy are not parties to the questioned
contract. Contracts produce effect as between the parties
who execute them. Only a party to the contract can maintain
an action to enforce the obligations arising under said
contract (Young vs. CA, 169 SCRA 213). Since a contract is
binding only upon the parties thereto, a third person cannot
ask for its rescission if it is in fraud of his rights. One who is
not a party to a contract has no rights under such contract
and even if the contrary may be voidable, its nullity can be
asserted only by one who is a party thereto; a third person
would have absolutely no personality to ask for the
annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340;
Ibaez vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson
vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party
obliged principally or subsidiarily in a contract may exercise
an action for nullity of the contract if he is prejudiced in his
rights with respect to one of the contracting parties and can
show the detriment which would positively result to him from
the contract in which he had no intervention (Baez vs. CA,
59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113;
Leodovica vs. CA, 65 SCRA 154-155). In the case at bar,
petitioners failed to show that they were prejudiced in their
rights [or that a] detriment x x x would positively result to
them. Hence, they lack locus standi in court.
To the mind of the Court, procedural matters in the present
controversy may be dispensed with, stressing that the
instant case is a political question, a question which the
court cannot, in any manner, take judicial cognizance. Courts

will not interfere with purely political questions because of

the principle of separation of powers (Taada vs. Cuenco,
103 Phil. 1051). Political questions are those questions
which, under the Constitution, are to be decided by the
people in their sovereign capacity or in regard to which full
discretionary authority has been delegated to the legislative
or [to the] executive branch of the government (Nuclear Free
Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs.
Gonzales, 152 SCRA 272; Citizens Alliance for Consumer
Protection vs. Energy Regulatory Board, G.R. No. 78888-90,
June 23, 1988).
The citation made by the provincial government[, to] which
this Court is inclined to agree, is that the matter falls under
the discretion of another department, hence the decision
reached is in the category of a political question and
consequently may not be the subject of judicial jurisdiction
(Cruz in Political Law, 1998 Ed., page 81) is correct.
It is [a] well-recognized principle that purely administrative
and discretionary functions may not be interfered with by the
courts (Adm. Law Test & Cases, 2001 Ed., De Leon, De
Leon, Jr.).
The case therefore calls for the doctrine of ripeness for
judicial review. This determines the point at which courts
may review administrative action. The basic principle of
ripeness is that the judicial machinery should be conserved
for problems which are real and present or imminent and
should not be squandered on problems which are future,
imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial
injury to the petitioners.
In other words, the putting up of the New Cagayan Town
Center by the province over the land fully owned by it and
the concomitant contracts entered into by the same is within
the bounds of its corporate power, an undertaking which falls
within the ambit of its discretion and therefore a purely
political issue which is beyond the province of the court x x x.
[Consequently, the court cannot,] in any manner, take judicial
cognizance over it. The act of the provincial government was
in pursuance of the mandate of the Local Government Code
of 1991.
Indeed, adjudication of the procedural issues presented for
resolution by the present action would be a futile exercise in
exegesis.
What defeats the plea of the petitioners for the issuance of a
writ of preliminary injunction is the fact that their averments
are merely speculative and founded on conjectures. An
injunction is not intended to protect contingent or future
rights nor is it a remedy to enforce an abstract right (Cerebo
vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637).
An injunction, whether preliminary or final, will not issue to
protect a right not in in esse and which may never arise, or
to restrain an act which does not give rise to a cause of
action. The complainants right on title, moreover, must be
clear and unquestioned [since] equity, as a rule, will not take
cognizance of suits to establish title and will not lend its

preventive aid by injunction where the complainants title or

right is doubtful or disputed. The possibility of irreparable
damage, without proof of violation of an actual existing right,
is no ground for injunction being a mere damnum, absque
injuria (Talisay-Silay Milling Company, Inc. vs. CFI of Negros
Occidental, et. al. 42 SCRA 577, 582).
For lack of cause of action, the case should be dismissed.
The facts and allegations [necessarily] suggest also that this
court may dismiss the case for want of jurisdiction.
The rule has to be so because it can motu propio dismiss it
as its only jurisdiction is to dismiss it if it has no jurisdiction.
This is in line with the ruling in Andaya vs. Abadia, 46 SCAD
1036, G.R. No. 104033, Dec. 27, 1993 where the court may
dismiss a complaint even without a motion to dismiss or
answer.
Upon the foregoing considerations, the case is hereby
dismissed without costs.
SO ORDERED. 34
Petitioners filed a Motion for Reconsideration 35 to which
respondents filed their respective Oppositions. 36 Petitioners
then filed a Motion to Inhibit, which the court granted.
Accordingly, the case was re-raffled to Branch 1 of the RTC
of Tuguegarao City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao
City issued a Resolution denying petitioners plea for
reconsideration. The court found the motion to be a mere
scrap of paper as the notice of hearing was addressed only
to the Clerk of Court in violation of Section 5, Rule 15 of the
Rules of Court. As to the merits, the court sustained the
findings of Branch 5 that petitioners lack legal standing to
sue and that the issue involved is political.
Issues
Hence, the present recourse where petitioners argue that:
A. The lower court decided a question of substance in a way
not in accord with law and with the applicable decision of the
Supreme Court, and
B. The lower court has so far departed from the accepted
and usual course of judicial proceedings as to call for an
exercise of the power of supervision in that:

Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that the public money
is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an
invalid or unconstitutional law. 39 A person suing as a
taxpayer, however, must show that the act complained of
directly involves the illegal disbursement of public funds
derived from taxation. 40 He must also prove that he has
sufficient interest in preventing the illegal expenditure of
money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute
or contract. 41 In other words, for a taxpayers suit to
prosper, two requisites must be met: (1) public funds derived
from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some
irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42
In light of the foregoing, it is apparent that contrary to the
view of the RTC,
a taxpayer need not be a party to the contract to challenge
its validity. 43 As long as taxes are involved, people have a
right to question contracts entered into by the government.
In this case, although the construction of the town center
would be primarily sourced from the proceeds of the bonds,
which respondents insist are not taxpayers money, a
government support in the amount of P187 million would still
be spent for paying the interest of the bonds. 44 In fact, a
Deed of Assignment 45 was executed by the governor in
favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial
government as payment and/or security for the obligations of
the provincial government under the Trust Indenture
Agreement dated September 17, 2003. Records also show
that on March 4, 2004, the governor requested the
Sangguniang Panlalawigan to appropriate an amount of P25
million for the interest of the bond. 46 Clearly, the first
requisite has been met.

II. [It] determined that the matter of contract entered into by

the provincial government is in the nature of a political
question;

As to the second requisite, the court, in recent cases, has

relaxed the stringent "direct injury test" bearing in mind that
locus standi is a procedural technicality. 47 By invoking
"transcendental importance", "paramount public interest", or
"far-reaching implications", ordinary citizens and taxpayers
were allowed to sue even if they failed to show direct injury.
48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the
court did not hesitate to give standing to taxpayers. 49

III. [It] denied the admission of Amended Petition; and

We find no reason to deviate from the jurisprudential trend.

IV. [It] found a defect of substance in the petitioners Motion

for Reconsideration. 38

To begin with, the amount involved in this case is substantial.

Under the various agreements entered into by the governor,
which were ratified by the Sangguniang Panlalawigan, the

I. It denied locus standi to petitioners;

provincial government of Cagayan would incur the following

costs: 50
Compensation to Preferred Ventures -

P 6,150,000.00

(3% of P205M) 51 Resolution No. 290-2001

Management and Underwriting Fees -

3,075,000.00

(1.5% of P205M) 52
Documentary Tax - 1,537,500.00
(0.75% of P205M) 53
Guarantee Fee 54 - 7,350,000.00
Construction and Design
213,795,732.39
Total Cost -

of

town

center

55

P231,908,232.39

What is more, the provincial government would be shelling

out a total amount of P187 million for the period of seven
years by way of subsidy for the interest of the bonds.
Without a doubt, the resolution of the present petition is of
paramount importance to the people of Cagayan who at the
end of the day would bear the brunt of these agreements.

annual regular income, including the IRA, to respondent

RCBC to cover and secure the payment of the bonds
floated; and the lack of consultation and discussion with the
community regarding the proposed project, as well as a
proper and legitimate bidding for the construction of the town
center.
Obviously, the issues raised in the petition do not refer to the
wisdom but to the legality of the acts complained of. Thus,
we find the instant controversy within the ambit of judicial
review. Besides, even if the issues were political in nature, it
would still come within our powers of review under the
expanded jurisdiction conferred upon us by Section 1, Article
VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to
excess or lack of jurisdiction has been committed by any
branch or instrumentality of the government. 58
The Motion to Admit Amended Petition was properly denied
However, as to the denial of petitioners Motion to Admit
Amended Petition, we find no reason to reverse the same.
The inclusion of the province of Cagayan as a petitioner
would not only change the theory of the case but would also
result in an absurd situation. The provincial government, if
included as a petitioner, would in effect be suing itself
considering that public respondents are being sued in their
official capacity.

Another point to consider is that local government units now

possess more powers, authority and resources at their
disposal, 56 which in the hands of unscrupulous officials
may be abused and misused to the detriment of the public.
To protect the interest of the people and to prevent taxes
from being squandered or wasted under the guise of
government projects, a liberal approach must therefore be
adopted in determining locus standi in public suits.

In any case, there is no need to amend the petition because

petitioners, as we have said, have legal standing to sue as
taxpayers.

In view of the foregoing, we are convinced that petitioners

have sufficient standing to file the present suit. Accordingly,
they should be given the opportunity to present their case
before the RTC.

This brings us to the fourth and final issue.

Having resolved the core issue, we shall now proceed to the

remaining issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be
decided by the people in their sovereign capacity or by the
legislative or the executive branch of the government to
which full discretionary authority has been delegated. 57
In filing the instant case before the RTC, petitioners seek to
restrain public respondents from implementing the bond
flotation and to declare null and void all contracts related to
the bond flotation and construction of the town center. In the
petition before the RTC, they alleged grave abuse of
discretion and clear violations of law by public respondents.
They put in issue the overpriced construction of the town
center; the grossly disadvantageous bond flotation; the
irrevocable assignment of the provincial governments

Section 5, Rule 15 of the Rules of Court was substantially

complied with

A perusal of the Motion for Reconsideration filed by

petitioners would show that the notice of hearing was
addressed only to the Clerk of Court in violation of Section 5,
Rule 15 of the Rules of Court, which requires the notice of
hearing to be addressed to all parties concerned. This
defect, however, did not make the motion a mere scrap of
paper. The rule is not a ritual to be followed blindly. 59 The
purpose of a notice of hearing is simply to afford the adverse
parties a chance to be heard before a motion is resolved by
the court. 60 In this case, respondents were furnished copies
of the motion, and consequently, notified of the scheduled
hearing. Counsel for public respondents in fact moved for
the postponement of the hearing, which the court granted.
61 Moreover, respondents were afforded procedural due
process as they were given sufficient time to file their
respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all
parties was substantially complied with. 62 In effect, the
defect in the Motion for Reconsideration was cured.
We cannot overemphasize that procedural rules are mere
tools to aid the courts in the speedy, just and inexpensive

resolution of cases. 63 Procedural defects or lapses, if

negligible, should be excused in the higher interest of justice
as technicalities should not override the merits of the case.
Dismissal of cases due to technicalities should also be
avoided to afford the parties the opportunity to present their
case. Courts must be reminded that the swift unclogging of
the dockets although a laudable objective must not be done
at the expense of substantial justice. 64
WHEREFORE, the instant Petition is PARTIALLY
GRANTED. The April 27, 2004 Order of Branch 5 and the
August 20, 2004 Resolution of Branch 1 of the Regional Trial
Court of Tuguegarao City are hereby REVERSED and SET
ASIDE insofar as the dismissal of the petition is concerned.
Accordingly, the case is hereby REMANDED to the court a
quo for further proceedings.
SO ORDERED.

SMART COMMUNICATIONS, INC.,

Petitioner,
- versus THE CITY OF DAVAO, represented herein by its Mayor
HON. RODRIGO R. DUTERTE, and the SANGGUNIANG
PANLUNGSOD OF DAVAO CITY,
Respondents.
G.R. No. 155491
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
September 16, 2008
x-----------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court filed by Smart Communications, Inc. (Smart)

against the City of Davao, represented by its Mayor, Hon.

Rodrigo R. Duterte, and the Sangguniang Panlungsod of
Davao City, to annul the Decision[1] dated July 19, 2002 of
the Regional Trial Court (RTC) and its Order[2] dated
September 26, 2002 in Sp. Civil Case No. 28,976-2002.
The Facts
On February 18, 2002, Smart filed a special civil action for
declaratory relief[3] under Rule 63 of the Rules of Court, for
the ascertainment of its rights and obligations under the Tax
Code of the City of Davao,[4] particularly Section 1, Article
10 thereof, the pertinent portion of which reads:
Notwithstanding any exemption granted by any law or other
special law, there is hereby imposed a tax on businesses
enjoying a franchise, at a rate of seventy-five percent (75%)
of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the income or receipts
realized within the territorial jurisdiction of Davao City.
Smart contends that its telecenter in Davao City is exempt
from payment of franchise tax to the City, on the following
grounds: (a) the issuance of its franchise under Republic Act
(R.A.) No. 7294[5] subsequent to R.A. No. 7160 shows the
clear legislative intent to exempt it from the provisions of
R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only
apply to exemptions already existing at the time of its
effectivity and not to future exemptions; (c) the power of the
City of Davao to impose a franchise tax is subject to
statutory limitations such as the in lieu of all taxes clause
found in Section 9 of R.A. No. 7294; and (d) the imposition of
franchise tax by the City of Davao would amount to a
violation of the constitutional provision against impairment of
contracts.[7]
On March 2, 2002, respondents filed their Answer[8] in which
they contested the tax exemption claimed by Smart. They
invoked the power granted by the Constitution to local
government units to create their own sources of revenue.[9]
On May 17, 2002, a pre-trial conference was held. Inasmuch
as only legal issues were involved in the case, the RTC
issued an order requiring the parties to submit their
respective memoranda and, thereafter, the case would be
deemed submitted for resolution.[10]
On July 19, 2002, the RTC rendered its Decision[11] denying
the petition. The trial court noted that the ambiguity of the in
lieu of all taxes provision in R.A. No. 7294, on whether it
covers both national and local taxes, must be resolved
against the taxpayer.[12] The RTC ratiocinated that tax
exemptions are construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority and,
thus, those who assert a tax exemption must justify it with
words too plain to be mistaken and too categorical not to be
misinterpreted.[13] On the issue of violation of the nonimpairment clause of the Constitution, the trial court cited
Mactan Cebu International Airport Authority v. Marcos,[14]
and declared that the citys power to tax is based not merely
on a valid delegation of legislative power but on the direct

authority granted to it by the fundamental law. It added that

while such power may be subject to restrictions or conditions
imposed by Congress, any such legislated limitation must be
consistent with the basic policy of local autonomy.[15]
Smart filed a motion for reconsideration which was denied by
the trial court in an Order[16] dated September 26, 2002.

PETITIONER IS EXEMPT FROM THE PAYMENT OF THE

FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT
UNITS UNDER THE LOCAL GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT
THE IMPOSITION OF THE LOCAL FRANCHISE TAX ON
PETITIONER WOULD VIOLATE THE CONSTITUTIONAL
PROHIBITION AGAINST IMPAIRMENT OF CONTRACTS.

Thus, the instant case.

Smart assigns the following errors:
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT
UNDER PETITIONERS FRANCHISE (REPUBLIC ACT NO.
7294), WHICH CONTAINS THE IN LIEU OF ALL TAXES
CLAUSE, AND WHICH IS A SPECIAL LAW ENACTED
SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY
RESPONDENT CITY.

[i.] THE LOWER COURT ERRED IN DENYING THE

PETITION BELOW.[17]
The Issue
In sum, the pivotal issue in this case is whether Smart is
liable to pay the franchise tax imposed by the City of Davao.
The Ruling of the Court
We rule in the affirmative.

