G.R. No.

166006
March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner, vs. FERTIPHIL CORPORATION, Respondent.
DECISION

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the
former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court
of Appeals (CA) affirming with modification that of the RTC in Makati City,2 finding petitioner
Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for
the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws.3 They are both engaged in the importation and distribution of fertilizers,
pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued
LOI No. 1465 which provided, among others, for the imposition of a capital recovery
component (CRC) on the domestic sale of all grades of fertilizers in the Philippines.4 The LOI
provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market
to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the
Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to
FPA from July 8, 1985 to January 24, 1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With
the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under
LOI No. 1465, but PPI refused to accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against FPA and PPI with the RTC in
Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process of
law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which
used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No.
1465 was a valid exercise of the police power of the State in ensuring the stability of the
fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage
from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the
seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:

2) the sum of P100,000 as attorneys fees;

3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of
taxation, the RTC invalidated the levy for violating the basic principle that taxes can only be
levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of
taxation by the state is plenary. Comprehensive and supreme, the principal check upon its
abuse resting in the responsibility of the members of the legislature to their constituents.
However, there are two kinds of limitations on the power of taxation: the inherent limitations
and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:

The power to tax can be resorted to only for a constitutionally valid public purpose. By the
same token, taxes may not be levied for purely private purposes, for building up of private
fortunes, or for the redress of private wrongs. They cannot be levied for the improvement of
private property, or for the benefit, and promotion of private enterprises, except where the
aid is incident to the public benefit. It is well-settled principle of constitutional law that no
general tax can be levied except for the purpose of raising money which is to be expended
for public use. Funds cannot be exacted under the guise of taxation to promote a purpose
that is not of public interest. Without such limitation, the power to tax could be exercised or
employed as an authority to destroy the economy of the people. A tax, however, is not held
void on the ground of want of public interest unless the want of such interest is clear. (71 Am.
Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and
Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465
which, in turn, remitted the amount to the defendant Planters Products, Inc. thru the latters
depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff,
Fertiphil Corporation, which is a private domestic corporation, became poorer by the amount
of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it
is quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold
in the country and orders that the said amount should go to the defendant Planters Product,
Inc. is unlawful because it violates the mandate that a tax can be levied only for a public
purpose and not to benefit, aid and promote a private enterprise such as Planters Product,
Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI then filed a notice of appeal
with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related
proceeding, this Court14 allowed the appeal of PPI and remanded the case to the CA for
proper disposition.
CA Decision

tax cases: inherent limitations

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other issuances. The
Constitution vests that power not only in the Supreme Court but in all Regional Trial Courts.

Page

REYES, R.T., J.:

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection
was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve
the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts
is to avoid ruling on constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following
requisites are obtaining in a controversy before it: First, there must be before the court an
actual case calling for the exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However,
a perusal of the complaint also reveals that the instant action is founded on the claim that the
levy imposed was an unlawful and unconstitutional special assessment. Consequently, the
requisite that the constitutionality of the law in question be the very lis mota of the case is
present, making it proper for the trial court to rule on the constitutionality of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued under the police
power of the state, it is still unconstitutional because it did not promote public welfare. The
CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the
said law was an invalid exercise of the States power of taxation inasmuch as it violated the
inherent and constitutional prescription that taxes be levied only for public purposes. It
reasoned out that the amount collected under the levy was remitted to the depository bank
of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise
of police power. In addition, it disputes the court a quos findings arguing that the collections
under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation
created by law to hold in trust for millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been
characterized as the most essential, insistent and the least limitable of powers, extending as
it does to all the great public needs. It may be exercised as long as the activity or the property
sought to be regulated has some relevance to public welfare (Constitutional Law, by Isagani
A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution,
which requires the concurrence of a lawful subject and a lawful method. Thus, our courts
have laid down the test to determine the validity of a police measure as follows: (1) the
interests of the public generally, as distinguished from those of a particular class, requires
its exercise; and (2) the means employed are reasonably necessary for the accomplishment

It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in
the country is an undertaking imbued with public interest. However, the method by which
LOI 1465 sought to achieve this is by no means a measure that will promote the public
welfare. The governments commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable attempt to mask the
subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like
PPI, as identical with the general interest of the countrys farmers or even the Filipino people
in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by
private interest, the use of police power becomes a travesty which must be struck down for
being an arbitrary exercise of government power. To rule in favor of appellant would
contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the
benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock ownership
of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of
farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by
then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice
in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to
include in its fertilizer pricing formula a capital recovery component, the proceeds of which
will be used initially for the purpose of funding the unpaid portion of the outstanding capital
stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) (such unpaid portion of the outstanding capital stock of
Planters being hereafter referred to as the Unpaid Capital), and subsequently for such
capital increases as may be required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which will
be added to the price of all domestic sales of fertilizer in the Philippines by any importer
and/or fertilizer mother company. In this connection, the Republic hereby acknowledges that
the advances by Planters to Planters Foundation which were applied to the payment of the
Planters shares now held in trust by Planters Foundation, have been assigned to, among
others, the Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the
proceeds of the capital recovery component in the special trust account designated in the
notice dated April 2, 1985, addressed by counsel for the Creditors to Planters Foundation.
Such proceeds shall be deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until payment in
full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may
be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and
(d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the carrying cost shall be at such rate as will represent the full and
reasonable cost to Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations." (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime
Minister Virata taken together with the Justice Secretarys Opinion does not preponderantly

tax cases: inherent limitations

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the award of attorneys fees is hereby DELETED.15

of the purpose and not unduly oppressive upon individuals (National Development Company
v. Philippine Veterans Bank, 192 SCRA 257 [1990]).

Page

On November 28, 2003, the CA handed down its decision affirming with modification that of
the RTC, with the following fallo:

Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I. THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE.
NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
II. LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A
FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE
EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

III. THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS
REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN
EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED
RIGHTS BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO ANY
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV. THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO
APPLICATION IN THE INSTANT CASE.20 (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to
resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere
procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465
because it does not have a "personal and substantial interest in the case or will sustain direct
injury as a result of its enforcement."21 It asserts that Fertiphil did not suffer any damage
from the CRC imposition because "incidence of the levy fell on the ultimate consumer or the
farmers themselves, not on the seller fertilizer company."22
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice
has been adequately discussed by this Court in a catena of cases. Succinctly put, the
doctrine requires a litigant to have a material interest in the outcome of a case. In private
suits, locus standi requires a litigant to be a "real party in interest," which is defined as "the
party who stands to be benefited or injured by the judgment in the suit or the party entitled
to the avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the doctrine especially when
plaintiff asserts a public right on behalf of the general public because of conflicting public
policy issues. 24 On one end, there is the right of the ordinary citizen to petition the courts to

In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in
public suits. In People v. Vera,25 it was held that a person who impugns the validity of a
statute must have "a personal and substantial interest in the case such that he has sustained,
or will sustain direct injury as a result." The "direct injury test" in public suits is similar to the
"real party in interest" rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil
Procedure.26
Recognizing that a strict application of the "direct injury" test may hamper public interest,
this Court relaxed the requirement in cases of "transcendental importance" or with "far
reaching implications." Being a mere procedural technicality, it has also been held that locus
standi may be waived in the public interest.27
Whether or not the complaint for collection is characterized as a private or public suit,
Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of
LOI No. 1465. It was required, and it did pay, the P10 levy imposed for every bag of fertilizer
sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy
to the ultimate consumer, but that does not disqualify it from attacking the constitutionality
of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy.
It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is
sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled
to factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil
and other domestic sellers much more expensive. The harm to their business consists not
only in fewer clients because of the increased price, but also in adopting alternative
corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer
sellers may have shouldered all or part of the levy just to be competitive in the market. The
harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy
consistently adopted by this Court on locus standi must apply. The issues raised by Fertiphil
are of paramount public importance. It involves not only the constitutionality of a tax law but,
more importantly, the use of taxes for public purpose. Former President Marcos issued LOI
No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the
text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse,
the levy was made dependent and conditional upon PPI becoming financially viable. The LOI
provided that "the capital contribution shall be collected until adequate capital is raised to
make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our
constitutional duty to squarely resolve the issue as the final arbiter of all justiciable
controversies. The doctrine of standing, being a mere procedural technicality, should be
waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in the
complaint; it is the lis mota of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts
that the constitutionality of the LOI cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue is not necessary for a
determination of the complaint for collection.29

tax cases: inherent limitations

PPI moved for reconsideration but its motion was denied.19 It then filed the present petition
with this Court.

be freed from unlawful government intrusion and illegal official action. At the other end, there
is the public policy precluding excessive judicial interference in official acts, which may
unnecessarily hinder the delivery of basic public services.

Page

demonstrate that the collections made were held in trust in favor of millions of farmers.
Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this
Court is constrained to rely on what is explicitly provided in LOI 1465 that one of the primary
aims in imposing the levy is to support the successful rehabilitation and continued viability of
PPI.18

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its
complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the case
because the trial court cannot determine its claim without resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute,
presidential decree or an executive order. This is clear from Section 5, Article VIII of the 1987
Constitution, which provides:

(e) It was a glaring example of crony capitalism, a forced program through which the PPI,
having been presumptuously masqueraded as "the" fertilizer industry itself, was the sole and
anointed beneficiary;

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules
of Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or
regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to resolve
constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order. The
Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation not only in this Court, but in all Regional Trial Courts.32
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court
reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction,
however, is not limited to the Court of Appeals or to this Court alone for even the regional
trial courts can take cognizance of actions assailing a specific rule or set of rules
promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts.34
Judicial review of official acts on the ground of unconstitutionality may be sought or availed
of through any of the actions cognizable by courts of justice, not necessarily in a suit for
declaratory relief. Such review may be had in criminal actions, as in People v. Ferrer35
involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions,
as in Krivenko v. Register of Deeds36 involving the constitutionality of laws prohibiting aliens
from acquiring public lands. The constitutional issue, however, (a) must be properly raised
and presented in the case, and (b) its resolution is necessary to a determination of the case,
i.e., the issue of constitutionality must be the very lis mota presented.37
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately
raised in the complaint for collection filed with the RTC. The pertinent portions of the
complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer
in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive
because:

7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of
entities which had to bear the burden of paying the CRC derived no benefit therefrom; that
on the contrary it was used by PPI in trying to regain its former despicable monopoly of the
fertilizer industry to the detriment of other distributors and importers.38 (Underscoring
supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection.
Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the
ground that the law imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation
to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should
be refunded under the civil code principle against unjust enrichment. The refund is a mere
consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to
refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of
the LOI which triggers the refund. The issue of constitutionality is the very lis mota of the
complaint with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of
taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer
supply and distribution in the country and for benefiting a foundation created by law to hold
in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a
private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also
argues that, even if the LOI is enacted under the police power, it is still unconstitutional
because it did not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are
distinct and have different tests for validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property in order to promote the
general welfare,39 while the power of taxation is the power to levy taxes to be used for public
purpose. The main purpose of police power is the regulation of a behavior or conduct, while
taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to
determine the validity of a law enacted under the police power.40 The power of taxation, on
the other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its
taxation power. While it is true that the power of taxation can be used as an implement of
police power,41 the primary purpose of the levy is revenue generation. If the purpose is

tax cases: inherent limitations

xxxx

xxxx

xxxx

Page

SECTION 5. The Supreme Court shall have the following powers:

(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the
expense and disadvantage of the other fertilizer importers/distributors who were themselves
in tight business situation and were then exerting all efforts and maximizing management and
marketing skills to remain viable;

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the
Land Transportation and Traffic Code that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser degree, pay for the
operating expenses of the administering agency. x x x Fees may be properly regarded as
taxes even though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax. Such is the case of motor
vehicle registration fees. The same provision appears as Section 59(b) in the Land
Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax
as the law refers to the imposition on the registration, operation or ownership of a motor
vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136
also speaks of other "fees" such as the special permit fees for certain types of motor vehicles
(Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-raising. Thus, they
are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee
and chauffeurs license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61.44 (Underscoring
supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The
levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price
of a bag of fertilizer by as much as five percent.45 A plain reading of the LOI also supports
the conclusion that the levy was for revenue generation. The LOI expressly provided that the
levy was imposed "until adequate capital is raised to make PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was
not for a public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for
a public purpose. They cannot be used for purely private purposes or for the exclusive
benefit of private persons.46 The reason for this is simple. The power to tax exists for the
general welfare; hence, implicit in its power is the limitation that it should be used only for a
public purpose. It would be a robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case bluntly put it: "To lay with one
hand, the power of the government on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called taxation."47
The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services, but
also includes those purposes designed to promote social justice. Thus, public money may
now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian
reform.
While the categories of what may constitute a public purpose are continually expanding in
light of the expansion of government functions, the inherent requirement that taxes can only

The purpose of a law is evident from its text or inferable from other secondary sources. Here,
We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a
public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company.
The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal
meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise
capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law.
They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under
the LOI. We find it utterly repulsive that a tax law would expressly name a private company
as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of
crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent
upon PPI becoming financially "viable." This suggests that the levy was actually imposed to
benefit PPI. The LOI notably does not fix a maximum amount when PPI is deemed financially
"viable." Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy
is made indefinite. They are required to continuously pay the levy until adequate capital is
raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI.49 This
proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was
to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that
PPI was in deep financial problem because of its huge corporate debts. There were pending
petitions for rehabilitation against PPI before the Securities and Exchange Commission. The
government guaranteed payment of PPIs debts to its foreign creditors. To fund the payment,
President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding
read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

tax cases: inherent limitations

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration
fee is not an exercise by the State of its police power, but of its taxation power, thus:

be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a
tax law is only a mask to exact funds from the public when its true intent is to give undue
benefit and advantage to a private enterprise, that law will not satisfy the requirement of
"public purpose."