[b.] THE LOWER COURT ERRED IN HOLDING THAT

PETITIONERS FRANCHISE IS A GENERAL LAW AND DID
NOT REPEAL RELEVANT PROVISIONS REGARDING
FRANCHISE TAX OF THE LOCAL GOVERNMENT CODE,
WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT
SECTION 137 OF THE LOCAL GOVERNMENT CODE,
WHICH, IN RELATION TO SECTION 151 THEREOF,
ALLOWS RESPONDENT CITY TO IMPOSE THE
FRANCHISE TAX, AND SECTION 193 OF THE CODE,
WHICH PROVIDES FOR WITHDRAWAL OF TAX
EXEMPTION PRIVILEGES, ARE NOT APPLICABLE TO
THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT
SECTIONS 137 AND 193 OF THE LOCAL GOVERNMENT
CODE REFER ONLY TO EXEMPTIONS ALREADY
EXISTING AT THE TIME OF ITS ENACTMENT BUT NOT
TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE
OF
STATUTORY
CONSTRUCTION
THAT
TAX
EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST
THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT
PETITIONERS FRANCHISE (REPUBLIC ACT NO. 7294)
HAS BEEN AMENDED AND EXPANDED BY SECTION 23
OF REPUBLIC ACT NO. 7925, THE PUBLIC
TELECOMMUNICATIONS POLICY ACT, TAKING INTO
ACCOUNT THE FRANCHISE OF GLOBE TELECOM, INC.
(GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE
SPECIAL
PROVISIONS
AND
WERE
ENACTED
SUBSEQUENT TO THE LOCAL GOVERNMENT CODE,
THEREBY PROVIDING AN ADDITIONAL GROUND WHY
NO FRANCHISE TAX MAY BE IMPOSED ON PETITIONER
BY RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE
RULING OF THE DEPARTMENT OF FINANCE, THROUGH
ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT

I. Prospective Effect of R.A. No. 7160

On March 27, 1992, Smarts legislative franchise (R.A. No.
7294) took effect. Section 9 thereof, quoted hereunder, is at
the heart of the present controversy:
Section 9. Tax provisions. The grantee, its successors or
assigns shall be liable to pay the same taxes on their real
estate buildings and personal property, exclusive of' this
franchise, as other persons or corporations which are now or
hereafter may be required by law to pay. In addition thereto,
the grantee, its successors or assigns shall pay a franchise
tax equivalent to three percent (3%) of all gross receipts of
the business transacted under this franchise by the grantee,
its successors or assigns and the said percentage shall be in
lieu of all taxes on this franchise or earnings thereof:
Provided, That the grantee, its successors or assigns shall
continue to be liable for income taxes payable under Title II
of the National Internal Revenue Code pursuant to Section 2
of Executive Order No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or
repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due
thereon to the Commissioner of Internal Revenue or his duly
authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to
audit by the Bureau of Internal Revenue. (Emphasis
supplied.)
Smart alleges that the in lieu of all taxes clause in Section 9
of its franchise exempts it from all taxes, both local and
national, except the national franchise tax (now VAT),
income tax, and real property tax.[18]
On January 1, 1992, two months ahead of Smarts franchise,
the Local Government Code (R.A. No. 7160) took effect.
Section 137, in relation to Section 151 of R.A. No. 7160,
allowed the imposition of franchise tax by the local
government units; while Section 193 thereof provided for the
withdrawal of tax exemption privileges granted prior to the

issuance of R.A. No. 7160 except for those expressly

mentioned therein, viz.:

part of the statute must be construed with reference to the

context.[19]

Section 137. Franchise Tax. Notwithstanding any exemption

granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at the rate
not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based
on the incoming receipt, or realized, within its territorial
jurisdiction.

Smart is of the view that the only taxes it may be made to

bear under its franchise are the national franchise tax (now
VAT), income tax, and real property tax.[20] It claims
exemption from the local franchise tax because the in lieu of
taxes clause in its franchise does not distinguish between
national and local taxes.[21]

In the case of a newly started business, the tax shall not

exceed one-twentieth (1/20) of one percent (1%) of the
capital investment. In the succeeding calendar year,
regardless of when the business started to operate, the tax
shall be based on the gross receipts for the preceding
calendar year, or any fraction thereon, as provided herein.
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 allowed for the province or municipality by
not more than fifty percent (50%) except the rates of
professional and amusement taxes.
Section 193. Withdrawal of Tax Exemption Privileges.
Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or
controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, non-stock
and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.
(Emphasis supplied.)
Smart argues that it is not covered by Section 137, in
relation to Section 151 of R.A. No. 7160, because its
franchise was granted after the effectivity of the said law. We
agree with Smarts contention on this matter. The withdrawal
of tax exemptions or incentives provided in R.A. No. 7160
can only affect those franchises granted prior to the
effectivity of the law. The intention of the legislature to
remove all tax exemptions or incentives granted prior to the
said law is evident in the language of Section 193 of R.A.
No. 7160. No interpretation is necessary.
II. The in lieu of all taxes Clause in R.A. No. 7294
The in lieu of all taxes clause in Smarts franchise is put in
issue before the Court. In order to ascertain its meaning,
consistent with fundamentals of statutory construction, all the
words in the statute must be considered. The grant of tax
exemption by R.A. No. 7294 is not to be interpreted from a
consideration of a single portion or of isolated words or
clauses, but from a general view of the act as a whole. Every

We pay heed that R.A. No. 7294 is not definite in granting

exemption to Smart from local taxation. Section 9 of R.A. No.
7294 imposes on Smart a franchise tax equivalent to three
percent (3%) of all gross receipts of the business transacted
under the franchise and the said percentage shall be in lieu
of all taxes on the franchise or earnings thereof. R.A. No
7294 does not expressly provide what kind of taxes Smart is
exempted from. It is not clear whether the in lieu of all taxes
provision in the franchise of Smart would include exemption
from local or national taxation. What is clear is that Smart
shall pay franchise tax equivalent to three percent (3%) of all
gross receipts of the business transacted under its franchise.
But whether the franchise tax exemption would include
exemption from exactions by both the local and the national
government is not unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A. No.
7294 on whether Smart is exempted from both local and
national franchise tax must be construed strictly against
Smart which claims the exemption. Smart has the burden of
proving that, aside from the imposed 3% franchise tax,
Congress intended it to be exempt from all kinds of franchise
taxes whether local or national. However, Smart failed in this
regard.
Tax exemptions are never presumed and are strictly
construed against the taxpayer and liberally in favor of the
taxing authority.[22] They can only be given force when the
grant is clear and categorical.[23] The surrender of the
power to tax, when claimed, must be clearly shown by a
language that will admit of no reasonable construction
consistent with the reservation of the power. If the intention
of the legislature is open to doubt, then the intention of the
legislature must be resolved in favor of the State.[24]
In this case, the doubt must be resolved in favor of the City
of Davao. The in lieu of all taxes clause applies only to
national internal revenue taxes and not to local taxes. As
appropriately pointed out in the separate opinion of Justice
Antonio T. Carpio in a similar case[25] involving a demand
for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers
only to taxes, other than income tax, imposed under the
National Internal Revenue Code. The "in lieu of all taxes"
clause does not apply to local taxes. The proviso in the first
paragraph of Section 9 of Smart's franchise states that the
grantee shall "continue to be liable for income taxes payable
under Title II of the National Internal Revenue Code." Also,
the second paragraph of Section 9 speaks of tax returns filed
and taxes paid to the "Commissioner of Internal Revenue or

his duly authorized representative in accordance with the

National Internal Revenue Code." Moreover, the same
paragraph declares that the tax returns "shall be subject to
audit by the Bureau of Internal Revenue." Nothing is
mentioned in Section 9 about local taxes. The clear intent is
for the "in lieu of all taxes" clause to apply only to taxes
under the National Internal Revenue Code and not to local
taxes. Even with respect to national internal revenue taxes,
the "in lieu of all taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in
Smart's franchise to also apply to local taxes, Congress
would have expressly mentioned the exemption from
municipal and provincial taxes. Congress could have used
the language in Section 9(b) of Clavecilla's old franchise, as
follows:
x x x in lieu of any and all taxes of any kind, nature or
description levied, established or collected by any authority
whatsoever, municipal, provincial or national, from which the
grantee is hereby expressly exempted, x x x. (Emphasis
supplied).
However, Congress did not expressly exempt Smart from
local taxes. Congress used the "in lieu of all taxes" clause
only in reference to national internal revenue taxes. The only
interpretation, under the rule on strict construction of tax
exemptions, is that the "in lieu of all taxes" clause in Smart's
franchise refers only to national and not to local taxes.
It should be noted that the in lieu of all taxes clause in R.A.
No. 7294 has become functus officio with the abolition of the
franchise tax on telecommunications companies.[26] As
admitted by Smart in its pleadings, it is no longer paying the
3% franchise tax mandated in its franchise. Currently, Smart
along with other telecommunications companies pays the
uniform 10% value-added tax.[27]
The VAT on sale of services of telephone franchise grantees
is equivalent to 10% of gross receipts derived from the sale
or exchange of services.[28] R.A. No. 7716, as amended by
the Expanded Value Added Tax Law (R.A. No. 8241), the
pertinent portion of which is hereunder quoted, amended
Section 9 of R.A. No. 7294:
SEC. 102. Value-added tax on sale of services and use or
lease of properties. (a) Rate and base of tax. There shall be
levied assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale
or exchange of services, including the use or lease of
properties.
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, rest

houses, 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, air, and water relative to their
transport of goods or cargoes; services of franchise grantees
of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those
under Section 117 of this Code; services of banks, non-bank
financial intermediaries and finance companies; and non-life
insurance companies (except their crop insurances)
including surety, fidelity, indemnity and bonding companies;
and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties. x x x.[29]
R.A. No. 7716, specifically Section 20 thereof, expressly
repealed the provisions of all special laws relative to the rate
of franchise taxes. It also repealed, amended, or modified all
other laws, orders, issuances, rules and regulations, or parts
thereof which are inconsistent with it.[30] In effect, the in lieu
of all taxes clause in R.A. No. 7294 was rendered ineffective
by the advent of the VAT Law.[31]
However, the franchise tax that the City of Davao may
impose must comply with Sections 137 and 151 of R.A. No.
7160. Thus, the local franchise tax that may be imposed by
the City must not exceed 50% of 1% of the gross annual
receipts for the preceding calendar year based on the
income on receipts realized within the territorial jurisdiction of
Davao.
III. Opinion of the Bureau of Local Government Finance
(BLGF)
In support of its argument that the in lieu of all taxes clause
is to be construed as an exemption from local franchise
taxes, Smart submits the opinion of the Department of
Finance, through the BLGF, dated August 13, 1998 and
February 24, 1998, regarding the franchises of Smart and
Globe, respectively.[32] Smart presents the same arguments
as the Philippine Long Distance Telephone Company in the
previous cases already decided by this Court.[33] As
previously held by the Court, the findings of the BLGF are
not conclusive on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the
franchise of petitioner and in effect restored its exemptions
from local taxes. Petitioner contends that courts should not
set aside conclusions reached by the BLGF because its
function is precisely the study of local tax problems and it
has necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose
findings on questions of fact are given weight and deference
in the courts. The authorities cited by petitioner pertain to the
Court of Tax Appeals, a highly specialized court which
performs judicial functions as it was created for the review of

tax cases. In contrast, the BLGF was created merely to

provide consultative services and technical assistance to
local governments and the general public on local taxation,
real property assessment, and other related matters, among
others. The question raised by petitioner is a legal question,
to wit, the interpretation of 23 of R.A. No. 7925. There is,
therefore, no basis for claiming expertise for the BLGF that
administrative agencies are said to possess in their
respective fields.
Petitioner likewise argues that the BLGF enjoys the
presumption of regularity in the performance of its duty. It
does enjoy this presumption, but this has nothing to do with
the question in this case. This case does not concern the
regularity of performance of the BLGF in the exercise of its
duties, but the correctness of its interpretation of a provision
of law.[34]
IV. Tax Exclusion/Tax Exemption
Smart gives another perspective of the in lieu of all taxes
clause in Section 9 of R.A. No. 7294 in order to avoid the
payment of local franchise tax. It says that, viewed from
another angle, the in lieu of all taxes clause partakes of the
nature of a tax exclusion and not a tax exemption. A tax
exemption means that the taxpayer does not pay any tax at
all. Smart pays VAT, income tax, and real property tax. Thus,
what it enjoys is more accurately a tax exclusion.[35]
However, as previously held by the Court, both in their
nature and effect, there is no essential difference between a
tax exemption and a tax exclusion. An exemption is an
immunity or a privilege; it is the freedom from a charge or
burden to which others are subjected. An exclusion, on the
other hand, is the removal of otherwise taxable items from
the reach of taxation, e.g., exclusions from gross income and
allowable deductions. An exclusion is, thus, also an immunity
or privilege which frees a taxpayer from a charge to which
others are subjected. Consequently, the rule that a tax
exemption should be applied in strictissimi juris against the
taxpayer and liberally in favor of the government applies
equally to tax exclusions.[36]
V. Section 23 of R.A. No. 7925
To further its claim, Smart invokes Section 23 of the Public
Telecommunications Policy Act (R.A. No. 7925):
SECTION
23.
Equality
of
Treatment
in
the
Telecommunications Industry. Any advantage, favor,
privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications
franchise and shall be accorded immediately and
unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect
provisions of telecommunications franchises concerning
territory covered by the franchise, the life span of the
franchise, or the type of service authorized by the franchise.
(Emphasis supplied.)

In sum, Smart wants us to interpret anew Section 23 of R.A.

No. 7925, in connection with the franchise of Globe (R.A.
No. 7227),[37] which was enacted on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise
known as the most favored treatment clause or the equality
clause, the provision in the franchise of Globe exempting it
from local taxes is automatically incorporated in the
franchise of Smart.[38] Smart posits that, since the franchise
of Globe contains a provision exempting it from municipal or
local franchise tax, this provision should also benefit Smart
by virtue of Section 23 of R.A. No. 7925. The provision in
Globes franchise invoked by Smart reads:
(b) The grantee shall further pay to the Treasurer of the
Philippines each year after the audit and approval of the
accounts as prescribed in this Act, one and one-half per
centum of all gross receipts from business transacted under
this franchise by the said grantee in the Philippines, in lieu of
any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever,
municipal, provincial or national, from which the grantee is
hereby expressly exempted, effective from the date of the
approval of Republic Act Numbered Sixteen hundred
eighteen.[39]
We find no reason to disturb the previous pronouncements
of this Court regarding the interpretation of Section 23 of
R.A. No. 7925. As aptly explained in the en banc decision of
this Court in Philippine Long Distance Telephone Company,
Inc. v. City of Davao,[40] and recently in Digital
Telecommunications Philippines, Inc. (Digitel) v. Province of
Pangasinan,[41] Congress, in approving Section 23 of R.A.
No. 7925, did not intend it to operate as a blanket tax
exemption to all telecommunications entities.[42] The
language of Section 23 of R.A. No. 7925 and the
proceedings of both Houses of Congress are bereft of
anything that would signify the grant of tax exemptions to all
telecommunications entities, including those whose
exemptions had been withdrawn by R.A. No. 7160.[43] The
term exemption in Section 23 of R.A. No. 7925 does not
mean tax exemption. The term refers to exemption from
certain regulations and requirements imposed by the
National Telecommunications Commission.[44]
Furthermore, in the franchise of Globe (R.A. No. 7229), the
legislature incontrovertibly stated that it will be liable for one
and one-half per centum of all gross receipts from business
transacted under the franchise, in lieu of any and all taxes of
any kind, nature, or description levied, established, or
collected by any authority whatsoever, municipal, provincial,
or national, from which the grantee is hereby expressly
exempted.[45] The grant of exemption from municipal,
provincial, or national is clear and categorical that aside from
the franchise tax collected by virtue of R.A. No. 7229, no
other franchise tax may be collected from Globe regardless
of who the taxing power is. No such provision is found in the
franchise of Smart; the kind of tax from which it is exempted
is not clearly specified.

As previously explained by the Court, the stance of Smart

would lead to absurd consequences.

save only where a tax exemption has been granted for a

valid consideration. x x x.

The acceptance of petitioner's theory would result in absurd

consequences. To illustrate: In its franchise, Globe is
required to pay a franchise tax of only one and one-half
percentum (1%) of all gross receipts from its transactions
while Smart is required to pay a tax of three percent (3%) on
all gross receipts from business transacted. Petitioner's
theory would require that, to level the playing field, any
"advantage, favor, privilege, exemption, or immunity" granted
to Globe must be extended to all telecommunications
companies, including Smart. If, later, Congress again grants
a franchise to another telecommunications company
imposing, say, one percent (1%) franchise tax, then all other
telecommunications franchises will have to be adjusted to
"level the playing field" so to speak. This could not have
been the intent of Congress in enacting 23 of Rep. Act 7925.
Petitioner's theory will leave the Government with the burden
of having to keep track of all granted telecommunications
franchises, lest some companies be treated unequally. It is
different if Congress enacts a law specifically granting
uniform advantages, favor, privilege, exemption, or immunity
to all telecommunications entities.[46]

WHEREFORE, the instant petition is DENIED for lack of

merit. Costs against petitioner.

VI. Non-impairment Clause of the Constitution

Another argument of Smart is that the imposition of the local
franchise tax by the City of Davao would violate the
constitutional prohibition against impairment of contracts.
The franchise, according to petitioner, is in the nature of a
contract between the government and Smart.[47]
However, we find that there is no violation of Article III,
Section 10 of the 1987 Philippine Constitution. As previously
discussed, the franchise of Smart does not expressly provide
for exemption from local taxes. Absent the express provision
on such exemption under the franchise, we are constrained
to rule against it. The in lieu of all taxes clause in Section 9
of R.A. No. 7294 leaves much room for interpretation. Due to
this ambiguity in the law, the doubt must be resolved against
the grant of tax exemption.