Page

primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax.42

Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer,
pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine
Government confirms its awareness of the following: (1) that Planters has outstanding
obligations in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently
experiencing financial difficulties, and (3) that there are presently pending with the
Securities and Exchange Commission of the Philippines a petition filed at Planters own
behest for the suspension of payment of all its obligations, and a separate petition filed by
Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a
rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms
that it considers and continues to consider Planters as a major fertilizer distributor.
Accordingly, for and in consideration of your expressed willingness to consider and
participate in the effort to rehabilitate Planters, the Republic hereby manifests its full and
unqualified support of the successful rehabilitation and continuing viability of Planters, and
to that end, hereby binds and obligates itself to the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to
include in its fertilizer pricing formula a capital recovery component, the proceeds of which
will be used initially for the purpose of funding the unpaid portion of the outstanding capital
stock of Planters presently held in trust by Planters Foundation, Inc. ("Planters Foundation"),
which unpaid capital is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) such unpaid portion of the outstanding capital stock of
Planters being hereafter referred to as the "Unpaid Capital"), and subsequently for such
capital increases as may be required for the continuing viability of Planters.

The LOI is still unconstitutional even if enacted under the police power; it did not promote
public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still
be invalid for failing to comply with the test of "lawful subjects" and "lawful means."
Jurisprudence states the test as follows: (1) the interest of the public generally, as
distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public
interest. The law was enacted to give undue advantage to a private corporation. We quote
with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with public interest. However, the method
by which LOI 1465 sought to achieve this is by no means a measure that will promote the
public welfare. The governments commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable attempt to mask the
subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like
PPI, as identical with the general interest of the countrys farmers or even the Filipino people
in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by
private interest, the use of police power becomes a travesty which must be struck down for
being an arbitrary exercise of government power. To rule in favor of appellant would
contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of operative fact is
inapplicable.

xxxx
The capital recovery component shall continue to be charged and collected until payment in
full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may
be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables, and
(d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the "carrying cost" shall be at such rate as will represent the full and
reasonable cost to Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an
unconstitutional law has an effect before being declared unconstitutional. PPI wants to retain
the levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on
appeal, unless it has been raised in the court a quo.53 PPI did not raise the applicability of
the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue
with Us in order to extricate itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law
is void. It produces no rights, imposes no duties and affords no protection. It has no legal
effect. It is, in legal contemplation, inoperative as if it has not been passed.54 Being void,
Fertiphil is not required to pay the levy. All levies paid should be refunded in accordance with
the general civil code principle against unjust enrichment. The general rule is supported by
Article 7 of the Civil Code, which provides:

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the
corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the
stability of the fertilizer industry in the country. The letter of understanding and the plain text
of the LOI clearly indicate that the levy was exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465
was not for a public purpose. LOI No. 1465 failed to comply with the public purpose
requirement for tax laws.

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter
of equity and fair play.55 It nullifies the effects of an unconstitutional law by recognizing that

tax cases: inherent limitations

(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51

Page

By:

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by
Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial
that the levies paid were remitted and deposited to its bank account. Quite the reverse, it
would be inequitable and unjust not to order a refund. To do so would unjustly enrich PPI at
the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that "every person
who, through an act of performance by another comes into possession of something at the
expense of the latter without just or legal ground shall return the same to him." We cannot
allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must
refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28,
2003 is AFFIRMED.
SO ORDERED.

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

tax cases: inherent limitations

The doctrine is applicable when a declaration of unconstitutionality will impose an undue

burden on those who have relied on the invalid law. Thus, it was applied to a criminal case
when a declaration of unconstitutionality would put the accused in double jeopardy57 or
would put in limbo the acts done by a municipality in reliance upon a law creating it.58

G.R. No. L-10405

December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitionerappellant, vs. THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL.,
respondents-appellees.
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.

Page

the existence of a statute prior to a determination of unconstitutionality is an operative fact

and may have consequences which cannot always be ignored. The past cannot always be
erased by a new judicial declaration.56

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

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.
xxx

xxx

xxx

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

tax cases: inherent limitations

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 abovementioned 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.

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."

Page

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."

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:

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.
Page

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

advantage of individuals, although each advantage to individuals might incidentally serve the
public. (81 C.J.S. pp. 1147; emphasis supplied.)

tax cases: inherent limitations

Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero
and Solicitor Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic
Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order
for the period from August nineteen to September thirty every year the printing and issue of
semi-postal stamps of different denominations with face value showing the regular postage
charge plus the additional amount of five centavos for the said purpose, and during the said
period, no mail matter shall be accepted in the mails unless it bears such semi-postal stamps:
Provided, That no such additional charge of five centavos shall be imposed on newspapers.
The additional proceeds realized from the sale of the semi-postal stamps shall constitute a
special fund and be deposited with the National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4)
administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958),
and 10 (July 15, 1960). All these administrative orders were issued with the approval of the
respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at "5
+ 5" centavos and another at "10 + 5" centavos, will soon be released for use by the public
on their mails to be posted during the same period starting with the year 1958.
xxx

xxx

xxx

During the period from August 19 to September 30 each year starting in 1958, no mail matter
of whatever class, and whether domestic or foreign, posted at any Philippine Post Office and
addressed for delivery in this country or abroad, shall be accepted for mailing unless it bears
at least one such semi-postal stamp showing the additional value of five centavos intended
for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions
of postage meters, each piece of such mail shall bear at least one such semi-postal stamp if
posted during the period above stated starting with the year 1958, in addition to being
charged the usual postage prescribed by existing regulations. In the case of business reply
envelopes and cards mailed during said period, such stamp should be collected from the
addressees at the time of delivery. Mails entitled to franking privilege like those from the
office of the President, members of Congress, and other offices to which such privilege has
been granted, shall each also bear one such semi-postal stamp if posted during the said
period.

Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking privilege
which are not exempted from the payment of the five centavos intended for the Philippine
Tuberculosis Society, such extra charge may be collected in cash, for which official receipt
(General Form No. 13, A) shall be issued, instead of affixing the semi-postal stamp in the
manner hereinafter indicated:
1.
Second-class mail. Aside from the postage at the second-class rate, the extra
charge of five centavos for the Philippine Tuberculosis Society shall be collected on each
separately-addressed piece of second-class mail matter, and the total sum thus collected
shall be entered in the same official receipt to be issued for the postage at the second-class
rate. In making such entry, the total number of pieces of second-class mail posted shall be
stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall be
entered separate from the postage in both of the official receipt and the Record of
Collections.
2.
First-class and third-class mail permits. Mails to be posted without postage
affixed under permits issued by this Bureau shall each be charged the usual postage, in
addition to the five-centavo extra charge intended for said society. The total extra charge
thus received shall be entered in the same official receipt to be issued for the postage
collected, as in subparagraph 1.
3.
Metered mail. For each piece of mail matter impressed by postage meter under
metered mail permit issued by this Bureau, the extra charge of five centavos for said society
shall be collected in cash and an official receipt issued for the total sum thus received, in the
manner indicated in subparagraph 1.
4.
Business reply cards and envelopes. Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for said
society shall be collected in cash on each reply card or envelope delivered, in addition to the
required postage which may also be paid in cash. An official receipt shall be issued for the
total postage and total extra charge received, in the manner shown in subparagraph 1.
5.
Mails entitled to franking privilege. Government agencies, officials, and other
persons entitled to the franking privilege under existing laws may pay in cash such extra
charge intended for said society, instead of affixing the semi-postal stamps to their mails,
provided that such mails are presented at the post-office window, where the five-centavo
extra charge for said society shall be collected on each piece of such mail matter. In such
case, an official receipt shall be issued for the total sum thus collected, in the manner stated
in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office window
shall be affixed with the necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies
and Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm.
Order 3, as amended, exempts "copies of periodical publications received for mailing under
any class of mail matter, including newspapers and magazines admitted as second-class
mail."

tax cases: inherent limitations

10

G.R. No. L-23645

October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee, vs. ENRICO PALOMAR, in his capacity as
Postmaster General, HON. BRIGIDO R. VALENCIA, in his capacity as Secretary of Public
Works and Communications, and DOMINGO GOPEZ, in his capacity as Acting Postmaster of
San Fernando, Pampanga, respondent-appellants.

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

Page

G.R. No. L-7859

December 22, 1955
WALTER LUTZ vs. J. ANTONIO ARANETA (see cases on tax as a power)

In view of this development, the petitioner brough suit for declaratory relief in the Court of
First Instance of Pampanga, to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it violates the equal protection
clause of the Constitution as well as the rule of uniformity and equality of taxation. The lower
court declared the statute and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention
that declaratory relief is unavailing because this suit was filed after the petitioner had
committed a breach of the statute. While conceding that the mailing by the petitioner of a
letter without the additional anti-TB stamp was a violation of Republic Act 1635, as amended,
the trial court nevertheless refused to dismiss the action on the ground that under section 6
of Rule 64 of the Rules of Court, "If before the final termination of the case a breach or
violation of ... a statute ... should take place, the action may thereupon be converted into an
ordinary action."

The prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, section 1 so provides.
Section 6 of the same rule, which allows the court to treat an action for declaratory relief as
an ordinary action, applies only if the breach or violation occurs after the filing of the action
but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before the
firing of this action, then indeed the remedy of declaratory relief cannot be availed of, much
less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not
constitute a breach of the statute because the statute appears to be addressed only to postal
authorities. The statute, it is true, in terms provides that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamps." It does not follow, however, that only
postal authorities can be guilty of violating it by accepting mails without the payment of the
anti-TB stamp. It is obvious that they can be guilty of violating the statute only if there are
people who use the mails without paying for the additional anti-TB stamp. Just as in bribery
the mere offer constitutes a breach of the law, so in the matter of the anti-TB stamp the mere
attempt to use the mails without the stamp constitutes a violation of the statute. It is not
required that the mail be accepted by postal authorities. That requirement is relevant only
for the purpose of fixing the liability of postal officials.

1.
It is said that the statute is violative of the equal protection clause of the
Constitution. More specifically the claim is made that it constitutes mail users into a class for
the purpose of the tax while leaving untaxed the rest of the population and that even among
postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar exemption to
offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As
such the objections levelled against it must be viewed in the light of applicable principles of
taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects
of taxation and to grant exemptions.4 This power has aptly been described as "of wide range
and flexibility."5 Indeed, it is said that in the field of taxation, more than in other areas, the
legislature possesses the greatest freedom in classification.6 The reason for this is that
traditionally, classification has been a device for fitting tax programs to local needs and
usages in order to achieve an equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent such relationship the selection
of mail users is constitutionally impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made
by the legislation and its purpose is undoubtedly true in some contexts, it has no application
to a measure whose sole purpose is to raise revenue ... So long as the classification imposed
is based upon some standard capable of reasonable comprehension, be that standard based
upon ability to produce revenue or some other legitimate distinction, equal protection of the
law has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79
S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct.
578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be sought in the legislature. Now, the
classification of mail users is not without any reason. It is based on ability to pay, let alone
the enjoyment of a privilege, and on administrative convinience. In the allocation of the tax
burden, Congress must have concluded that the contribution to the anti-TB fund can be
assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it
is now a settled principle of law that "consideration of practical administrative convenience
and cost in the administration of tax laws afford adequate ground for imposing a tax on a well
recognized and defined class."9 In the case of the anti-TB stamps, undoubtedly, the single
most important and influential consideration that led the legislature to select mail users as
subjects of the tax is the relative ease and convenienceof collecting the tax through the post
offices. The small amount of five centavos does not justify the great expense and
inconvenience of collecting through the regular means of collection. On the other hand, by
placing the duty of collection on postal authorities the tax was made almost self-enforcing,
with as little cost and as little inconvenience as possible.

Page

Nevertheless, we are of the view that the petitioner's choice of remedy is correct because
this suit was filed not only with respect to the letter which he mailed on September 15, 1963,
but also with regard to any other mail that he might send in the future. Thus, in his complaint,
the petitioner prayed that due course be given to "other mails without the semi-postal stamps
which he may deliver for mailing ... if any, during the period covered by Republic Act 1635,
as amended, as well as other mails hereafter to be sent by or to other mailers which bear the
required postage, without collection of additional charge of five centavos prescribed by the
same Republic Act." As one whose mail was returned, the petitioner is certainly interested
in a ruling on the validity of the statute requiring the use of additional stamps.

We now consider the constitutional objections raised against the statute and the
implementing orders.

11

The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the
post office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin
Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp
required by the statute, it was returned to the petitioner.

II.
tax cases: inherent limitations

It is thus erroneous for the trial court to hold that because certain mail users are exempted
from the levy the law and administrative officials have sanctioned an invidious discrimination
offensive to the Constitution. The application of the lower courts theory would require all mail
users to be taxed, a conclusion that is hardly tenable in the light of differences in status of
mail users. The Constitution does not require this kind of equality.

According to the trial court, the money raised from the sales of the anti-TB stamps is spent
for the benefit of the Philippine Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out, the Society is not really the
beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as a special fund and as such need not be
appropriated by law.18

As the United States Supreme Court has said, the legislature may withhold the burden of the
tax in order to foster what it conceives to be a beneficent enterprise.11 This is the case of
newspapers which, under the amendment introduced by Republic Act 2631, are exempt from
the payment of the additional stamp.

3.
Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is one
of the grounds on which the lower court invalidated Republic Act 1631, as amended, namely,
that it constitutes an undue delegation of legislative power.

As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and such
consent, being in derogation of its sovereignty, is to be strictly construed.12 Administrative
Order 9 of the respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but a
restatement of this well-known principle of constitutional law.

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for
certain classes of mail matters (such as mail permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in cash instead of the purchase of the anti-TB
stamp. It further states that mails deposited during the period August 19 to September 30 of
each year in mail boxes without the stamp should be returned to the sender, if known,
otherwise they should be treated as nonmailable.

The trial court likewise held the law invalid on the ground that it singles out tuberculosis to
the exclusion of other diseases which, it is said, are equally a menace to public health. But it
is never a requirement of equal protection that all evils of the same genus be eradicated or
none at all.13 As this Court has had occasion to say, "if the law presumably hits the evil where
it is most felt, it is not to be overthrown because there are other instances to which it might
have been applied."14

It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may be
necessary to prevent a failure of the undertaking. The authority given to the Postmaster
General to raise funds through the mails must be liberally construed, consistent with the
principle that where the end is required the appropriate means are given.19

2.
The petitioner further argues that the tax in question is invalid, first, because it is
not levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer
to say that the only benefit to which the taxpayer is constitutionally entitled is that derived
from his enjoyment of the privileges of living in an organized society, established and
safeguarded by the devotion of taxes to public purposes. Any other view would preclude the
levying of taxes except as they are used to compensate for the burden on those who pay them
and would involve the abandonment of the most fundamental principle of government that
it exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate
rather than a graduated tax. A tax need not be measured by the weight of the mail or the
extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same considerations
may induce the legislature to impose a flat tax which in effect is a charge for the transaction,
operating equally on all persons within the class regardless of the amount involved.16 As Mr.
Justice Holmes said in sustaining the validity of a stamp act which imposed a flat rate of two
cents on every $100 face value of stock transferred:

The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the
additional charge but also that of the regular postage. In the case of business reply cards,
for instance, it is obvious that to require mailers to affix the anti-TB stamp on their cards
would be to make them pay much more because the cards likewise bear the amount of the
regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not
bear the anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamp" is a declaration that such mail matter is
nonmailable within the meaning of section 1952 of the Administrative Code. Administrative
Order 7 of the Postmaster General is but a restatement of the law for the guidance of postal
officials and employees. As for Administrative Order 9, we have already said that in listing
the offices and entities of the Government exempt from the payment of the stamp, the
respondent Postmaster General merely observed an established principle, namely, that the
Government is exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.

tax cases: inherent limitations

12

Granted the power to select the subject of taxation, the State's power to grant exemption
must likewise be conceded as a necessary corollary. Tax exemptions are too common in the
law; they have never been thought of as raising issues under the equal protection clause.

One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again
equality in this sense has to yield to practical considerations and usage. There must be a
fixed and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there
is equality. When the taxes on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent. Valuation is not the only
thing to be considered. As was pointed out by the court of appeals, the familiar stamp tax of
2 cents on checks, irrespective of income or earning capacity, and many others, illustrate
the necessity and practice of sometimes substituting count for weight ...17

Page

And then of course it is not accurate to say that the statute constituted mail users into a class.
Mail users were already a class by themselves even before the enactment of the statue and
all that the legislature did was merely to select their class. Legislation is essentially empiric
and Republic Act 1635, as amended, no more than reflects a distinction that exists in fact. As
Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law; to
disregard [them] and concentrate on some abstract identities is lifeless logic."10

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?

MARTIN, J.:

1.
The power of taxation is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent government, without being expressly
conferred by the people. 6 It is a power that is purely legislative and which the central
legislative body cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers. The exception,
however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to tax. 9
Under the New Constitution, local governments are granted the autonomous authority to
create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
local government unit shall have the power to create its sources of revenue and to levy taxes,
subject to such limitations as may be provided by law." Withal, it cannot be said that Section
2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to
enact and vest in local governments the power of local taxation.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject
matter and the production tax rates imposed therein are practically the same, and second,
that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to
enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962,
levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the
taxes due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked
during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962,
levies and collects "on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the person,
fun company, partnership, corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of gallons produced or
manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production
tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act
of 1948, as amended.
There are three capital questions raised in this appeal:

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted
to tax subjects which for reasons of public policy the State has not deemed wise to tax for
more general purposes. 10 This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed over under the guise of
the taxing power, except when the taking of the property is in the lawful exercise of the taxing
power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the jurisdiction of the government
levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and
opportunity for hearing are provided. 11 Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is imposed on property
outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used
in assessing and collecting taxes. But, a tax does not violate the due process clause, as
applied to a particular taxpayer, although the purpose of the tax will result in an injury rather
than a benefit to such taxpayer. Due process does not require that the property subject to
the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice
and hearing as to the amount of the tax and the manner in which it shall be apportioned are
generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may
not be exercised. 13 The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental
law, since We have not adopted as part thereof the injunction against double taxation found
in the Constitution of the United States and some states of the Union. 14 Double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case
where one tax is imposed by the State and the other by the city or municipality. 17

tax cases: inherent limitations

13

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines,
Inc., commenced a complaint with preliminary injunction before the Court of First Instance
of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as
the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well
as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan,
Leyte, null and void.

3. Are Ordinances Nos. 23 and 27 unjust and unfair?

Page

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of taxation delegated to municipalities under
the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or

specific taxes?

2.
The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both ordinances
are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which
was approved on September 25, 1962, levies or collects from soft drinks producers or
manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective
of the volume contents of the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle and still pay the same tax rate,
the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in
Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is
thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates
as a repeal of the latter, even without words to that effect. 18 Plaintiff-appellant in its brief
admitted that defendants-appellees are only seeking to enforce Ordinance No. 27, series of
1962. Even the stipulation of facts confirms the fact that the Acting Municipal Treasurer of
Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of
said Ordinance No. 27, series of 1962. The aforementioned admission shows that only
Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the
Provincial Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of
Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the
latter are inconsistent with the provisions of the former."

the constutional policy of according the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No.
231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go
slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance
with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen
local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under
Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance
No. 27. Municipalities are empowered to impose, not only municipal license taxes upon
persons engaged in any business or occupation but also to levy for public purposes, just and
uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second power
of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known
as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27
of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23,
same series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost
"everything, accepting those which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the exceptions and limitations in
the law, the same comes within the ambit of the general rule, pursuant to the rules of
exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation
applies, particularly, to the prohibition against municipalities and municipal districts to
impose "any percentage tax or other taxes in any form based thereon nor impose taxes on
articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer
imposes a sales tax and is null and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No.
27 does not partake of the nature of a percentage tax on sales, or other taxes in any form
based thereon. The tax is levied on the produce (whether sold or not) and not on the sales.
The volume capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio between the
volume of sales and the amount of the tax. 21

tax cases: inherent limitations

Page

3.
The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on
all softdrinks, produced or manufactured, or an equivalent of 1- centavos per case, 23
cannot be considered unjust and unfair. 24 an increase in the tax alone would not support
the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the reates of imposable taxes. 25 This is in line with

14

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco
other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium
and other habit-forming drugs. 22 Soft drink is not one of those specified.