[G.R. No. 115349. April 18, 1997]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
THE COURT OF APPEALS, THE COURT OF TAX
APPEALS and ATENEO DE MANILA UNIVERSITY,
respondents.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations
and cultural values thru its Institute of Philippine Culture, is
the Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview
of then Section 205 of the National Internal Revenue Code
levying a three percent contractors tax? This question is
answered by the Court in the negative as it resolves this
petition assailing the Decision[1] of the Respondent Court of
Appeals[2] in CA-G.R. SP No. 31790 promulgated on April
27, 1994 affirming that of the Court of Tax Appeals.[3]
The Antecedent Facts
The antecedents as found by the Court of Appeals are
reproduced hereinbelow, the same being largely undisputed
by the parties.

Moreover, Smarts franchise was granted with the express

condition that it is subject to amendment, alteration, or
repeal.[48] As held in Tolentino v. Secretary of Finance: [49]

Private respondent is a non-stock, non-profit educational

institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government
agencies.

It is enough to say that the parties to a contract cannot,

through the exercise of prophetic discernment, fetter the
exercise of the taxing power of the State. For not only are
existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting
contracts against impairment presupposes the maintenance
of a government which retains adequate authority to secure
the peace and good order of society.

On July 8, 1983, private respondent received from petitioner

Commissioner of Internal Revenue a demand letter dated
June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractors tax, and an
assessment dated June 27, 1983 in the sum of P1,141,837
for alleged deficiency income tax, both for the fiscal year
ended March 31, 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently
filed with the latter a memorandum contesting the validity of
the assessments.

In truth, the Contract Clause has never been thought as a

limitation on the exercise of the States power of taxation

On March 17, 1988, petitioner rendered a letter-decision

canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractors tax by
increasing the amount due to P193,475.55. Unsatisfied,

private respondent requested for a reconsideration or

reinvestigation of the modified assessment. At the same
time, it filed in the respondent court a petition for review of
the said letter-decision of the petitioner. While the petition
was pending before the respondent court, petitioner issued a
final decision dated August 3, 1988 reducing the assessment
for deficiency contractors tax from P193,475.55 to
P46,516.41, exclusive of surcharge and interest.

a. Persons, association and corporations under contract for

embroidery and apparel for export and gross receipts of or
from pioneer industry registered with the Board of
Investment under R.A. No. 5186;

On July 12, 1993, the respondent court rendered the

questioned decision which dispositively reads:

c. Regional or area headquarters established in the

Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communication and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region (Section
205 of the Tax Code).

WHEREFORE, in view of the foregoing, respondents

decision is SET ASIDE. The deficiency contractors tax
assessment in the amount of P46,516.41 exclusive of
surcharge and interest for the fiscal year ended March 31,
1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following
issues:
1)WHETHER OR NOT PRIVATE RESPONDENT FALLS
UNDER
THE
PURVIEW
OF
INDEPENDENT
CONTRACTOR PURSUANT TO SECTION 205 OF THE
TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS
SUBJECT TO 3% CONTRACTORS TAX UNDER SECTION
205 OF THE TAX CODE.

b. Individuals occupation tax under Section 12 of the Local

Tax Code (under the old Section 182 [b] of the Tax Code);
and

Petitioner thus submits that since private respondent falls

under the definition of an independent contractor and is not
among the aforementioned exceptions, private respondent is
therefore subject to the 3% contractors tax imposed under
the same Code.[4]
The Court of Appeals disagreed with the Petitioner
Commissioner of Internal Revenue and affirmed the assailed
decision of the Court of Tax Appeals. Unfazed, petitioner
now asks us to reverse the CA through this petition for
review.
The Issues
Petitioner submits before us the following issues:

The pertinent portions of Section 205 of the National Internal

Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards,
and others. - A contractors tax of three per centum of the
gross receipts is hereby imposed on the following:
(16) Business agents and other independent contractors
except persons, associations and corporations under
contract for embroidery and apparel for export, as well as
their agents and contractors and except gross receipts of or
from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
The term independent contractors include persons (juridical
or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or
their employees.
Petitioner contends that the respondent court erred in
holding that private respondent is not an independent
contractor within the purview of Section 205 of the Tax Code.
To petitioner, the term independent contractor, as defined by
the Code, encompasses all kinds of services rendered for a
fee and that the only exceptions are the following:

1) Whether or not private respondent falls under the purview

of independent contractor pursuant to Section 205 of the Tax
Code
2) Whether or not private respondent is subject to 3%
contractors tax under Section 205 of the Tax Code.[5]
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch -- the
Institute of Philippine Culture -- performing the work of an
independent contractor and, thus, subject to the three
percent contractors tax levied by then Section 205 of the
National Internal Revenue Code?
The Courts Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal
Revenue Code germane to the case before us read:
SEC. 205. Contractors, proprietors or operators of
dockyards, and others. -- A contractors tax of three per
centum of the gross receipts is hereby imposed on the
following:

(16) Business agents and other independent contractors,

except persons, associations and corporations under
contract for embroidery and apparel for export, as well as
their agents and contractors, and except gross receipts of or
from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;
The term independent contractors include persons (juridical
or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or
their employees.
The term independent contractor shall not include regional or
area headquarters established in the Philippines by
multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from
the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.
The term gross receipts means all amounts received by the
prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the
subcontractor.
Petitioner Commissioner of Internal Revenue contends that
Private Respondent Ateneo de Manila University falls within
the definition of an independent contractor and is not one of
those mentioned as excepted; hence, it is properly a subject
of the three percent contractors tax levied by the foregoing
provision of law.[6] Petitioner states that the term
independent contractor is not specifically defined so as to
delimit the scope thereof, so much so that any person who x
x x renders physical and mental service for a fee, is now
indubitably considered an independent contractor liable to
3% contractors tax.[7] according to petitioner, Ateneo has the
burden of proof to show its exemption from the coverage of
the law.
We disagree. Petitioner Commissioner of Internal Revenue
erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to
reiterate the hornbook doctrine in the interpretation of tax
laws that (a) statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. x x
x (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes

applies with peculiar strictness to tax laws and the provisions

of a taxing act are not to be extended by implication.[8]
Parenthetically, in answering the question of who is subject
to tax statutes, it is basic that in case of doubt, such statutes
are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are
not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import.[9]
To fall under its coverage, Section 205 of the National
Internal Revenue Code requires that the independent
contractor be engaged in the business of selling its services.
Hence, to impose the three percent contractors tax on
Ateneos Institute of Philippine Culture, it should be
sufficiently proven that the private respondent is indeed
selling its services for a fee in pursuit of an independent
business. And it is only after private respondent has been
found clearly to be subject to the provisions of Sec. 205 that
the question of exemption therefrom would arise. Only after
such coverage is shown does the rule of construction -- that
tax exemptions are to be strictly construed against the
taxpayer -- come into play, contrary to petitioners position.
This is the main line of reasoning of the Court of Tax Appeals
in its decision,[10] which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine
Culture
After reviewing the records of this case, we find no evidence
that Ateneos Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a
business apart from and independently of the academic
purposes of the university.
Stressing that it is not the Ateneo de Manila University per se
which is being taxed, Petitioner Commissioner of Internal
Revenue contends that the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross
receipts made in favor of IPC pursuant to the contracts the
latter entered to conduct researches for the benefit primarily
of its clients. The tax is imposed on the exercise of a taxable
activity. x x x [T]he sale of services of private respondent is
made under a contract and the various contracts entered
into between private respondent and its clients are almost of
the same terms, showing, among others, the compensation
and terms of payment.[11] (Underscoring supplied.)
In theory, the Commissioner of Internal Revenue may be
correct. However, the records do not show that Ateneos IPC
in fact contracted to sell its research services for a fee.
Clearly then, as found by the Court of Appeals and the Court
of Tax Appeals, petitioners theory is inapplicable to the
established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to
prove its bare contention that, indeed, contracts for sale of
services were ever entered into by the private respondent.
As appropriately pointed out by the latter:

An examination of the Commissioners Written Formal Offer

of Evidence in the Court of Tax Appeals shows that only the
following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiners Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport
to be contracts between private respondent and third parties.
[12]
Moreover, the Court of Tax Appeals accurately and correctly
declared that the funds received by the Ateneo de Manila
University are technically not a fee. They may however fall
as gifts or donations which are tax-exempt as shown by
private respondents compliance with the requirement of
Section 123 of the National Internal Revenue Code providing
for the exemption of such gifts to an educational institution.
[13]
Respondent Court of Appeals elucidated on the ruling of the
Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition
of an independent contractor.
For one, the established facts show that IPC, as a unit of the
private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university status.
In fact, the research activities being carried out by the IPC is
focused not on business or profit but on social sciences
studies of Philippine society and culture. Since it can only
finance a limited number of IPCs research projects, private
respondent occasionally accepts sponsorship for unfunded
IPC research projects from international organizations,
private foundations and governmental agencies. However,
such sponsorships are subject to private respondents terms
and conditions, among which are, that the research is
confined to topics consistent with the private respondents
academic agenda; that no proprietary or commercial
purpose research is done; and that private respondent
retains not only the absolute right to publish but also the
ownership of the results of the research conducted by the
IPC. Quite clearly, the aforementioned terms and conditions
belie the allegation that private respondent is a contractor or
is engaged in business.
For another, it bears stressing that private respondent is a
non-stock, non-profit educational corporation. The fact that it
accepted sponsorship for IPCs unfunded projects is merely
incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the private
respondent. Moreover, the records do not show that in
accepting sponsorship of research work, IPC realized profits

from such work. On the contrary, the evidence shows that for
about 30 years, IPC had continuously operated at a loss,
which means that sponsored funds are less than actual
expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education
and not profit is the motive for undertaking the research
projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there
is no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none
was so distributed because they accrued to the benefit of the
private respondent which is a non-profit educational
institution.[14]
Therefore, it is clear that the funds received by Ateneos
Institute of Philippine Culture are not given in the concept of
a fee or price in exchange for the performance of a service
or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPCs
benefactors solely for the purpose of sponsoring or funding
the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPCs terms
and conditions. No proprietary or commercial research is
done, and IPC retains the ownership of the results of the
research, including the absolute right to publish the same.
The copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be
reproduced without its permission.[15] The amounts given to
IPC, therefore, may not be deemed, it bears stressing, as
fees or gross receipts that can be subjected to the three
percent contractors tax.
It is also well to stress that the questioned transactions of
Ateneos Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract for a piece of work.
By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price
certain in money or its equivalent.[16] By its very nature, a
contract of sale requires a transfer of ownership. Thus,
Article 1458 of the Civil Code expressly makes the obligation
to transfer ownership as an essential element of the contract
of sale, following modern codes, such as the German and
the Swiss. Even in the absence of this express requirement,
however, most writers, including Sanchez Roman, Gayoso,
Valverde, Ruggiero, Colin and Capitant, have considered
such transfer of ownership as the primary purpose of sale.
Perez and Alguer follow the same view, stating that the
delivery of the thing does not mean a mere physical transfer,
but is a means of transmitting ownership. Transfer of title or
an agreement to transfer it for a price paid or promised to be
paid is the essence of sale.[17] In the case of a contract for a
piece of work, the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain
price or compensation. x x x If the contractor agrees to
produce the work from materials furnished by him, he shall
deliver the thing produced to the employer and transfer
dominion over the thing. x x x.[18] Ineludably, whether the
contract be one of sale or one for a piece of work, a transfer

of ownership is involved and a party necessarily walks away

with an object.[19] In the case at bench, it is clear from the
evidence on record that there was no sale either of objects
or services because, as adverted to earlier, there was no
transfer of ownership over the research data obtained or the
results of research projects undertaken by the Institute of
Philippine Culture.
Furthermore, it is clear that the research activity of the
Institute of Philippine Culture is done in pursuance of
maintaining Ateneos university status and not in the course
of an independent business of selling such research with
profit in mind. This is clear from a reading of the regulations
governing universities:
31.In addition to the legal requisites an institution must meet,
among others, the following requirements before an
application for university status shall be considered:
(e) The institution must undertake research and operate with
a competent qualified staff at least three graduate
departments in accordance with the rules and standards for
graduate education. One of the departments shall be
science and technology. The competence of the staff shall
be judged by their effective teaching, scholarly publications
and research activities published in its school journal as well
as their leadership activities in the profession.
(f) The institution must show evidence of adequate and
stable financial resources and support, a reasonable portion
of which should be devoted to institutional development and
research. (underscoring supplied)

of Appeals appear untainted by any abuse of authority, much

less grave abuse of discretion. Thus, we find the decision of
the latter affirming that of the former free from any palpable
error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture
conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and
disbursements for the period 1972 to 1985.[23] In fact, it was
Ateneo de Manila University itself that had funded the
research projects of the institute, and it was only when
Ateneo could no longer produce the needed funds that the
institute sought funding from outside. The testimony of
Ateneos Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and
nonprofit nature of the institutes research activities done in
furtherance of the universitys purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero
(Office Manager of the Institute of Philippine Culture) that as
far as grants from sponsored research it is possible that the
grant sometimes is less than the actual cost. Will you please
tell us in this case when the actual cost is a lot less than the
grant who shoulders the additional cost?

A The University.
Q Now, why is this done by the University?

32. University status may be withdrawn, after due notice and

hearing, for failure to maintain satisfactorily the standards
and requirements therefor.[20]

A Because of our faculty development program as a

university, because a university has to have its own research
institute.[24]

Petitioners contention that it is the Institute of Philippine

Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical
entity that is separate and distinct from the latter.

So, why is it that Ateneo continues to operate and conduct

researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the
process? The plain and simple answer is that private
respondent is not a contractor selling its services for a fee
but an academic institution conducting these researches
pursuant to its commitments to education and, ultimately, to
public service. For the institute to have tenaciously continued
operating for so long despite its accumulation of significant
losses, we can only agree with both the Court of Tax Appeals
and the Court of Appeals that education and not profit is
[IPCs] motive for undertaking the research projects.[25]

Factual Findings and Conclusions of the Court of Tax

Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the Court of Tax Appeals is a
highly specialized body specifically created for the purpose
of reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether[21] Ateneo de
Manila University may be deemed a subject of the three
percent contractors tax through the evidence presented
before it. Consequently, as a matter of principle, this Court
will not set aside the conclusion reached by x x x the Court
of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident
exercise of authority x x x.[22] This point becomes more
evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court

WHEREFORE, premises considered, the petition is DENIED

and the assailed Decision of the Court of Appeals is hereby
AFFIRMED in full.
SO ORDERED.

PHILIPPINE HEALTH CARE G.R. No. 167330

PROVIDERS, INC.,

Petitioner, Present:

PUNO, C.J., Chairperson,

CORONA,
- v e r s u s - CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.**

COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 18, 2009
RESOLUTION
CORONA, J.:
ARTICLE II

group practice health care delivery system or a health

maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial
responsibilities of the organization. Individuals enrolled in its
health care programs pay an annual membership fee and
are entitled to various preventive, diagnostic and curative
medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating
in the group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.
On January 27, 2000, respondent Commissioner of Internal
Revenue [CIR] sent petitioner a formal demand letter and
the corresponding assessment notices demanding the
payment of deficiency taxes, including surcharges and
interest, for the taxable years 1996 and 1997 in the total
amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment
was imposed on petitioners health care agreement with the
members of its health care program pursuant to Section 185
of the 1997 Tax Code xxxx
Petitioner protested the assessment in a letter dated
February 23, 2000. As respondent did not act on the protest,
petitioner filed a petition for review in the Court of Tax
Appeals (CTA) seeking the cancellation of the deficiency
VAT and DST assessments.

Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to
health of the people and instill health consciousness among
them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and
comprehensive approach to health development which shall
endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There
shall be priority for the needs of the underprivileged sick,
elderly, disabled, women, and children. The State shall
endeavor to provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and
supplemental motion for reconsideration dated July 10, 2008
and July 14, 2008, respectively, filed by petitioner Philippine
Health Care Providers, Inc.[2]

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose

is [t]o establish, maintain, conduct and operate a prepaid

On April 5, 2002, the CTA rendered a decision, the

dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition
for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the 1996
VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully
paid for the 1997 VAT deficiency. Accordingly, VAT Ruling
No. [231]-88 is declared void and without force and effect.
The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET ASIDE.
Respondent is ORDERED to DESIST from collecting the
said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of
Appeals (CA)] insofar as it cancelled the DST assessment.
He claimed that petitioners health care agreement was a
contract of insurance subject to DST under Section 185 of
the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held
that petitioners health care agreement was in the nature of a
non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The

Decision of the Court of Tax Appeals, insofar as it cancelled
and set aside the 1996 and 1997 deficiency documentary
stamp tax assessment and ordered petitioner to desist from
collecting the same is REVERSED and SET ASIDE.

(g) The agreements do not fall under the phrase other

branch of insurance mentioned in Section 185.

Respondent is ordered to pay the amounts of

P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively,
plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and
249 of the Tax Code, until the same shall have been fully
paid.

(i) Petitioner availed of the tax amnesty benefits under RA[5]

9480 for the taxable year 2005 and all prior years. Therefore,
the questioned assessments on the DST are now rendered
moot and academic.[6]

SO ORDERED.