Direct appeal to this Court, from a decision of the Court of First Instance of Agusan,
dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with
offices and principal place of business in Quezon City. The defendants are the City of Butuan,
its City Mayor, the members of its municipal board and its City Treasurer. Plaintiff seeks
to recover the sums paid by it to the City of Butuan hereinafter referred to as the City and
collected by the latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal
Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to prevent
the enforcement thereof. Both parties submitted the case for decision in the lower court upon
a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the
"Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities
in the Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and
shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City of Butuan
and all municipalities of Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was
subsequently amended by Ordinance No. 122 and effective November 28, 1960. A copy of
Ordinance No. 110, Series of 1960 and Ordinance No. 122 are incorporated herein as
Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of
P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of
P4,926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January
1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of
P14,177.03 paid under protest and those that if may later on pay until the termination of this
case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that
the tax imposed is excessive and that it is unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has
prepared a form to be accomplished by the plaintiff for the computation of the tax. A copy of
the form is enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to
July 30, 1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1"
to "D-5". In this Profit and Loss Statement, the defendants claim that the plaintiff is not
entitled to a depreciation of P3,052.63 but only P1,202.55 in which case the profit of plaintiff
will be increased from P1,254.44 to P3,104.52. The plaintiff differs only on the claim of
depreciation which the company claims to be P3,052.62. This is in accordance with the
findings of the representative of the undersigned City Attorney who verified the records of
the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was
increased to P1.92 which price is uniform throughout the Philippines. Said increase was
made due to the increase in the production cost of its manufacture.

xxx

xxx

x x x1wph1.t

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within
the purview thereof. Section 2 provides for the payment by "any agent and/or consignee" of
any dealer "engaged in selling liquors, imported or local, in the City," of taxes at specified
rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and
carbonated beverages therein named, and "all other soft drinks or carbonated drinks."
Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the
ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar
month." Pursuant to Section 5, the taxes "shall be based and computed from the cargo
manifest or bill of lading or any other record showing the number of cases of soft drinks,
liquors or all other soft drinks or carbonated drinks received within the month." Sections 6,
7 and 8 specify the surcharge to be added for failure to pay the taxes within the period
prescribed and the penalties imposable for "deliberate and willful refusal to pay the tax
mentioned in Sections 2 and 3" or for failure "to furnish the office of the City Treasurer a copy
of the bill of lading or cargo manifest or record of soft drinks, liquors or carbonated drinks
for sale in the City." Section 9 makes the ordinance applicable to soft drinks, liquors or
carbonated drinks "received outside" but "sold within" the City. Section 10 of the ordinance
provides that the revenue derived therefrom "shall be alloted as follows: 40% for Roads and
Bridges Fund; 40% for the General Fund and 20% for the School Fund."

Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the
nature of an import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and
confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2 of Republic Act No.
2264, upon the authority of which it was enacted, is an unconstitutional delegation of
legislative powers.
The second and last objections are manifestly devoid of merit. Indeed independently of
whether or not the tax in question, when considered in relation to the sales tax prescribed by
Acts of Congress, amounts to double taxation, on which we need not and do not express any
opinion - double taxation, in general, is not forbidden by our fundamental law. We have not
adopted, as part thereof, the injunction against double taxation found in the Constitution of
the United States and of some States of the Union.1 Then, again, the general principle against
delegation of legislative powers, in consequence of the theory of separation of powers2 is
subject to one well-established exception, namely: legislative powers may be delegated to
local governments to which said theory does not apply3 in respect of matters of local
concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft
drinks or carbonated drinks in the production and sale of which plaintiff is engaged or
less than P0.0042 per bottle, is manifestly too small to be excessive, oppressive, or
confiscatory.
The first and the fourth objections merit, however, serious consideration. In this connection,
it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as originally
approved, was imposed upon dealers "engaged in selling" soft drinks or carbonated drinks.
Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise.
As amended by Ordinance No. 122, the tax is, however, imposed only upon "any agent and/or
consignee of any person, association, partnership, company or corporation engaged in
selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which was inserted
by said Ordinance No. 122:
... Definition of the Term Consignee or Agent. For purposes of this Ordinance, a
consignee of agent shall mean any person, association, partnership, company or

tax cases: inherent limitations

15

CONCEPCION, C.J.:

8. That the parties reserve the right to submit arguments on the constitutionality and illegality
of Ordinance No. 110, as amended of the City of Butuan in their respective memoranda.

Page

G.R. No. L-22814

August 28, 1968
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant, vs. CITY OF
BUTUAN, MEMBERS OF THE MUNICIPAL BOARD, THE CITY MAYOR and THE CITY
TREASURER, all of the CITY OF BUTUAN, defendants-appellees.
Sabido, Sabido and Associates for plaintiff-appellant.
The City Attorney of Butuan City for defendants-appellees.

corporation who acts in the place of another by authority from him or one entrusted with the
business of another or to whom is consigned or shipped no less than 1,000 cases of hard
liquors or soft drinks every month for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not
subject to the tax, unless they are agents and/or consignees of another dealer, who, in the
very nature of things, must be one engaged in business outside the City. Besides, the tax
would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft
drinks are consigned or shipped to him every month. When we consider, also, that the tax
"shall be based and computed from the cargo manifest or bill of lading ... showing the number
of cases" not sold but "received" by the taxpayer, the intention to limit the application
of the ordinance to soft drinks and carbonated drinks brought into the City from outside
thereof becomes apparent. Viewed from this angle, the tax partakes of the nature of an
import duty, which is beyond defendant's authority to impose by express provision of law.4
Even however, if the burden in question were regarded as a tax on the sale of said beverages,
it would still be invalid, as discriminatory, and hence, violative of the uniformity required by
the Constitution and the law therefor, since only sales by "agents or consignees" of outside
dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other
merchants, regardless of the volume of their sales, and even if the same exceeded those
made by said agents or consignees of producers or merchants established outside the City
of Butuan, would be exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does not
require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation.5 The classification made in the exercise of this authority, to be valid,
must, however, be reasonable6 and this requirement is not deemed satisfied unless: (1) it is
based upon substantial distinctions which make real differences; (2) these are germane to
the purpose of the legislation or ordinance; (3) the classification applies, not only to present
conditions, but, also, to future conditions substantially identical to those of the present; and
(4) the classification applies equally all those who belong to the same class.7
These conditions are not fully met by the ordinance in question.8 Indeed, if its purpose were
merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no
reason why sales thereof by sealers other than agents or consignees of producers or
merchants established outside the City of Butuan should be exempt from the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall be
entered annulling Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the
City of Butuan to refund to plaintiff herein the amounts collected from and paid under protest
by the latter, with interest thereon at the legal rate from the date of the promulgation of this
decision, in addition to the costs, and defendants herein are, accordingly, restrained and
prohibited permanently from enforcing said Ordinance, as amended. It is so ordered.

G.R. No. 127316

October 12, 2000
LIGHT RAIL TRANSIT AUTHORITY, petitioner, vs. CENTRAL BOARD OF ASSESSMENT
APPEALS, BOARD OF ASSESSMENT APPEALS OF MANILA and the CITY ASSESSOR OF
MANILA, respondents.
DECISION
PANGANIBAN, J.:
The Light Rail Transit Authority and the Metro Transit Organization function as serviceoriented business entities, which provide valuable transportation facilities to the paying
public. In the absence, however, of any express grant of exemption in their favor, they are
subject to the payment of real property taxes.
The Case
In the Petition for Review before us, the Light Rail Transit Authority (LRTA) challenges the
November 15, 1996 Decision1 of the Court of Appeals (CA) in CA-GR SP No. 38137, which
disposed as follows:
"WHEREFORE, premises considered, the appealed decision (dated October 15, 1994) of the
Central Board of Assessment Appeals is hereby AFFIRMED, with costs against the
petitioner."2
The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the June 26,
1992 Resolution of the Board of Assessment Appeals of Manila, which had declared
petitioner's carriageways and passenger terminals as improvements subject to real property
taxes.
The Facts
The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling, as
follows:3
"1. The LRTA is a government-owned and controlled corporation created and organized
under Executive Order No. 603, dated July 12, 1980 'x x x primarily responsible for the
construction, operation, maintenance and/or lease of light rail transit system in the
Philippines, giving due regard to the [reasonable requirements] of the public transportation
of the country' (LRTA vs. The Hon. Commission on Audit, GR No. No. 88365);
"2. x x x [B]y reason of x x x Executive Order 603, LRTA acquired real properties x x x
constructed structural improvements, such as buildings, carriageways, passenger terminal
stations, and installed various kinds of machinery and equipment and facilities for the
purpose of its operations;

Page

"4. That it commenced its operations in 1984, and that sometime that year, RespondentAppellee City Assessor of Manila assessed the real properties of [petitioner], consisting of
lands, buildings, carriageways and passenger terminal stations, machinery and equipment
which he considered real propert[y] under the Real Property Tax Code, to commence with
the year 1985;

16

"3. x x x [F]or x x x an effective maintenance, operation and management, it entered into a

Contract of Management with the Meralco Transit Organization (METRO) in which the latter
undertook to manage, operate and maintain the Light Rail Transit System owned by the LRTA
subject to the specific stipulations contained in said agreement, including payments of a
management fee and real property taxes (Add'l Exhibit "I", Records)

tax cases: inherent limitations

"5. That [petitioner] paid its real property taxes on all its real property holdings, except the
carriageways and passenger terminal stations including the land where it is constructed on
the ground that the same are not real properties under the Real Property Tax Code, and if
the same are real propert[y], these x x x are for public use/purpose, therefore, exempt from
realty taxation, which claim was denied by the Respondent-Appellee City Assessor of Manila;
and
"6. x x x [Petitioner], aggrieved by the action of the Respondent-Appellee City Assessor, filed
an appeal with the Local Board of Assessment Appeals of Manila x x x. Appellee, herein, after
due hearing, in its resolution dated June 26, 1992, denied [petitioner's] appeal, and declared
that carriageways and passenger terminal stations are improvements, therefore, are real
propert[y] under the Code, and not exempt from the payment of real property tax.
"A motion for reconsideration filed by [petitioner] was likewise denied."

"V
The Honorable Court of Appeals erred in failing to consider that payment of the realty taxes
assessed is not warranted and should the legality of the questioned assessment be upheld,
the amount of the realty taxes assessed would far exceed the annual earnings of petitioner,
a government corporation."
The foregoing all point to one main issue: whether petitioner's carriageways and passenger
terminal stations are subject to real property taxes.
The Court's Ruling

The CA Ruling
The Court of Appeals held that petitioner's carriageways and passenger terminal stations
constituted real property or improvements thereon and, as such, were taxable under the
Real Property Tax Code. The appellate court emphasized that such pieces of property did
not fall under any of the exemptions listed in Section 40 of the aforementioned law. The
reason was that they were not owned by the government or any government-owned
corporation which, as such, was exempt from the payment of real property taxes. True, the
government owned the real property upon which the carriageways and terminal stations
were built. However, they were still taxable, because beneficial use had been transferred to
petitioner, a taxable entity.
The CA debunked the argument of petitioner that carriageways and terminals were intended
for public use. The former agreed, instead, with the CBAA. The CBAA had concluded that
since petitioner was not engaged in purely governmental or public service, the latter's
endeavors were proprietary. Indeed, petitioner was deemed as a profit-oriented endeavor,
serving as it did, only the paying public.
Hence, this Petition.4

The Petition has no merit.

Main Issue:
May Real Property Taxes be Assessed and Collected?
The Real Property Tax Code,6 the law in force at the time of the assailed assessment in 1984,
mandated that "there shall be levied, assessed and collected in all provinces, cities and
municipalities an annual ad valorem tax on real property such as lands, buildings, machinery
and other improvements affixed or attached to real property not hereinafter specifically
exempted."7
Petitioner does not dispute that its subject carriageways and stations may be considered
real property under Article 415 of the Civil Code. However, it resolutely argues that the same
are improvements, not of its properties, but of the government-owned national roads to
which they are immovably attached. They are thus not taxable as improvements under the
Real Property Tax Code. In essence, it contends that to impose a tax on the carriageways
and terminal stations would be to impose taxes on public roads.
The argument does not persuade. We quote with approval the solicitor general's astute
comment on this matter:

"I
The Honorable Court of Appeals erred in not holding that the carriageways and terminal
stations of petitioner are not improvements for purposes of the Real Property Tax Code.
"II
The Honorable Court of Appeals erred in not holding that being attached to national roads
owned by the national government, subject carriageways and terminal stations should be
considered property of the national government.
"III
The Honorable Court of Appeals erred in not holding that payment of charges or fares in the
operation of the light rail transit system does not alter the nature of the subject carriageways
and terminal stations as devoted for public use.