In its motion for reconsideration, petitioner reveals for the

first time that it availed of a tax amnesty under RA 9480[7]
(also known as the Tax Amnesty Act of 2007) by fully paying
the amount of P5,127,149.08 representing 5% of its net
worth as of the year ending December 31, 2005.[8]

Petitioner moved for reconsideration but the CA denied it.

Hence, petitioner filed this case.
In a decision dated June 12, 2008, the Court denied the
petition and affirmed the CAs decision. We held that
petitioners health care agreement during the pertinent period
was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares[3]
and Philamcare Health Systems, Inc. v. CA.[4] We also ruled
that petitioners contention that it is a health maintenance
organization (HMO) and not an insurance company is
irrelevant because contracts between companies like
petitioner and the beneficiaries under their plans are treated
as insurance contracts. Moreover, DST is not a tax on the
business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the
transaction of the business.
Unable to accept our verdict, petitioner filed the present
motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged in
the business of fidelity bonds and other insurance policies.
Petitioner, as an HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine
National Bank, affirmed in effect the CAs disposition that
health care services are not in the nature of an insurance
business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from
items subject to DST is clear, especially in the light of the
amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are
contracts of indemnity, they are not those contemplated
under Section 185.
(f) Assuming arguendo that petitioners agreements are akin
to health insurance, health insurance is not covered by
Section 185.

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

prospectively.

Oral arguments were held in Baguio City on April 22, 2009.

The parties submitted their memoranda on June 8, 2009.

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the
Securities and Exchange Commission on June 30, 1987.[9]
It is engaged in the dispensation of the following medical
services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring of
health problems, family planning counseling, consultation
and advices on diet, exercise and other healthy habits, and
immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete blood
count, and the like and
Curative medical services which pertain to the performing of
other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.[10]
Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis.
The medical services are dispensed to enrolled members in
a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental
practitioners under contract with it. It negotiates with such
health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health
services. Except in cases of emergency, the professional
services are to be provided only by petitioner's physicians,
i.e. those directly employed by it[11] or whose services are
contracted by it.[12] Petitioner also provides hospital
services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and
general nursing care.[13] If and when a member avails of the
benefits under the agreement, petitioner pays the
participating physicians and other health care providers for
the services rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual
members are required to sign and execute a standard health

care agreement embodying the terms and conditions for the

provision of the health care services. The same agreement
contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic
and curative medical services. Except for the curative aspect
of the medical service offered, the enrolled member may
actually make use of the health care services being offered
by petitioner at any time.

is, we choose the interpretation which gives effect to the

whole of the statute its every word.[18]

HEALTH MAINTENANCE ORGANIZATIONS ARE NOT

ENGAGED IN THE INSURANCE BUSINESS

From the language of Section 185, it is evident that two

requisites must concur before the DST can apply, namely:
(1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).

We said in our June 12, 2008 decision that it is irrelevant

that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the DST
is not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the business.
[15]

Petitioner is admittedly an HMO. Under RA 7875 (or The

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

Petitioner, however, submits that it is of critical importance to

characterize the business it is engaged in, that is, to
determine whether it is an HMO or an insurance company,
as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care
agreements.[16]

The question is: was petitioner, as an HMO, engaged in the

business of insurance during the pertinent taxable years?
We rule that it was not.

A second hard look at the relevant law and jurisprudence

convinces the Court that the arguments of petitioner are
meritorious.
Section 185 of the National Internal Revenue Code of 1997
(NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or obligations
of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or
corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for the
doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond
or other obligations issued by any province, city, municipality,
or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any
mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be
collected a documentary stamp tax of fifty centavos (P0.50)
on each four pesos (P4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word,
clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes
some words idle and nugatory.[17] This principle is
expressed in the maxim Ut magis valeat quam pereat, that

Section 2 (2) of PD[20] 1460 (otherwise known as the

Insurance Code) enumerates what constitutes doing an
insurance business or transacting an insurance business:
a)
making or proposing to make, as insurer, any
insurance contract;
b)
making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the
surety;
c)
doing any kind of business, including a
reinsurance business, specifically recognized as constituting
the doing of an insurance business within the meaning of
this Code;
d)
doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that
no profit is derived from the making of insurance contracts,
agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business
Various courts in the United States, whose jurisprudence has
a persuasive effect on our decisions,[21] have determined
that HMOs are not in the insurance business. One test that
they have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance
business) are the principal object and purpose of the
organization or whether they are merely incidental to its
business. If these are the principal objectives, the business

is that of insurance. But if they are merely incidental and

service is the principal purpose, then the business is not
insurance.
Applying the principal object and purpose test,[22] there is
significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a
group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health
Association[23] wherein the Court of Appeals of the District
of Columbia Circuit held that Group Health Association
should not be considered as engaged in insurance activities
since it was created primarily for the distribution of health
care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in
one aspect as creating security against loss from illness or
accident more truly they constitute the quantity purchase of
well-rounded, continuous medical service by its members.
xxx The functions of such an organization are not identical
with those of insurance or indemnity companies. The latter
are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its
extension in kind, quantity or distribution; with the unusual
occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is
concerned principally with getting service rendered to its
members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary
purpose is to reduce the cost rather than the risk of medical
care; to broaden the service to the individual in kind and
quantity; to enlarge the number receiving it; to regularize it
as an everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting against
the financial loss caused by extraordinary and unusual
occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary
aches and pains, minor ills and all the temporary bodily
discomforts as well as the more serious and unusual illness.
To summarize, the distinctive features of the cooperative are
the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services
is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There
is, therefore, a substantial difference between contracting in
this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption
may be present should not outweigh all other factors. If
attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement
and economic function becomes faint, if not extinct. This is

especially true when the contract is for the sale of goods or

services on contingency. But obviously it was not the
purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That
view would cause them to engulf practically all contracts,
particularly conditional sales and contingent service
agreements. The fallacy is in looking only at the risk
element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is
involved or assumed, but on whether that or something else
to which it is related in the particular plan is its principal
object purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the
California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service rather
than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding
that the service is not engaged in the insurance business.
Absence or presence of assumption of risk or peril is not the
sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of
operation as a whole, service rather than indemnity is its
principal object and purpose. Certainly the objects and
purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social
service. Probably there is no more impelling need than that
of adequate medical care on a voluntary, low-cost basis for
persons of small income. The medical profession unitedly is
endeavoring to meet that need. Unquestionably this is
service of a high order and not indemnity.[26] (Emphasis
supplied)
American courts have pointed out that the main difference
between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical
services through participating physicians while insurance
companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit.
Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross
and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between medical service corporations
and ordinary health and accident insurers is that the former
undertake to provide prepaid medical services through
participating physicians, thus relieving subscribers of any
further financial burden, while the latter only undertake to
indemnify an insured for medical expenses up to, but not
beyond, the schedule of rates contained in the policy.
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who will
render services to subscribers on a prepaid basis. Hence, if
there are no physicians participating in the medical service
corporations plan, not only will the subscribers be deprived
of the protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be
doing business solely as a health and accident indemnity
insurer without having qualified as such and rendering itself

subject to the more stringent financial requirements of the

General Insurance Laws.
A participating provider of health care services is one who
agrees in writing to render health care services to or for
persons covered by a contract issued by health service
corporation in return for which the health service corporation
agrees to make payment directly to the participating
provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be
insufficient to override the primary purpose of the business
to provide medical services as needed, with payment made
directly to the provider of these services.[29] In short, even if
petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member
has prepaid, it nevertheless cannot be considered as being
engaged in the insurance business.
By the same token, any indemnification resulting from the
payment for services rendered in case of emergency by nonparticipating health providers would still be incidental to
petitioners purpose of providing and arranging for health
care services and does not transform it into an insurer. To
fulfill its obligations to its members under the agreements,
petitioner is required to set up a system and the facilities for
the delivery of such medical services. This indubitably shows
that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers
preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.
[30] As an HMO, it is its obligation to maintain the good
health of its members. Accordingly, its health care programs
are designed to prevent or to minimize the possibility of any
assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss
or damage arising from a medical condition but, on the
contrary, to provide the health and medical services needed
to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative medical
services), but these are incidental to the principal activity of
providing them medical care. The insurance-like aspect of
petitioners business is miniscule compared to its
noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services,
it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal
purpose test used in the above-quoted U.S. cases, we are
not saying that petitioners operations are identical in every
respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the
purpose of determining what doing an insurance business
means, we have to scrutinize the operations of the business
as a whole and not its mere components. This is of course
only prudent and appropriate, taking into account the
burdensome and strict laws, rules and regulations applicable
to insurers and other entities engaged in the insurance

business. Moreover, we are also not unmindful that there are

other American authorities who have found particular HMOs
to be actually engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part
of the insurance industry. This is evident from the fact that it
is not supervised by the Insurance Commission but by the
Department of Health.[33] In fact, in a letter dated
September 3, 2000, the Insurance Commissioner confirmed
that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great
weight. It is well-settled that the interpretation of an
administrative agency which is tasked to implement a statute
is accorded great respect and ordinarily controls the
interpretation of laws by the courts. The reason behind this
rule was explained in Nestle Philippines, Inc. v. Court of
Appeals:[34]
The rationale for this rule relates not only to the emergence
of the multifarious needs of a modern or modernizing society
and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the
accumulation of experience and growth of specialized
capabilities by the administrative agency charged with
implementing a particular statute. In Asturias Sugar Central,
Inc. vs. Commissioner of Customs,[35] the Court stressed
that executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the
meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion
thereon. The courts give much weight to the government
agency officials charged with the implementation of the law,
their competence, expertness, experience and informed
judgment, and the fact that they frequently are the drafters of
the law they interpret.[36]
A HEALTH CARE AGREEMENT IS NOT AN INSURANCE
CONTRACT CONTEMPLATED UNDER SECTION 185 OF
THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of

insurance or obligations of the nature of indemnity for loss,
damage, or liability. In our decision dated June 12, 2008, we
ruled that petitioners health care agreements are contracts
of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not
based on loss or damage because, under the said
agreement, petitioner assumes the liability and indemnifies
its member for hospital, medical and related expenses (such
as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or
liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital,
medical and professional services to the member in case of
sickness, injury or emergency or his availment of so-called
"out-patient services" (including physical examination, x-ray
and laboratory tests, medical consultations, vaccine

administration and family planning counseling) is the

contingent event which gives rise to liability on the part of the
member. In case of exposure of the member to liability, he
would be entitled to indemnification by petitioner.

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

Furthermore, the fact that petitioner must relieve its member

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

4.
Such assumption of risk is part of a general scheme
to distribute actual losses among a large group of persons
bearing a similar risk and

We reconsider. We shall quote once again the pertinent

portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or obligations
of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or
corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), xxxx
(Emphasis supplied)
In construing this provision, we should be guided by the
principle that tax statutes are strictly construed against the
taxing authority.[38] This is because taxation is a destructive
power which interferes with the personal and property rights
of the people and takes from them a portion of their property
for the support of the government.[39] Hence, tax laws may
not be extended by implication beyond the clear import of
their language, nor their operation enlarged so as to
embrace matters not specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the Court
pronounced that a health care agreement is in the nature of
non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health
service provider to a member under the terms of their health
care agreement. Such contracts, as contracts of adhesion,
are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling
that Blue Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
insurance contract exists where the following elements
concur:
1.

The insured has an insurable interest;

3.

The insurer assumes the risk;

5.
In consideration of the insurers promise, the insured
pays a premium.[41]
Do the agreements between petitioner and its members
possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance
laws has pointed out that, even if a contract contains all the
elements of an insurance contract, if its primary purpose is
the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract
containing all the four elements mentioned above would be
an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an
insurance contract. For example, a law firm which enters into
contracts with clients whereby in consideration of periodical
payments, it promises to represent such clients in all suits for
or against them, is not engaged in the insurance business.
Its contracts are simply for the purpose of rendering personal
services. On the other hand, a contract by which a
corporation, in consideration of a stipulated amount, agrees
at its own expense to defend a physician against all suits for
damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business of
insurance. Unlike the lawyers retainer contract, the essential
purpose of such a contract is not to render personal
services, but to indemnify against loss and damage resulting
from the defense of actions for malpractice.[42] (Emphasis
supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioners agreements. To begin
with, there is no loss, damage or liability on the part of the
member that should be indemnified by petitioner as an HMO.
Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital,
medical and professional services rendered by the
petitioners physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement,
petitioner does not reimburse or indemnify the member as
the latter does not pay any third party. Instead, it is the
petitioner who pays the participating physicians and other
health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements
that gives rise to a monetary liability on the part of the
member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The
terms indemnify or indemnity presuppose that a liability or
claim has already been incurred. There is no indemnity

precisely because the member merely avails of medical

services to be paid or already paid in advance at a preagreed price under the agreements.
Third. According to the agreement, a member can take
advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family
planning counseling, even in the absence of any peril, loss
or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to
reimburse the member who receives care from a nonparticipating physician or hospital. However, this is only a
very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to
the happening of a contingency but includes incidents even
in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot
Care Program, Inc.,[43] although the health care contracts
called for the defendant to partially reimburse a subscriber
for treatment received from a non-designated doctor, this did
not make defendant an insurer. Citing Jordan, the Court
determined that the primary activity of the defendant (was)
the provision of podiatric services to subscribers in
consideration of prepayment for such services.[44] Since
indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature
of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is sufficient
to establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a business risk
when it offers to provide health services: the risk that it might
fail to earn a reasonable return on its investment. But it is not
the risk of the type peculiar only to insurance companies.
Insurance risk, also known as actuarial risk, is the risk that
the cost of insurance claims might be higher than the
premiums paid. The amount of premium is calculated on the
basis of assumptions made relative to the insured.[45]
However, assuming that petitioners commitment to provide
medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the
prepaid fees, it still will not qualify as an insurance contract
because petitioners objective is to provide medical services
at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its
members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.

THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST

ON HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the
imposition of DST on petitioners health care agreements
under Section 185 of the NIRC of 1997 is the provisions
legislative history. The text of Section 185 came into U.S. law
as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed
under Section 116, Article XI of Act No. 1189 (otherwise
known as the Internal Revenue Law of 1904)[46] enacted on
July 2, 1904 and became effective on August 1, 1904.
Except for the rate of tax, Section 185 of the NIRC of 1997 is
a verbatim reproduction of the pertinent portion of Section
116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for
and in respect to the several bonds, debentures, or
certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in
this section, or for or in respect to the vellum, parchment, or
paper upon which such instrument, matters, or things or any
of them shall be written or printed by any person or persons
who shall make, sign, or issue the same, on and after
January first, nineteen hundred and five, the several taxes
following:
Third xxx (c) on all policies of insurance or bond or obligation
of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity,
employers liability, plate glass, steam boiler, burglar,
elevator, automatic sprinkle, or other branch of insurance
(except life, marine, inland, and fire insurance) xxxx
(Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue
Law of 1914) was enacted revising and consolidating the
laws relating to internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items
subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No.
2339 was again reproduced as Section 1604 (l), Article IV of
Act No. 2657 (Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision became
Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of
Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In an
amendment introduced by RA 40 on October 1, 1946, the

DST rate was increased but the provision remained

substantially the same.
Thereafter, on June 3, 1977, the same provision with the
same DST rate was reproduced in PD 1158 (NIRC of 1977)
as Section 234. Under PDs 1457 and 1959, enacted on June
11, 1978 and October 10, 1984 respectively, the DST rate
was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD
1994, Section 234 of the NIRC of 1977 was renumbered as
Section 198. And under Section 23 of EO[47] 273 dated July
25, 1987, it was again renumbered and became Section
185.
On December 23, 1993, under RA 7660, Section 185 was
amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC
of 1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In 2004,
amendments to the DST provisions were introduced by RA
9243[48] but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in
the Philippines with the formation of Bancom Health Care
Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services,
Inc. (or Intercare). However, there are those who claim that
Health Maintenance, Inc. is the HMO industry pioneer,
having set foot in the Philippines as early as 1965 and
having been formally incorporated in 1991. Afterwards,
HMOs proliferated quickly and currently, there are 36
registered HMOs with a total enrollment of more than 2
million.[49]
We can clearly see from these two histories (of the DST on
the one hand and HMOs on the other) that when the law
imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the
intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical
terms. It had many opportunities to do so. But it did not. The
fact that the NIRC contained no specific provision on the
DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative
intent to impose it on them. As a matter of fact, petitioner
was assessed its DST liability only on January 27, 2000,
after more than a decade in the business as an HMO.[50]
Considering that Section 185 did not change since 1904
(except for the rate of tax), it would be safe to say that health
care agreements were never, at any time, recognized as
insurance contracts or deemed engaged in the business of
insurance within the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY

As a general rule, the power to tax is an incident of

sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which
imposes the tax on the constituency who is to pay it.[51] So
potent indeed is the power that it was once opined that the
power to tax involves the power to destroy.[52]
Petitioner claims that the assessed DST to date which
amounts to P376 million[53] is way beyond its net worth of
P259 million.[54] Respondent never disputed these
assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the
purpose of the government to throttle private business. On
the contrary, the government ought to encourage private
enterprise.[55] Petitioner, just like any concern organized for
a lawful economic activity, has a right to maintain a
legitimate business.[56] As aptly held in Roxas, et al. v. CTA,
et al.:[57]
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax
collector kill the hen that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not
to be taxed out of existence. Incurring losses because of a
tax imposition may be an acceptable consequence but killing
the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of
the nations thrust towards a better economy which will
ultimately benefit the majority of our people.[59]
PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST
assessment for taxable years 1996 and 1997 became moot
and academic[60] when it availed of the tax amnesty under
RA 9480 on December 10, 2007. It paid P5,127,149.08
representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of
the tax amnesty. Under Section 6(a) of RA 9480, it is entitled
to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from
the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.[61]

Far from disagreeing with petitioner, respondent manifested

in its memorandum:

Section 6 of [RA 9840] provides that availment of tax

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

In view of petitioners availment of the benefits of [RA 9840],

and without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty
extinguishes the tax liabilities of petitioner. This admission,
however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted
under circumstances amounting to tax fraud under Section
10 of said amnesty law.[62] (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the
taxes covered by the tax amnesty program under RA 9480.
[63] There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.
IS THE COURT BOUND BY A MINUTE RESOLUTION IN
ANOTHER CASE?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of
the CA[64] in CIR v. Philippine National Bank[65] that a
health care agreement of Philamcare Health Systems is not
an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29,
2001 minute resolution of this Court dismissing the appeal in
Philippine National Bank (G.R. No. 148680).[66] Petitioner
argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care
agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our

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

With respect to the same subject matter and the same

issues concerning the same parties, it constitutes res
judicata.[69] However, if other parties or another subject
matter (even with the same parties and issues) is involved,

the minute resolution is not binding precedent. Thus, in CIR

v. Baier-Nickel,[70] the Court noted that a previous case, CIR
v. Baier-Nickel[71] involving the same parties and the same
issues, was previously disposed of by the Court thru a
minute resolution dated February 17, 2003 sustaining the
ruling of the CA. Nonetheless, the Court ruled that the
previous case ha(d) no bearing on the latter case because
the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.
[72]
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The
constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and
the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute
resolutions. A minute resolution is signed only by the clerk of
court by authority of the justices, unlike a decision. It does
not require the certification of the Chief Justice. Moreover,
unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of
Article VIII speaks of a decision.[73] Indeed, as a rule, this
Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioners liability for DST on its health
care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding precedent)
in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that
petitioners health care agreements are not subject to DST.
A FINAL NOTE
Taking into account that health care agreements are clearly
not within the ambit of Section 185 of the NIRC and there
was never any legislative intent to impose the same on
HMOs like petitioner, the same should not be arbitrarily and
unjustly included in its coverage.
It is a matter of common knowledge that there is a great
social need for adequate medical services at a cost which
the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity
purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical
services), including the ability to control costs. They protect
their members from exposure to the high cost of
hospitalization and other medical expenses brought about by
a fluctuating economy. Accordingly, they play an important
role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with
affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of

the premium charged.[74] Its imposition will elevate the cost
of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the
day, neither side wins, considering the indispensability of the
services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED.
The August 16, 2004 decision of the Court of Appeals in CAG.R. SP No. 70479 is REVERSED and SET ASIDE. The
1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET ASIDE.
Respondent is ordered to desist from collecting the said tax.

2.
That on February 2, 1943, they bought from Mrs.
Josefina Florentino a lot with an area of 3,713.40 sq. m.
including improvements thereon from the sum of
P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
3.
That on April 3, 1944 they purchased from Mrs.
Josefa Oppus 21 parcels of land with an aggregate area of
3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of
P82,255.00 as of 1948;
4.
That on April 28, 1944 they purchased from the
Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has
an assessed value of P4,983.00 as of 1948;

No costs.
SO ORDERED.
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and

FRANCISCA EVANGELISTA, petitioners,

5.
That on April 28, 1944 they bought form Mrs.
Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has
an assessed value of P59,140.00 as of 1948;

THE COLLECTOR OF INTERNAL REVENUE and THE

COURT OF TAX APPEALS, respondents.

6.
That in a document dated August 16, 1945, they
appointed their brother Simeon Evangelista to 'manage their
properties with full power to lease; to collect and receive
rents; to issue receipts therefor; in default of such payment,
to bring suits against the defaulting tenants; to sign all
letters, contracts, etc., for and in their behalf, and to endorse
and deposit all notes and checks for them;

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

7.
That after having bought the above-mentioned real
properties the petitioners had the same rented or leases to
various tenants;

vs.

Office of the Solicitor General Ambrosio Padilla, Assistant

Solicitor General Esmeraldo Umali and Solicitor Felicisimo
R. Rosete for Respondents.
CONCEPCION, J.:

8.
That from the month of March, 1945 up to an
including December, 1945, the total amount collected as
rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a
net rental income of P5,948.33;

This is a petition filed by Eufemia Evangelista, Manuela

Evangelista and Francisca Evangelista, for review of a
decision of the Court of Tax Appeals, the dispositive part of
which reads:

9.
That on 1946, they realized a gross rental income
of in the sum of P24,786.30, out of which amount was
deducted in the sum of P16,288.27 for expenses thereby
leaving them a net rental income of P7,498.13;

FOR ALL THE FOREGOING, we hold that the petitioners are

liable for the income tax, real estate dealer's tax and the
residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same
in the total amount of P6,878.34, which is hereby affirmed
and the petition for review filed by petitioner is hereby
dismissed with costs against petitioners.

10.
That in 1948, they realized a gross rental income
of P17,453.00 out of the which amount was deducted the
sum of P4,837.65 as expenses, thereby leaving them a net
rental income of P12,615.35.

It appears from the stipulation submitted by the parties:

1.
That the petitioners borrowed from their father the
sum of P59,1400.00 which amount together with their
personal monies was used by them for the purpose of
buying real properties,.

It further appears that on September 24, 1954 respondent

Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and
corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as
follows:
INCOME TAXES
1945

14.84

1949

1946

38.75

1,144.71

Total including surcharge

1947

P193.75

10.34

TOTAL TAXES DUE

1948

P6,878.34.

1,912.30

Said letter of demand and corresponding assessments were

delivered to petitioners on December 3, 1954, whereupon
they instituted the present case in the Court of Tax Appeals,
with a prayer that "the decision of the respondent contained
in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the
taxes in question, with costs against the respondent.

1949
1,575.90
Total including surcharge and compromise
P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946
P37.50
1947
150.00
1948
150.00
1949
150.00
Total including penalty
P527.00
RESIDENCE TAXES OF CORPORATION

After appropriate proceedings, the Court of Tax Appeals the

above-mentioned decision for the respondent, and a petition
for reconsideration and new trial having been subsequently
denied, the case is now before Us for review at the instance
of the petitioners.
The issue in this case whether petitioners are subject to the
tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence
tax for corporations and the real estate dealers fixed tax.
With respect to the tax on corporations, the issue hinges on
the meaning of the terms "corporation" and "partnership," as
used in section 24 and 84 of said Code, the pertinent parts
of which read:
SEC. 24. Rate of tax on corporations.There shall be
levied, assessed, collected, and paid annually upon the total
net income received in the preceding taxable year from all
sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or
organized but not including duly registered general copartnerships (compaias colectivas), a tax upon such
income equal to the sum of the following: . . .

1946

SEC. 84 (b). The term 'corporation' includes partnerships, no

matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or
insurance companies, but does not include duly registered
general copartnerships. (compaias colectivas).

38.75

Article 1767 of the Civil Code of the Philippines provides:

1947

By the contract of partnership two or more persons bind

themselves to contribute money, properly, or industry to a
common fund, with the intention of dividing the profits among
themselves.

1945
P38.75

38.75
1948
38.75

Pursuant to the article, the essential elements of a

partnership are two, namely: (a) an agreement to contribute

money, property or industry to a common fund; and (b) intent

to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute
money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and
then divide the same among themselves, because:
1.
Said common fund was not something they found
already in existence. It was not property inherited by them
pro indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to
establish said common fund.
2.
They invested the same, not merely not merely in
one transaction, but in a series of transactions. On February
2, 1943, they bought a lot for P100,000.00. On April 3, 1944,
they purchased 21 lots for P18,000.00. This was soon
followed on April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April 28, 1944),
they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and
preservation of the aforementioned common fund or even of
the property acquired by the petitioners in February, 1943. In
other words, one cannot but perceive a character of
habitually peculiar to business transactions engaged in the
purpose of gain.
3.
The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein.
The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there
has been any change in the utilization thereof.
4.
Since August, 1945, the properties have been
under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue
receipts, to bring suits, to sign letters and contracts, and to
indorse and deposit notes and checks. Thus, the affairs
relative to said properties have been handled as if the same
belonged to a corporation or business and enterprise
operated for profit.
5.
The foregoing conditions have existed for more
than ten (10) years, or, to be exact, over fifteen (15) years,
since the first property was acquired, and over twelve (12)
years, since Simeon Evangelista became the manager.
6.
Petitioners have not testified or introduced any
evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation
therefor.

Although, taken singly, they might not suffice to establish the

intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence,
those cases are not in point.
Petitioners insist, however, that they are mere co-owners,
not copartners, for, in consequence of the acts performed by
them, a legal entity, with a personality independent of that of
its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax
Appeals.
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore,
to organizations which are not necessarily "partnerships", in
the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely
one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said
Code, "the term corporation includes partnerships, no matter
how created or organized." This qualifying expression clearly
indicates that a joint venture need not be undertaken in any
of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, joint accounts, (cuentas
en participation)" and "associations," none of which has a
legal personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as
above stated, "duly registered general copartnerships"
which are possessed of the aforementioned personality
have been expressly excluded by law (sections 24 and 84 [b]
from the connotation of the term "corporation" It may not be
amiss to add that petitioners' allegation to the effect that their
liability in connection with the leasing of the lots above
referred to, under the management of one person even if
true, on which we express no opinion tends to increase
the similarity between the nature of their venture and that
corporations, and is, therefore, an additional argument in
favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States,
"corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance
companies." However, the term "association" is not used in
the aforementioned laws.
. . . in any narrow or technical sense. It includes any
organization, created for the transaction of designed affairs,

or the attainment of some object, which like a corporation,

continues notwithstanding that its members or participants
change, and the affairs of which, like corporate affairs, are
conducted by a single individual, a committee, a board, or
some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an
agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or
company, a 'business' trusts a 'Massachusetts' trust, a
'common law' trust, and 'investment' trust (whether of the
fixed or the management type), an interinsuarance exchange
operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever
name known) which is not, within the meaning of the Code, a
trust or an estate, or a partnership. (7A Mertens Law of
Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term
'partnership 'it includes not only a partnership as known at
common law but, as well, a syndicate, group, pool, joint
venture or other unincorporated organizations which carries
on any business financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a
corporation. . . (7A Merten's Law of Federal Income taxation,
p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture
is carried on, . . .. ( 8 Merten's Law of Federal Income
Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National
Internal Revenue Code, includes these partnerships with
the exception only of duly registered general copartnerships
within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute
a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of
Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter
how created or organized, whether domestic or resident
foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock
company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter
how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is
analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and
that the latter was approved on June 15, 1939, the day

immediately after the approval of said Commonwealth Act

No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners
are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually
engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals
of said properties from June 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax
provided in section 193 (q) of our National Internal Revenue
Code, for "real estate dealers," inasmuch as, pursuant to
section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the
business of buying, selling, exchanging, leasing, or renting
property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner
of rental property or properties rented or offered to rent for
an aggregate amount of three thousand pesos or more a
year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax
appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.

G.R. No. 172087

March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION

(PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented
herein by HON. JOSE MARIO BUAG, in his official
capacity as COMMISSIONER OF INTERNAL REVENUE,
Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in
behalf, or under the authority of Respondent. Public and
Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and
Prohibition1 with prayer for the issuance of a Temporary
Restraining Order and/or Preliminary Injunction, dated April
17, 2006, of petitioner Philippine Amusement and Gaming
Corporation (PAGCOR), seeking the declaration of nullity of
Section 1 of Republic Act (R.A.) No. 9337 insofar as it
amends Section 27 (c) of the National Internal Revenue
Code of 1997, by excluding petitioner from exemption from
corporate income tax for being repugnant to Sections 1 and
10 of Article III of the Constitution. Petitioner further seeks to
prohibit the implementation of Bureau of Internal Revenue
(BIR) Revenue Regulations No. 16-2005 for being contrary
to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.)
No. 1067-A2 on January 1, 1977. Simultaneous to its
creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A)
was issued exempting PAGCOR from the payment of any
type of tax, except a franchise tax of five percent (5%) of the
gross revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399
was issued expanding the scope of PAGCOR's exemption.5
To consolidate the laws pertaining to the franchise and
powers of PAGCOR, P.D. No. 18696 was issued. Section 13
thereof reads as follows:
Sec. 13. Exemptions. x x x
(1) Customs Duties, taxes and other imposts on
importations. - All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such other
gambling paraphernalia, including accessories or related
facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration thereof
and such other clubs, recreation or amusement places to be
established under and by virtue of this Franchise shall be
exempt from the payment of duties, taxes and other imposts,
including all kinds of fees, levies, or charges of any kind or
nature.
Vessels and/or accessory ferry boats imported or to be
imported by any corporation having existing contractual
arrangements with the Corporation, for the sole and
exclusive use of the casino or to be used to service the
operations and requirements of the casino, shall likewise be
totally exempt from the payment of all customs duties, taxes
and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether
National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of
any kind or form, income or otherwise, as well as fees,
charges, or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except
a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly
to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or
description, levied, established, or collected by any
municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings
derived from the operations conducted under the franchise,
specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies,
shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to
be conducted under this Franchise and to those receiving

compensation or other remuneration from the Corporation as

a result of essential facilities furnished and/or technical
services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted
by the Corporation or operator in pursuance of this provision
shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law
to the contrary, in the event the Corporation should declare a
cash dividend income corresponding to the participation of
the private sector shall, as an incentive to the beneficiaries,
be subject only to a final flat income rate of ten percent
(10%) of the regular income tax rates. The dividend income
shall not in such case be considered as part of the
beneficiaries' taxable income; provided, however, that such
dividend income shall be totally exempted from income or
other form of taxes if invested within six (6) months from the
date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any affiliate
activity that will ultimately redound to the benefit of the
Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection
with or related to the operations of the casino(s);

(b) Government bonds, securities, treasury notes, or

government debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984

through P.D. No. 1931, but it was later restored by Letter of
Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,8 otherwise known as

the National Internal Revenue Code of 1997, took effect.
Section 27 (c) of R.A. No. 8424 provides that governmentowned and controlled corporations (GOCCs) shall pay
corporate income tax, except petitioner PAGCOR, the
Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office,
thus:
(c) Government-owned or Controlled Corporations, Agencies
or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and Gaming

Corporation (PAGCOR), shall pay such rate of tax upon their

taxable income as are imposed by this Section upon
corporations or associations engaged in similar business,
industry, or activity.9

PAGCOR as one of the franchisees subject to 10% VAT

imposed under Section 108 of the National Internal Revenue
Code of 1997, as amended by R.A. No. 9337. The said
revenue regulation, in part, reads:

With the enactment of R.A. No. 933710 on May 24, 2005,

certain sections of the National Internal Revenue Code of
1997 were amended. The particular amendment that is at
issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue
Code of 1997 by excluding PAGCOR from the enumeration
of GOCCs that are exempt from payment of corporate
income tax, thus:

Sec. 4. 108-3. Definitions and Specific Rules on Selected

Services.

(c) Government-owned or Controlled Corporations, Agencies

or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned and
controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the Philippine Charity Sweepstakes
Office (PCSO), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or
associations engaged in similar business, industry, or
activity.

Different groups came to this Court via petitions for certiorari

and prohibition11 assailing the validity and constitutionality of
R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT)

on sale of goods and properties; Section 5, which imposes a
10% VAT on importation of goods; and Section 6, which
imposes a 10% VAT on sale of services and use or lease of
properties, all contain a uniform proviso authorizing the
President, upon the recommendation of the Secretary of
Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of the
Constitution, which section vests in Congress the exclusive
authority to fix the rate of taxes, and of Section 1, Article III of
the Constitution on due process, as well as of Section 26 (2),
Article VI of the Constitution, which section provides for the
"no amendment rule" upon the last reading of a bill;

(h) x x x
Gross Receipts of all other franchisees, other than those
covered by Sec. 119 of the Tax Code, regardless of how their
franchisees may have been granted, shall be subject to the
10% VAT imposed under Sec.108 of the Tax Code. This
includes, among others, the Philippine Amusement and
Gaming Corporation (PAGCOR), and its licensees or
franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL
AND VOID AB INITIO FOR BEING REPUGNANT TO THE
EQUAL PROTECTION [CLAUSE] EMBODIED IN SECTION
1, ARTICLE III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL
AND VOID AB INITIO FOR BEING REPUGNANT TO THE
NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10,
ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3,
PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR
BEING BEYOND THE SCOPE OF THE BASIC LAW, RA
8424, SECTION 108, INSOFAR AS THE SAID
REGULATION IMPOSED VAT ON THE SERVICES OF THE
PETITIONER AS WELL AS PETITIONERS LICENSEES OR
FRANCHISEES
WHEN
THE
BASIC
LAW,
AS
INTERPRETED BY APPLICABLE JURISPRUDENCE,
DOES NOT IMPOSE VAT ON PETITIONER OR ON
PETITIONERS LICENSEES OR FRANCHISEES.14

2) Sections 8 and 12 were alleged to be violative of Section

1, Article III of the Constitution, or the guarantee of equal
protection of the laws, and Section 28 (1), Article VI of the
Constitution; and

The BIR, in its Comment15 dated December 29, 2006,

counters:

3) other technical aspects of the passage of the law,

questioning the manner it was passed.

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF

P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS
OF
LAWS
THAT
SHOULD
BE
HARMONIOUSLY CONSTRUED TOGETHER SO AS TO
GIVE EFFECT TO ALL OF THEIR PROVISIONS
WHENEVER POSSIBLE.

On September 1, 2005, the Court dismissed all the petitions

and upheld the constitutionality of R.A. No. 9337.12
On the same date, respondent BIR issued Revenue
Regulations (RR) No. 16-2005,13 specifically identifying

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF

SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.

operate only on some and not all of the people without

violating the equal protection clause. The classification must,
as an indispensable requisite, not be arbitrary. To be valid, it
must conform to the following requirements:

III
1) It must be based on substantial distinctions.
BIR REVENUE REGULATIONS ARE PRESUMED VALID
AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY
LAWFUL AUTHORITIES.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

The Office of the Solicitor General (OSG), by way of

Manifestation In Lieu of Comment,16 concurred with the
arguments of the petitioner. It added that although the State
is free to select the subjects of taxation and that the inequity
resulting from singling out a particular class for taxation or
exemption is not an infringement of the constitutional
limitation, a tax law must operate with the same force and
effect to all persons, firms and corporations placed in a
similar situation. Furthermore, according to the OSG, public
respondent BIR exceeded its statutory authority when it
enacted RR No. 16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in relation to R.A.
No. 9337.
The main issue is whether or not PAGCOR is still exempt
from corporate income tax and VAT with the enactment of
R.A. No. 9337.
After a careful study of the positions presented by the
parties, this Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c)
of the National Internal Revenue Code of 1977, petitioner is
no longer exempt from corporate income tax as it has been
effectively omitted from the list of GOCCs that are exempt
from it. Petitioner argues that such omission is
unconstitutional, as it is violative of its right to equal
protection of the laws under Section 1, Article III of the
Constitution:
Sec. 1. No person shall be deprived of life, liberty, or
property without due process of law, nor shall any person be
denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the
meaning and scope of equal protection, thus:

4) It must apply equally to all members of the class.18

It is not contested that before the enactment of R.A. No.

9337, petitioner was one of the five GOCCs exempted from
payment of corporate income tax as shown in R.A. No. 8424,
Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies
or Instrumentalities. - The provisions of existing special or
general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their
taxable income as are imposed by this Section upon
corporations or associations engaged in similar business,
industry, or activity.19
A perusal of the legislative records of the Bicameral
Conference Meeting of the Committee on Ways on Means
dated October 27, 1997 would show that the exemption of
PAGCOR from the payment of corporate income tax was
due to the acquiescence of the Committee on Ways on
Means to the request of PAGCOR that it be exempt from
such tax.20 The records of the Bicameral Conference
Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we
imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

Equal protection requires that all persons or things similarly

situated should be treated alike, both as to rights conferred
and responsibilities imposed. Similar subjects, in other
words, should not be treated differently, so as to give undue
favor to some and unjustly discriminate against others. 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. The "equal
protection of the laws is a pledge of the protection of equal
laws." It limits governmental discrimination. The equal
protection clause extends to artificial persons but only
insofar as their property is concerned.
Legislative bodies are allowed to classify the subjects of
legislation. If the classification is reasonable, the law may

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we
covered the tax on --- Whether on a universal basis, we
included a tax on cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN
Commission.

JAVIER.

Yeah,

Philippine

Insurance

CHAIRMAN ENRILE. Philippine Insurance --- Health, health

ba. Yon ang request ng Chairman, I will accept. (laughter)
Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue
gainers if we factored in an amount that would reflect the
VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this measure only.
We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the
exemption. Assuming that when we release the money into
the hands of the public, they will not use that to --- for
wallpaper. They will spend that eh, Mr. Chairman. So when
they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other
sales taxes no. Is there a quantification? Is there an
approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire
seven billion. In effect, it is not circulating in the economy
which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken
and spent by government, somebody receives it in the form
of wages and supplies and other services and other goods.
They are not being taken from the public and stored in
avault.
CHAIRMAN JAVIER. That 7.7 loss because of tax
exemption. That will be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424,
the exemption of PAGCOR from paying corporate income
tax was not based on a classification showing substantial
distinctions which make for real differences, but to reiterate,
the exemption was granted upon the request of PAGCOR
that it be exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending
R.A. No. 8424, PAGCOR has been excluded from the
enumeration of GOCCs that are exempt from paying
corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee
on the Disagreeing Provisions of Senate Bill No. 1950 and
House Bill No. 3555, show that it is the legislative intent that
PAGCOR be subject to the payment of corporate income
tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the
proponent of the amendment.

SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons

why we're even considering this VAT bill is we want to show
the world who our creditors, that we are increasing official
revenues that go to the national budget. Unfortunately today,
Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a
net income of 9.7 billion after paying some small taxes that
they are subjected to. Of the 9.7 billion, they claim they
remitted to national government seven billion. Pagkatapos,
there are other specific remittances like to the Philippine
Sports Commission, etc., as mandated by various laws, and
then about 400 million to the President's Social Fund. But all
in all, their net profit today should be about 12 billion. That's
why I am questioning this two billion. Because while
essentially they claim that the money goes to government,
and I will accept that just for the sake of argument. It does
not pass through the appropriation process. And I think that
at least if we can capture 35 percent or 32 percent through
the budgetary process, first, it is reflected in our official
income of government which is applied to the national
budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the
money is spent and not through a board of directors that has
absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr.
Chairman, follow up lang.
There is wisdom in the comments of my good friend from
Cebu, Senator Osmea.
SEN. OSMEA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay
Kasimanwa. But I would not want to put my friends from the
Department of Finance in a difficult position, but may we
know your comments on this knowing that as Senator
Osmea just mentioned, he said, "I accept that that a lot of it
is going to spending for basic services," you know, going to
most, I think, supposedly a lot or most of it should go to
government spending, social services and the like. What is
your comment on this? This is going to affect a lot of
services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them,
Mr. Senator, because you may have your own pre-judgment
on this and I don't blame you. I don't blame you. And I know
you have your own research. But will this not affect a lot, the
disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to
that question also. Wouldn't it be easier for you to explain to,
say, foreign creditors, how do you explain to them that if
there is a fiscal gap some of our richest corporations has
[been] spared [from] taxation by the government which is
one rich source of revenues. Now, why do you save, why do
you spare certain government corporations on that, like

Pagcor? So, would it be easier for you to make an argument

if everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to
respond to those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us
because it will then enter as an official revenue although
when dividends declare it also goes in as other income. (sic)
REP. TEVES. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27,
that is on income tax. Now, we are talking here on valueadded tax. Do you mean to say we are going to amend it
from income tax to value-added tax, as far as Pagcor is
concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending
that section with regard to the exemption from income tax of
Pagcor.
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr.
Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair.
What exactly are the functions of Pagcor that are VATable?
What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax.
This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa
kanya. Sale of what?
REP. VILLAFUERTE. Mr. Chairman, my question is, what
are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement
or the way they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles,
the Senate version does not discuss a VAT on Pagcor but it
just takes away their exemption from non-payment of income
tax.22
Taxation is the rule and exemption is the exception.23 The
burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so
claimed.24 As a rule, tax exemptions are construed strongly
against the claimant.25 Exemptions must be shown to exist
clearly and categorically, and supported by clear legal
provision.26

In this case, PAGCOR failed to prove that it is still exempt

from the payment of corporate income tax, considering that
Section 1 of R.A. No. 9337 amended Section 27 (c) of the
National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as
shown by the discussions in the Bicameral Conference
Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption
from the payment of corporate income tax. It is a basic
precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others
as expressed in the familiar maxim expressio unius est
exclusio alterius.27 Thus, the express mention of the
GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR
must be regarded as coming within the purview of the
general rule that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam in casibus
non exceptis.28
PAGCOR cannot find support in the equal protection clause
of the Constitution, as the legislative records of the
Bicameral Conference Meeting dated October 27, 1997, of
the Committee on Ways and Means, show that PAGCORs
exemption from payment of corporate income tax, as
provided in Section 27 (c) of R.A. No. 8424, or the National
Internal Revenue Code of 1997, was not made pursuant to a
valid classification based on substantial distinctions and the
other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some,
and not all, without violating the equal protection clause. The
legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was
PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No.
9337 is null and void ab initio for violating the nonimpairment clause of the Constitution. Petitioner avers that
laws form part of, and is read into, the contract even without
the parties expressly saying so. Petitioner states that the
private parties/investors transacting with it considered the
tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to
transact/invest with it. Petitioner argues that the withdrawal
of its exemption from corporate income tax by R.A. No. 9337
has the effect of changing the main consideration and
inducement for the transactions of private parties with it;
thus, the amendatory provision is violative of the nonimpairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in Section 10,
Article III of the Constitution, which provides that no law
impairing the obligation of contracts shall be passed. The
non-impairment clause is limited in application to laws that
derogate from prior acts or contracts by enlarging, abridging
or in any manner changing the intention of the parties.29
There is impairment if a subsequent law changes the terms
of a contract between the parties, imposes new conditions,

dispenses with those agreed upon or withdraws remedies for

the enforcement of the rights of the parties.30
As regards franchises, Section 11, Article XII of the
Constitution31 provides that no franchise or right shall be
granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the
common good so requires.32
In Manila Electric Company v. Province of Laguna,33 the
Court held that a franchise partakes the nature of a grant,
which is beyond the purview of the non-impairment clause of
the Constitution.34 The pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in the
nature of contracts and a part of the inducement for carrying
on the franchise, these exemptions, nevertheless, are far
from being strictly contractual in nature. Contractual tax
exemptions, in the real sense of the term and where the nonimpairment clause of the Constitution can rightly be invoked,
are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which
the government, acting in its private capacity, sheds its cloak
of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without
impairing the obligations of contracts. These contractual tax
exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes
the nature of a grant which is beyond the purview of the nonimpairment clause of the Constitution. Indeed, Article XII,
Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit
that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall
be subject to amendment, alteration or repeal by Congress
as and when the common good so requires.35
In this case, PAGCOR was granted a franchise to operate
and maintain gambling casinos, clubs and other recreation
or amusement places, sports, gaming pools, i.e., basketball,
football, lotteries, etc., whether on land or sea, within the
territorial jurisdiction of the Republic of the Philippines.36
Under Section 11, Article XII of the Constitution, PAGCORs
franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No.
9337, amending Section 27 (c) of R.A. No. 8424 by
withdrawing the exemption of PAGCOR from corporate
income tax, which may affect any benefits to PAGCORs
transactions with private parties, is not violative of the nonimpairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that
the provision subjecting PAGCOR to 10% VAT is invalid for
being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337
is it provided that petitioner can be subjected to VAT. R.A.
No. 9337 is clear only as to the removal of petitioner's
exemption from the payment of corporate income tax, which
was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts

petitioner from VAT pursuant to Section 7 (k) thereof, which
reads:
Sec. 7. Section 109 of the same Code, as amended, is
hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the
provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:

(k) Transactions which are exempt under international

agreements to which the Philippines is a signatory or under
special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because
PAGCORs charter, P.D. No. 1869, is a special law that
grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported
by Section 6 of R.A. No. 9337, which retained Section 108
(B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code
(R.A. No. 8424), as amended, is hereby further amended to
read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or
Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed
and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties: x x x
(B) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%)
rate;
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;
As pointed out by petitioner, although R.A. No. 9337
introduced amendments to Section 108 of R.A. No. 8424 by
imposing VAT on other services not previously covered, it did
not amend the portion of Section 108 (B) (3) that subjects to
zero percent rate services performed by VAT-registered
persons to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of
R.A. No. 8424 has been thoroughly and extensively
discussed in Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation.39 Acesite was the owner
and operator of the Holiday Inn Manila Pavilion Hotel. It

leased a portion of the hotels premises to PAGCOR. It

incurred VAT amounting to P30,152,892.02 from its rental
income and sale of food and beverages to PAGCOR from
January 1996 to April 1997. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the amount
assessed to PAGCOR. However, PAGCOR refused to pay
the taxes because of its tax-exempt status. PAGCOR paid
only the amount due to Acesite minus VAT in the sum of
P30,152,892.02. Acesite paid VAT in the amount of
P30,152,892.02 to the Commissioner of Internal Revenue,
fearing the legal consequences of its non-payment. In May
1998, Acesite sought the refund of the amount it paid as VAT
on the ground that its transaction with PAGCOR was subject
to zero rate as it was rendered to a tax-exempt entity. The
Court ruled that PAGCOR and Acesite were both exempt
from paying VAT, thus:
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating
PAGCOR, grants the latter an exemption from the payment
of taxes. Section 13 of P.D. 1869 pertinently provides:
Sec. 13. Exemptions.
(2) Income and other taxes. - (a) Franchise Holder: No tax
of any kind or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge
attach in any way to the earnings of the Corporation, except
a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under
this Franchise. Such tax shall be due and payable quarterly
to the National Government and shall be in lieu of all kinds of
taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any
municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings
derived from the operations conducted under the franchise
specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies,
shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to
be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or
operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only
to PAGCOR's direct tax liability and not to indirect taxes, like
the VAT.
We disagree.

A close scrutiny of the above provisos clearly gives

PAGCOR a blanket exemption to taxes with no distinction on
whether the taxes are direct or indirect. We are one with the
CA ruling that PAGCOR is also exempt from indirect taxes,
like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869],
the term "Corporation" or operator refers to PAGCOR.
Although the law does not specifically mention PAGCOR's
exemption from indirect taxes, PAGCOR is undoubtedly
exempt from such taxes because the law exempts from
taxes persons or entities contracting with PAGCOR in casino
operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one
step further by granting tax exempt status to persons dealing
with PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for the P30,
152,892.02 VAT and neither is Acesite as the latter is
effectively subject to zero percent rate under Sec. 108 B (3),
R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals
dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. It must be noted that the
indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods,
properties, or services subject to VAT. Thus, by extending
the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR
from being liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable
to said tax.
It is true that VAT can either be incorporated in the value of
the goods, properties, or services sold or leased, in which
case it is computed as 1/11 of such value, or charged as an
additional 10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its clients and
customer. In the instant case, Acesite followed the latter
method, that is, charging an additional 10% of the gross
sales and rentals. Be that as it may, the use of either
method, and in particular, the first method, does not
denigrate the fact that PAGCOR is exempt from an indirect
tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10%
VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax. Such exemption falls
within the former Section 102 (b) (3) of the 1977 Tax Code,
as amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:
Section 102. Value-added tax on sale of services.- (a) Rate
and base of tax - There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross
receipts derived by any person engaged in the sale of
services x x x; Provided, that the following services

performed in the Philippines by VAT registered persons shall

be subject to 0%.
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate (emphasis
supplied).
The rationale for the exemption from indirect taxes provided
for in P.D. 1869 and the extension of such exemption to
entities or individuals dealing with PAGCOR in casino
operations are best elucidated from the 1987 case of
Commissioner of Internal Revenue v. John Gotamco & Sons,
Inc., where the absolute tax exemption of the World Health
Organization (WHO) upon an international agreement was
upheld. We held in said case that the exemption of
contractee WHO should be implemented to mean that the
entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and
such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is
to exempt the contractor so that no contractor's tax may be
shifted to the contractee WHO. Thus, the proviso in P.D.
1869, extending the exemption to entities or individuals
dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.40
Although the basis of the exemption of PAGCOR and Acesite
from VAT in the case of The Commissioner of Internal
Revenue v. Acesite (Philippines) Hotel Corporation was
Section 102 (b) of the 1977 Tax Code, as amended, which
section was retained as Section 108 (B) (3) in R.A. No.
8424,41 it is still applicable to this case, since the provision
relied upon has been retained in R.A. No. 9337.421avvphi1
It is settled rule that in case of discrepancy between the
basic law and a rule or regulation issued to implement said
law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the
basic law.43 RR No. 16-2005, therefore, cannot go beyond
the provisions of R.A. No. 9337. Since PAGCOR is exempt
from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to 10% VAT under RR No.
16-2005; hence, the said regulatory provision is hereby
nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1
of Republic Act No. 9337, amending Section 27 (c) of the
National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation
from the enumeration of government-owned and controlled
corporations exempted from corporate income tax is valid
and constitutional, while BIR Revenue Regulations No. 162005 insofar as it subjects PAGCOR to 10% VAT is null and
void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.
No costs.

SO ORDERED.
G.R. No. 109289

October 3, 1994

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF
FINANCE & JOSE U. ONG, as COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 109446

October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW

OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES,
ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY
OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for

petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition
challenge, in G.R. No. 109289, the constitutionality of
Republic Act No. 7496, also commonly known as the
Simplified Net Income Taxation Scheme ("SNIT"), amending
certain provisions of the National Internal Revenue Code
and, in
G.R. No. 109446, the validity of Section 6, Revenue
Regulations No. 2-93, promulgated by public respondents
pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the
continued implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of
Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the
Congress shall embrace only one subject which shall be
expressed in the title thereof.

Article VI, Section 28(1) The rule of taxation shall be

uniform and equitable. The Congress shall evolve a
progressive system of taxation.

but not over P120,00

Article III, Section 1 No person shall be deprived of . . .

property without due process of law, nor shall any person be
denied the equal protection of the laws.

but not over P350,000

In G.R. No. 109446, petitioners, assailing Section 6 of

Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.

of excess over P350,000

The Solicitor General espouses the position taken by public

respondents.
The Court has given due course to both petitions. The
parties, in compliance with the Court's directive, have filed
their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314,
progenitor of Republic Act No. 7496, is a misnomer or, at
least, deficient for being merely entitled, "Simplified Net
Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their
Profession" (Petition in G.R. No. 109289).

Over P120,000

Over P350,000

of excess over P30,000

P15,600 + 20%
of excess over P120,000

P61,600 + 30%

Sec. 29. Deductions from gross income. In computing

taxable income subject to tax under Sections 21(a), 24(a),
(b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable
income subject to tax under Section 21 (f) in the case of
individuals engaged in business or practice of profession,
only the following direct costs shall be allowed as
deductions:
(a)

Raw materials, supplies and direct labor;

(b)
Salaries of employees directly engaged in
activities in the course of or pursuant to the business or
practice of their profession;
(c)
water;

Telecommunications, electricity, fuel, light and

(d)

Business rentals;

(e)

Depreciation;

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme
For The Self-Employed and Professionals Engaged In The
Practice of Their Profession, Amending Sections 21 and 29
of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred
to, of the National Internal Revenue Code, as now amended,
provide:
Sec. 21. Tax on citizens or residents.
(f)
Simplified Net Income Tax for the Self-Employed
and/or Professionals Engaged in the Practice of Profession.
A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year
from all sources, other than income covered by paragraphs
(b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his profession
herein, determined in accordance with the following
schedule:
Not over P10,000

3%

Over P10,000

P300 + 9%

but not over P30,000

Over P30,000

of excess over P10,000

P2,100 + 15%

(f)
Contributions made to the Government and
accredited relief organizations for the rehabilitation of
calamity stricken areas declared by the President; and
(g)
Interest paid or accrued within a taxable year on
loans contracted from accredited financial institutions which
must be proven to have been incurred in connection with the
conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are
difficult to determine, a maximum of forty per cent (40%) of
their gross receipts shall be allowed as deductions to answer
for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be
difficult to accept petitioner's view that the amendatory law
should be considered as having now adopted a gross
income, instead of as having still retained the net income,
taxation scheme. The allowance for deductible items, it is
true, may have significantly been reduced by the questioned
law in comparison with that which has prevailed prior to the
amendment; limiting, however, allowable deductions from
gross income is neither discordant with, nor opposed to, the
net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential,
continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been

envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor
any one of unrelated subjects in support of the whole act, (b)
to avoid surprises or even fraud upon the legislature, and (c)
to fairly apprise the people, through such publications of its
proceedings as are usually made, of the subjects of
legislation. 1 The above objectives of the fundamental law
appear to us to have been sufficiently met. Anything else
would be to require a virtual compendium of the law which
could not have been the intendment of the constitutional
mandate.

Having arrived at this conclusion, the plea of petitioner to

have the law declared unconstitutional for being violative of
due process must perforce fail. The due process clause may
correctly be invoked only when there is a clear contravention
of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.

Petitioner intimates that Republic Act No. 7496 desecrates

the constitutional requirement that taxation "shall be uniform
and equitable" in that the law would now attempt to tax
single proprietorships and professionals differently from the
manner it imposes the tax on corporations and partnerships.
The contention clearly forgets, however, that such a system
of income taxation has long been the prevailing rule even
prior to Republic Act No. 7496.

The several propositions advanced by petitioners revolve

around the question of whether or not public respondents
have exceeded their authority in promulgating Section 6,
Revenue Regulations No. 2-93, to carry out Republic Act No.
7496.

Uniformity of taxation, like the kindred concept of equal

protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in
privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend
classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose,
(3) the law applies, all things being equal, to both present
and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi
Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR,
197 SCRA 52).
What may instead be perceived to be apparent from the
amendatory law is the legislative intent to increasingly shift
the income tax system towards the schedular approach 2 in
the income taxation of individual taxpayers and to maintain,
by and large, the present global treatment 3 on taxable
corporations. We certainly do not view this classification to
be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of
the law, illustrating, in the process, what he believes to be an
imbalance between the tax liabilities of those covered by the
amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs
(place) of taxation. This court cannot freely delve into those
matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so
unconscionable and unjust as to amount to confiscation of
property, courts will not hesitate to strike it down, for, despite
all its plenitude, the power to tax cannot override
constitutional proscriptions. This stage, however, has not
been demonstrated to have been reached within any
appreciable distance in this controversy before us.

G.R. No. 109446

The questioned regulation reads:

Sec. 6. General Professional Partnership The general
professional partnership (GPP) and the partners comprising
the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct
costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by
partners in their individual capacities in the practice of their
profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not
deductible from his gross income.
The real objection of petitioners is focused on the
administrative interpretation of public respondents that would
apply SNIT to partners in general professional partnerships.
Petitioners cite the pertinent deliberations in Congress
during its enactment of Republic Act No. 7496, also quoted
by the Honorable Hernando B. Perez, minority floor leader of
the House of Representatives, in the latter's privilege speech
by way of commenting on the questioned implementing
regulation of public respondents following the effectivity of
the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the
correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income tax
return?
MR. PEREZ. That is correct, Mr. Speaker. This does not
apply to corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15
P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman
from Batangas say that this bill is intended to increase
collections as far as individuals are concerned and to make
collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal
Tamano on the Senate version of the SNITS, it is
categorically stated, thus:
This bill, Mr. President, is not applicable to business
corporations or to partnerships; it is only with respect to
individuals and professionals. (Emphasis ours)
The Court, first of all, should like to correct the apparent
misconception that general professional partnerships are
subject to the payment of income tax or that there is a
difference in the tax treatment between individuals engaged
in business or in the practice of their respective professions
and partners in general professional partnerships. The fact
of the matter is that a general professional partnership,
unlike an ordinary business partnership (which is treated as
a corporation for income tax purposes and so subject to the
corporate income tax), is not itself an income taxpayer. The
income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has
not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional
partnerships. (a) Persons exercising a common
profession in general partnership shall be liable for income
tax only in their individual capacity, and the share in the net
profits of the general professional partnership to which any
taxable partner would be entitled whether distributed or
otherwise, shall be returned for taxation and the tax paid in
accordance with the provisions of this Title.
(b)
In determining his distributive share in the net
income of the partnership, each partner
(1)
Shall take into account separately his distributive
share of the partnership's income, gain, loss, deduction, or
credit to the extent provided by the pertinent provisions of
this Code, and
(2)
Shall be deemed to have elected the itemized
deductions, unless he declares his distributive share of the
gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or
individually and one who does it through partnership
(whether registered or not) with others in the exercise of a
common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive
investment income, under the present income tax system all
individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a
common set of rules.
We can well appreciate the concern taken by petitioners if
perhaps we were to consider Republic Act No. 7496 as an

entirely independent, not merely as an amendatory, piece of

legislation. The view can easily become myopic, however,
when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and
precepts long obtaining under the National Internal Revenue
Code. To elaborate a little, the phrase "income taxpayers" is
an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income.
The law, in levying the tax, adopts the most comprehensive
tax situs of nationality and residence of the taxpayer (that
renders citizens, regardless of residence, and resident aliens
subject to income tax liability on their income from all
sources) and of the generally accepted and internationally
recognized income taxable base (that can subject nonresident aliens and foreign corporations to income tax on
their income from Philippine sources). In the process, the
Code classifies taxpayers into four main groups, namely: (1)
Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to
corpus and as to income).
Partnerships are, under the Code, either "taxable
partnerships" or
"exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are
subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations.
Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the
income tax approach is alike to both juridical persons.
Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during
its deliberations on Republic Act 7496, aforequoted, to cover
corporations and partnerships which are independently
subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly
identified as corporations nor even considered as
independent taxable entities for income tax purposes. A
general professional partnership is such an example. 4 Here,
the partners themselves, not the partnership (although it is
still obligated to file an income tax return [mainly for
administration and data]), are liable for the payment of
income tax in their individual capacity computed on their
respective and distributive shares of profits. In the
determination of the tax liability, a partner does so as an
individual, and there is no choice on the matter. In fine,
under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a
mere mechanism or a flow-through entity in the generation of
income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but
merely confirmed, the above standing rule as now so
modified by Republic Act
No. 7496 on basically the extent of allowable deductions
applicable to all individual income taxpayers on their noncompensation income. There is no evident intention of the

law, either before or after the amendatory legislation, to

place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their
respective professions individually and of those who do it
through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special
pronouncement on costs.
SO ORDERED.

G.R. No. L-15422

November 30, 1962

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COURT OF INDUSTRIAL RELATIONS and NATIONAL
TEXTILE WORKERS UNION, respondents.

Government Corporate Counsel Simeon M. Gopengco and

Lorenzo R. Mosqueda for petitioner.
Eulogio R. Lerum for respondent National Textile Workers
Union.
Mariano B. Tuason for respondent Court of Industrial
Relations.
REGALA, J.:
This is a case for review from the Court of Industrial
Relations. The pertinent facts are the following:
At the National Development Co., a government-owned and
controlled corporation, there were four shifts of work. One
shift was from 8 a.m. to 4 p.m., while the three other shifts
were from 6 a.m. to 2 p.m; then from 2 p.m. to 10 p.m. and,
finally, from 10 p.m. to 6 a.m. In each shift, there was a onehour mealtime period, to wit: From (1) 11 a.m. to 12 noon for
those working between 6 a.m. and 2 p.m. and from (2) 7
p.m. to 8 p.m. for those working between 2 p.m. and 10 p.m.
The records disclose that although there was a one-hour
mealtime, petitioner nevertheless credited the workers with
eight hours of work for each shift and paid them for the same
number of hours. However, since 1953, whenever workers in
one shift were required to continue working until the next
shift, petitioner instead of crediting them with eight hours of
overtime work, has been paying them for six hours only,
petitioner that the two hours corresponding to the mealtime
periods should not be included in computing compensation.
On the other hand, respondent National Textile Workers
Union whose members are employed at the NDC,
maintained the opposite view and asked the Court of

Industrial Relations to order the payment of additional

overtime pay corresponding to the mealtime periods.
After hearing, Judge Arsenio I. Martinez of the CIR issued an
order dated March 19, 1959, holding that mealtime should
be counted in the determination of overtime work and
accordingly ordered petitioner to pay P101,407.96 by way of
overtime compensation. Petitioner filed a motion for
reconsideration but the same was dismissed by the CIR en
banc on the ground that petitioner failed to furnish the union
a copy of its motion.
Thereafter, petitioner appealed to this Court, contending,
first, that the CIR has no jurisdiction over claims for overtime
compensation and, secondary that the CIR did not make "a
correct appraisal of the facts, in the light of the evidence" in
holding that mealtime periods should be included in overtime
work because workers could not leave their places of work
and rest completely during those hours.
In support of its contention that the CIR lost its jurisdiction
over claims for overtime pay upon the enactment of the
Industrial Peace Act (Republic Act No. 875), petitioner cites a
number of decisions of this Court. On May 23, 1960,
however, We ruled in Price Stabilization Corp. v. Court of
Industrial Relations, et al., G.R. No. L-13206, that
Analyzing these cases, the underlying principle, it will be
noted in all of them, though not stated in express terms, is
that where the employer-employee relationship is still
existing or is sought to be reestablished because of its
wrongful severance, (as where the employee seeks
reinstatement) the Court of Industrial Relations has
jurisdiction over all claims arising out of, or in connection
with the employment, such as those related to the Minimum
Wage Law and the Eight-Hour Labor Law. After the
termination of their relationship and no reinstatement is
sought, such claims become mere money claims, and come
within the jurisdiction of the regular courts,
We are aware that in 2 cases, some statements implying a
different view have been made, but we now hold and declare
the principle set forth in the next preceding paragraph as the
one governing all cases of this nature.
This has been the constant doctrine of this Court since May
23, 1960.1
A more recent definition of the jurisdiction of the CIR is found
in Campos, et al. v. Manila Railroad Co., et al., G.R. No. L17905, May 25, 1962, in which We held that, for such
jurisdiction to come into play, the following requisites must
be complied with: (a) there must exist between the parties an
employer-employee relationship or the claimant must seek
his reinstatement; and (b) the controversy must relate to a
case certified by the President to the CIR as one involving
national interest, or must arise either under the Eight-Hour
Labor Law, or under the Minimum Wage Law. In default of
any of these circumstances, the claim becomes a mere
money claim that comes under the jurisdiction of the regular
courts. Here, petitioner does not deny the existence of an

employer-employee relationship between it and the

members of the union. Neither is there any question that the
claim is based on the Eight-Hour Labor Law (Com. Act No.
444, as amended). We therefore rule in favor of the
jurisdiction of the CIR over the present claim.

evidence adduced by the petitioner that the pertinent

employees can freely leave their working place nor rest
completely. There is furthermore the aspect that during the
period covered the computation the work was on a 24-hour
basis and previously stated divided into shifts.

The other issue raised in the appeal is whether or not, on the

basis of the evidence, the mealtime breaks should be
considered working time under the following provision of the
law;

From these facts, the CIR correctly concluded that work in

petitioner company was continuous and therefore the
mealtime breaks should be counted as working time for
purposes of overtime compensation.

The legal working day for any person employed by another

shall be of not more than eight hours daily. When the work is
not continuous, the time during which the laborer is not
working and can leave his working place and can rest
completely shall not be counted. (Sec. 1, Com. Act No. 444,
as amended. Emphasis ours.)

Petitioner gives an eight-hour credit to its employees who

work a single shift say from 6 a.m. to 2 p.m. Why cannot it
credit them sixteen hours should they work in two shifts?

It will be noted that, under the law, the idle time that an
employee may spend for resting and during which he may
leave the spot or place of work though not the premises2 of
his employer, is not counted as working time only where the
work is broken or is not continuous.
The determination as to whether work is continuous or not is
mainly one of fact which We shall not review as long as the
same is supported by evidence. (Sec. 15, Com. Act No. 103,
as amended, Philippine Newspaper Guild v. Evening News,
Inc., 86 Phil. 303).
That is why We brushed aside petitioner's contention in one
case that workers who worked under a 6 a.m. to 6 p.m.
schedule had enough "free time" and therefore should not be
credited with four hours of overtime and held that the finding
of the CIR "that claimants herein rendered services to the
Company from 6:00 a.m. to 6:00 p.m. including Sundays and
holidays, . . . implies either that they were not allowed to
leave the spot of their working place, or that they could not
rest completely" (Luzon Stevedoring Co., Inc. v. Luzon
Marine Department Union, et al., G.R. No. L-9265, April 29,
1957).
Indeed, it has been said that no general rule can be laid
down is to what constitutes compensable work, rather the
question is one of fact depending upon particular
circumstances, to be determined by the controverted in
cases. (31 Am. Jurisdiction Sec. 626 pp. 878.)
In this case, the CIR's finding that work in the petitioner
company was continuous and did not permit employees and
laborers to rest completely is not without basis in evidence
and following our earlier rulings, shall not disturb the same.
Thus, the CIR found:
While it may be correct to say that it is well-high impossible
for an employee to work while he is eating, yet under Section
1 of Com. Act No. 444 such a time for eating can be
segregated or deducted from his work, if the same is
continuous and the employee can leave his working place
rest completely. The time cards show that the work was
continuous and without interruption. There is also the

There is another reason why this appeal should dismissed

and that is that there is no decision by the CIR en banc from
which petitioner can appeal to this Court. As already
indicated above, the records show that petitioner's motion for
reconsideration of the order of March 19, 1959 was
dismissed by the CIR en banc because of petitioner's failure
to serve a copy of the same on the union.
Section 15 of the rules of the CIR, in relation to Section 1 of
Commonwealth Act No. 103, states:
The movant shall file the motion (for reconsideration), in six
copies within five (5) days from the date on which he
receives notice of the order or decision, object of the motion
for reconsideration, the same to be verified under oath with
respect to the correctness of the allegations of fact, and
serving a copy thereof personally or by registered mail, on
the adverse party. The latter may file an answer, in six (6)
copies, duly verified under oath. (Emphasis ours.)
In one case (Bien, et al. v. Castillo, etc., et al., G.R. No. L7428, May 24, 1955), We sustained the dismissal of a
motion for reconsideration filed outside of the period
provided in the rules of the CIR. A motion for
reconsideration, a copy of which has not been served on the
adverse party as required by the rules, stands on the same
footing. For "in the very nature of things, a motion for
reconsideration against a ruling or decision by one Judge is
in effect an appeal to the Court of Industrial Relations, en
banc," the purpose being "to substitute the decision or order
of a collegiate court for the ruling or decision of any judge."
The provision in Commonwealth Act No. 103 authorizing the
presentation of a motion for reconsideration of a decision or
order of the judge to the CIR, en banc and not direct appeal
therefore to this Court, is also in accord with the principal of
exhaustion of administrative remedies before resort can be
made to this Court. (Broce, et al., v. The Court of Industrial
Relations, et al., G.R. No. L-12367, October 29, 1959).
Petitioner's motion for reconsideration having been
dismissed for its failure to serve a copy of the same on the
union, there is no decision of the CIR en banc that petitioner
can bring to this Court for review.

WHEREFORE, the order of March 19, 1959 and the

resolution of April 27, 1959 are hereby affirmed and the
appeal is dismissed, without pronouncement as to costs.
ERICSSON TELECOMMUNI- G.R. NO. 176667
CATIONS, INC.,
Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairperson,

2002, reiterating its position that the local business tax

should be based on gross receipts and not gross revenue.
Respondent denied petitioners protest and gave the latter 30
days within which to appeal the denial. This prompted
petitioner to file a petition for review[1] with the Regional Trial
Court (RTC) of Pasig, Branch 168, praying for the annulment
and cancellation of petitioners deficiency local business
taxes totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss
on the grounds that the court had no jurisdiction over the
subject matter and that petitioner had no legal capacity to
sue. The RTC denied the motion in an Order dated
December 3, 2002 due to respondents failure to include a
notice of hearing. Thereafter, the RTC declared respondents
in default and allowed petitioner to present evidence exparte.

- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and

In a Decision[2] dated March 8, 2004, the RTC canceled and

set aside the assessments made by respondent and its City
Treasurer. The dispositive portion of the RTC Decision
reads:

CITY OF PASIG, represented by

WHEREFORE, premises considered, judgment is hereby

rendered in favor of the plaintiff and ordering defendants to
CANCEL and SET ASIDE Assessment Notice dated October
25, 2000 and Notice of Assessment dated November 19,
2001.

its City Mayor, Hon. Vicente P.

SO ORDERED.[3]

Eusebio, et al.* Promulgated:

On appeal, the Court of Appeals (CA) rendered its

Decision[4] dated November 20, 2006, the dispositive
portion of which reads:

REYES, JJ.

Respondent. November 22, 2007

DECISION
AUSTRIA-MARTINEZ, J.:

WHEREFORE, the decision appealed from is hereby

ordered SET ASIDE and a new one entered DISMISSING
the plaintiff/appellees complaint WITHOUT PREJUDICE.
SO ORDERED.[5]

Ericsson Telecommunications, Inc. (petitioner), a corporation

with principal office in Pasig City, is engaged in the design,
engineering,
and
marketing
of
telecommunication
facilities/system. In an Assessment Notice dated October 25,
2000 issued by the City Treasurer of Pasig City, petitioner
was assessed a business tax deficiency for the years 1998
and 1999 amounting to P9,466,885.00 and P4,993,682.00,
respectively, based on its gross revenues as reported in its
audited financial statements for the years 1997 and 1998.
Petitioner filed a Protest dated December 21, 2000, claiming
that the computation of the local business tax should be
based on gross receipts and not on gross revenue.
The City of Pasig (respondent) issued another Notice of
Assessment to petitioner on November 19, 2001, this time
based on business tax deficiencies for the years 2000 and
2001, amounting to P4,665,775.51 and P4,710,242.93,
respectively, based on its gross revenues for the years 1999
and 2000. Again, petitioner filed a Protest on January 21,

The CA sustained respondents claim that the petition filed

with the RTC should have been dismissed due to petitioners
failure to show that Atty. Maria Theresa B. Ramos (Atty.
Ramos), petitioners Manager for Tax and Legal Affairs and
the person who signed the Verification and Certification of
Non-Forum Shopping, was duly authorized by the Board of
Directors.
Its motion for reconsideration having been denied in a
Resolution[6] dated February 9, 2007, petitioner now comes
before the Court via a Petition for Review on Certiorari under
Rule 45 of the Rules of Court, on the following grounds:
(1) THE COURT OF APPEALS ERRED IN DISMISSING
THE CASE FOR LACK OF SHOWING THAT THE
SIGNATORY OF THE VERIFICATION/ CERTIFICATION IS
NOT SPECIFICALLY AUTHORIZED FOR AND IN BEHALF
OF PETITIONER.

(2) THE COURT OF APPEALS ERRED IN GIVING DUE

COURSE TO RESPONDENTS APPEAL, CONSIDERING
THAT IT HAS NO JURISDICTION OVER THE SAME, THE
MATTERS TO BE RESOLVED BEING PURE QUESTIONS
OF LAW, JURISDICTION OVER WHICH IS VESTED ONLY
WITH THIS HONORABLE COURT.
(3) ASSUMING THE COURT OF APPEALS HAS
JURISDICTION OVER RESPONDENTS APPEAL, SAID
COURT ERRED IN NOT DECIDING ON THE MERITS OF
THE CASE FOR THE SPEEDY DISPOSITION THEREOF,
CONSIDERING
THAT THE
DEFICIENCY
LOCAL
BUSINESS
TAX
ASSESSMENTS
ISSUED
BY
RESPONDENT ARE CLEARLY INVALID AND CONTRARY
TO THE PROVISIONS OF THE PASIG REVENUE CODE
AND THE LOCAL GOVERNMENT CODE.[7]
After receipt by the Court of respondents complaint and
petitioners reply, the petition is given due course and
considered ready for decision without the need of
memoranda from the parties.
The Court grants the petition.
First, the complaint filed by petitioner with the RTC was
erroneously dismissed by the CA for failure of petitioner to
show that its Manager for Tax and Legal Affairs, Atty. Ramos,
was authorized by the Board of Directors to sign the
Verification and Certification of Non-Forum Shopping in
behalf of the petitioner corporation.
Time and again, the Court, under special circumstances and
for compelling reasons, sanctioned substantial compliance
with the rule on the submission of verification and
certification against non-forum shopping.[8]
In General Milling Corporation v. National Labor Relations
Commission,[9] the Court deemed as substantial compliance
the belated attempt of the petitioner to attach to the motion
for reconsideration the board resolution/secretarys
certificate, stating that there was no attempt on the part of
the petitioner to ignore the prescribed procedural
requirements.
In Shipside Incorporated v. Court of Appeals,[10] the
authority of the petitioners resident manager to sign the
certification against forum shopping was submitted to the CA
only after the latter dismissed the petition. The Court
considered the merits of the case and the fact that the
petitioner subsequently submitted a secretarys certificate, as
special circumstances or compelling reasons that justify
tempering the requirements in regard to the certificate of
non-forum shopping.[11]
There were also cases where there was complete noncompliance with the rule on certification against forum
shopping and yet the Court proceeded to decide the case on
the merits in order to serve the ends of substantial justice.
[12]
In the present case, petitioner submitted a Secretarys
Certificate signed on May 6, 2002, whereby Atty. Ramos was

authorized to file a protest at the local government level and

to sign, execute and deliver any and all papers, documents
and pleadings relative to the said protest and to do and
perform all such acts and things as may be necessary to
effect the foregoing.[13]
Applying the foregoing jurisprudence, the subsequent
submission of the Secretarys Certificate and the substantial
merits of the petition, which will be shown forthwith, justify a
relaxation of the rule.

Second, the CA should have dismissed the appeal of

respondent as it has no jurisdiction over the case since the
appeal involves a pure question of law. The CA seriously
erred in ruling that the appeal involves a mixed question of
law and fact necessitating an examination and evaluation of
the audited financial statements and other documents in
order to determine petitioners tax base.
There is a question of law when the doubt or difference is on
what the law is on a certain state of facts. On the other hand,
there is a question of fact when the doubt or difference is on
the truth or falsity of the facts alleged.[14] 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; otherwise
it is a question of fact.[15]
There is no dispute as to the veracity of the facts involved in
the present case. While there is an issue as to the correct
amount of local business tax to be paid by petitioner, its
determination will not involve a look into petitioners audited
financial statements or documents, as these are not
disputed; rather, petitioners correct tax liability will be
ascertained through an interpretation of the pertinent tax
laws, i.e., whether the local business tax, as imposed by the
Pasig City Revenue Code (Ordinance No. 25-92) and the
Local Government Code of 1991, should be based on gross
receipts, and not on gross revenue which respondent relied
on in computing petitioners local business tax deficiency.
This, clearly, is a question of law, and beyond the jurisdiction
of the CA.
Section 2(c), Rule 41 of the Rules of Court provides that in
all cases where questions of law are raised or involved, the
appeal shall be to this Court by petition for review on
certiorari under Rule 45.
Thus, as correctly pointed out by petitioner, the appeal
before the CA should have been dismissed, pursuant to
Section 5(f), Rule 56 of the Rules of Court, which provides:

Sec. 5. Grounds for dismissal of appeal.- The appeal may be

dismissed motu proprio or on motion of the respondent on
the following grounds:
(f) Error in the choice or mode of appeal.
Third, the dismissal of the appeal, in effect, would have
sustained the RTC Decision ordering respondent to cancel
the Assessment Notices issued by respondent, and
therefore, would have rendered moot and academic the
issue of whether the local business tax on contractors should
be based on gross receipts or gross revenues.
However, the higher interest of substantial justice dictates
that this Court should resolve the same, to evade further
repetition of erroneous interpretation of the law,[16] for the
guidance of the bench and bar.
As earlier stated, the substantive issue in this case is
whether the local business tax on contractors should be
based on gross receipts or gross revenue.
Respondent assessed deficiency local business taxes on
petitioner based on the latters gross revenue as reported in
its financial statements, arguing that gross receipts is
synonymous with gross earnings/revenue, which, in turn,
includes uncollected earnings. Petitioner, however, contends
that only the portion of the revenues which were actually and
constructively received should be considered in determining
its tax base.
Respondent is authorized to levy business taxes under
Section 143 in relation to Section 151 of the Local
Government Code.
Insofar as petitioner is concerned, the applicable provision is
subsection (e), Section 143 of the same Code covering
contractors and other independent contractors, to wit:
SEC. 143. Tax on Business. - The municipality may impose
taxes on the following businesses:
(e) On contractors and other independent contractors, in
accordance with the following schedule:
With gross receipts for the preceding calendar year in the
amount of:
(Emphasis supplied)
Amount of Tax Per Annum
The above provision specifically refers to gross receipts
which is defined under Section 131 of the Local Government
Code, as follows:

(n) Gross Sales or Receipts include the total amount of

money or its equivalent representing the contract price,
compensation or service fee, including the amount charged

or materials supplied with the services and the deposits or

advance payments actually or constructively received during
the taxable quarter for the services performed or to be
performed for another person excluding discounts if
determinable at the time of sales, sales return, excise tax,
and value-added tax (VAT);
The law is clear. Gross receipts include money or its
equivalent
actually
or
constructively received
in
consideration of services rendered or articles sold,
exchanged or leased, whether actual or constructive.

In Commissioner of Internal Revenue v. Bank of Commerce,

[17] the Court interpreted gross receipts as including those
which were actually or constructively received, viz.:
Actual receipt of interest income is not limited to physical
receipt. Actual receipt may either be physical receipt or
constructive receipt. When the depository bank withholds the
final tax to pay the tax liability of the lending bank, there is
prior to the withholding a constructive receipt by the lending
bank of the amount withheld. From the amount
constructively received by the lending bank, the depository
bank deducts the final withholding tax and remits it to the
government for the account of the lending bank. Thus, the
interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the
amount withheld as final tax.
The concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld
comes from the income earned by the taxpayer. Since the
amount of the tax withheld constitutes income earned by the
taxpayer, then that amount manifestly forms part of the
taxpayers gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the
government in payment of his tax liability. The amount
withheld indubitably comes from income of the taxpayer, and
thus forms part of his gross receipts. (Emphasis supplied)
Further elaboration was made by the Court in Commissioner
of Internal Revenue v. Bank of the Philippine Islands,[18] in
this wise:
Receipt of income may be actual or constructive. We have
held that the withholding process results in the taxpayers
constructive receipt of the income withheld, to wit:
By analogy, we apply to the receipt of income the rules on
actual and constructive possession provided in Articles 531
and 532 of our Civil Code.
Under Article 531:
Possession is acquired by the material occupation of a thing
or the exercise of a right, or by the fact that it is subject to
the action of our will, or by the proper acts and legal
formalities established for acquiring such right.

Article 532 states:

Possession may be acquired by the same person who is to
enjoy it, by his legal representative, by his agent, or by any
person without any power whatever; but in the last case, the
possession shall not be considered as acquired until the
person in whose name the act of possession was executed
has ratified the same, without prejudice to the juridical
consequences of negotiorum gestio in a proper case.
The last means of acquiring possession under Article 531
refers to juridical actsthe acquisition of possession by
sufficient titleto which the law gives the force of acts of
possession. Respondent argues that only items of income
actually received should be included in its gross receipts. It
claims that since the amount had already been withheld at
source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that
the acquisition of the right of possession is through the
proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be
actual receipt of the income withheld; however, as provided
for in Article 532, possession by any person without any
power whatsoever shall be considered as acquired when
ratified by the person in whose name the act of possession
is executed.
In our withholding tax system, possession is acquired by the
payor as the withholding agent of the government, because
the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt. The
processes of bookkeeping and accounting for interest on
deposits and yield on deposit substitutes that are subjected
to FWT are indeedfor legal purposestantamount to delivery,
receipt or remittance.[19]
Revenue Regulations No. 16-2005 dated September 1,
2005[20] defined and gave examples of constructive receipt,
to wit:
SEC. 4. 108-4. Definition of Gross Receipts. -- x x x
Constructive receipt occurs when the money consideration
or its equivalent is placed at the control of the person who
rendered the service without restrictions by the payor. The
following are examples of constructive receipts:
(1) deposit in banks which are made available to the seller of
services without restrictions;
(2) issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment
for services rendered; and
(3) transfer of the amounts retained by the payor to the
account of the contractor.
There is, therefore, constructive receipt, when the
consideration for the articles sold, exchanged or leased, or

the services rendered has already been placed under the

control of the person who sold the goods or rendered the
services without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent
actually or constructively received, including the value of
services rendered or articles sold, exchanged or leased, the
payment of which is yet to be received. This is in
consonance with the International Financial Reporting
Standards,[21] which defines revenue as the gross inflow of
economic benefits (cash, receivables, and other assets)
arising from the ordinary operating activities of an enterprise
(such as sales of goods, sales of services, interest, royalties,
and dividends),[22] which is measured at the fair value of the
consideration received or receivable.[23]
As aptly stated by the RTC:
[R]evenue from services rendered is recognized when
services have been performed and are billable. It is recorded
at the amount received or expected to be received. (Section
E [17] of the Statements of Financial Accounting Standards
No. 1).[24]
In petitioners case, its audited financial statements reflect
income or revenue which accrued to it during the taxable
period although not yet actually or constructively received or
paid. This is because petitioner uses the accrual method of
accounting, where income is reportable when all the events
have occurred that fix the taxpayers right to receive the
income, and the amount can be determined with reasonable
accuracy; the right to receive income, and not the actual
receipt, determines when to include the amount in gross
income.[25]
The imposition of local business tax based on petitioners
gross revenue will inevitably result in the constitutionally
proscribed double taxation taxing of the same person twice
by the same jurisdiction for the same thing[26] inasmuch as
petitioners revenue or income for a taxable year will
definitely include its gross receipts already reported during
the previous year and for which local business tax has
already been paid.
Thus, respondent committed a palpable error when it
assessed petitioners local business tax based on its gross
revenue as reported in its audited financial statements, as
Section 143 of the Local Government Code and Section
22(e) of the Pasig Revenue Code clearly provide that the tax
should be computed based on gross receipts.
WHEREFORE, the petition is GRANTED. The Decision
dated November 20, 2006 and Resolution dated February 9,
2007 issued by the Court of Appeals are SET ASIDE, and
the Decision dated March 8, 2004 rendered by the Regional
Trial Court of Pasig, Branch 168 is REINSTATED.
SO ORDERED.