"There is no point in clarifying the concept of industrial accession to determine the nature of
the property when what is fundamentally important for purposes of tax classification is to
determine the character of the property subject [to] tax. The character of tax as a property
tax must be determined by its incidents, and form the natural and legal effect thereof. It is
irrelevant to associate the carriageways and/or the passenger terminals as accessory
improvements when the view of taxability is focused on the character of the property. The
latter situation is not a novel issue as it has already been resolved by this Honorable Court in
the case of City of Manila vs. IAC (GR No. 71159, November 15, 1989) wherein it was held:
'The New Civil Code divides the properties into property for public and patrimonial property
(Art. 423), and further enumerates the property for public use as provincial road, city streets,
municipal streets, squares, fountains, public waters, public works for public service paid for
by said [provinces], cities or municipalities; all other property is patrimonial without
prejudice to provisions of special laws. (Art. 424, Province of Zamboanga v. City of
Zamboanga, 22 SCRA 1334 [1968])
xxx
'...while the following are corporate or proprietary property in character, viz: 'municipal
water works, slaughter houses, markets, stables, bathing establishments, wharves, ferries
and fisheries.' Maintenance of parks, golf courses, cemeteries and airports, among others,

tax cases: inherent limitations

17

In its Memorandum,5 petitioner urges the Court to resolve the following matters:

Page

The Issues

"IV

The Honorable Court of Appeals erred in failing to consider the view advanced by the
Department of Finance, which takes charge of the overall collection of taxes, that subject
carriageways and terminal stations are not subject to realty taxes.

are also recognized as municipal or city activities of a proprietary character (Dept. of

Treasury v. City of Evansville; 60 NE 2nd 952)'
"The foregoing enumeration in law does not specify or include carriageway or passenger
terminals as inclusive of properties strictly for public use to exempt petitioner's properties
from taxes. Precisely, the properties of petitioner are not exclusively considered as public
roads being improvements placed upon the public road, and this separability nature of the
structure in itself physically distinguishes it from a public road. Considering further that
carriageways or passenger terminals are elevated structures which are not freely
accessible to the public, viz-a-viz roads which are public improvements openly utilized by the
public, the former are entirely different from the latter.
"The character of petitioner's property, be it an improvements as otherwise distinguished by
petitioner, needs no further classification when the law already classified it as patrimonial
property that can be subject to tax. This is in line with the old ruling that if the public works is
not for such free public service, it is not within the purview of the first paragraph of Art. 424
if the New Civil Code."8
Though the creation of the LRTA was impelled by public service -- to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila -- its
operation undeniably partakes of ordinary business. Petitioner is clothed with corporate
status and corporate powers in the furtherance of its proprietary objectives.9 Indeed, it
operates much like any private corporation engaged in the mass transport industry. Given
that it is engaged in a service-oriented commercial endeavor, its carriageways and terminal
stations are patrimonial property subject to tax, notwithstanding its claim of being a
government-owned or controlled corporation.
True, petitioner's carriageways and terminal stations are anchored, at certain points, on
public roads. However, it must be emphasized that these structures do not form part of such
roads, since the former have been constructed over the latter in such a way that the flow of
vehicular traffic would not be impeded. These carriageways and terminal stations serve a
function different from that of the public roads. The former are part and parcel of the light
rail transit (LRT) system which, unlike the latter, are not open to use by the general public.
The carriageways are accessible only to the LRT trains, while the terminal stations have been
built for the convenience of LRTA itself and its customers who pay the required fare.

of the Philippines or any of its political subdivisions and any government-owned or controlled
corporation so exempt by its charter, provided, however, that this exemption shall not apply
to real property of the abovenamed entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person."12
Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax
exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in
connection with the importation of equipment not locally available, as the following provision
shows:
"ARTICLE 4
TAX AND DUTY EXEMPTIONS
Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials. - The
importation of equipment, machineries, spare parts, accessories and other materials,
including supplies and services, used directly in the operations of the Light Rails Transit
System, not obtainable locally on favorable terms, out of any funds of the authority including,
as stated in Section 7 above, proceeds from foreign loans credits or indebtedness, shall
likewise be exempted from all direct and indirect taxes, customs duties, fees, imposts, tariff
duties, compensating taxes, wharfage fees and other charges and restrictions, the
provisions of existing laws to the contrary notwithstanding."
Even granting that the national government indeed owns the carriageways and terminal
stations, the exemption would not apply because their beneficial use has been granted to
petitioner, a taxable entity.
Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly
construed against the claimant.13 LRTA has not shown its eligibility for exemption; hence, it
is subject to the tax.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of
Appeals AFFIRMED. Costs against the petitioner.
SO ORDERED.

Basis of Assessment Is Actual Use of Real Property

Under the Real Property Tax Code, real property is classified for assessment purposes on
the basis of actual use,10 which is defined as "the purpose for which the property is
principally or predominantly utilized by the person in possession of the property."11
Petitioner argues that it merely operates and maintains the LRT system, and that the actual
users of the carriageways and terminal stations are the commuting public. It adds that the
public-use character of the LRT is not negated by the fact that revenue is obtained from the
latter's operations.

In any event, there is another legal justification for upholding the assailed CA
Decision.1wphi1 Under the Real Property Tax Code, real property "owned by the Republic
tax cases: inherent limitations

Page

Petitioner Not Exempt from Payment of Real Property Taxes

18

We do not agree. Unlike public roads which are open for use by everyone, the LRT is
accessible only to those who pay the required fare. It is thus apparent that petitioner does
not exist solely for public service, and that the LRT carriageways and terminal stations are
not exclusively for public use. Although petitioner is a public utility, it is nonetheless profitearning. It actually uses those carriageways and terminal stations in its public utility business
and earns money therefrom.

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995 2 denying the
motion to reconsider the decision.
We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to "principally undertake the economical, efficient and
effective control, management and supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports as may be
established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to:

a)
encourage, promote and develop international and domestic air traffic in the
Central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country; and
b)
upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from
payment of realty taxes in accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land
belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M,
918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio
Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified, claiming in its
favor the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It
was also asserted that it is an instrumentality of the government performing governmental
functions, citing section 133 of the Local Government Code of 1991 which puts limitations on
the taxing powers of local government units:

Sec. 133.
Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangay shall not extend to the levy of the following:
a)

...

xxx

xxx

xxx

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that
the MCIAA is a government-controlled corporation whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect
on January 1, 1992:
Sec. 193.
Withdrawal of Tax Exemption Privilege. 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 nonprofit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied)
xxx

xxx

Sec. 234.
(a)

...

xxx

xxx

(c)

...

xxx
Exemptions from Real Property taxes. . . .

xxx

Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of petitioner,
the latter was compelled to pay its tax account "under protest" and thereafter filed a Petition
for Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29,
1994. MCIAA basically contended that the taxing powers of local government units do not
extend to the levy of taxes or fees of any kind on an instrumentality of the national
government. Petitioner insisted that while it is indeed a government-owned corporation, it
nonetheless stands on the same footing as an agency or instrumentality of the national
government. Petitioner insisted that while it is indeed a government-owned corporation, it
nonetheless stands on the same footing as an agency or instrumentality of the national
government by the very nature of its powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the government
but merely a government-owned corporation performing proprietary functions As such, all
exemptions previously granted to it were deemed withdrawn by operation of law, as provided
under Sections 193 and 234 of the Local Government Code when it took effect on January 1,
1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings,
to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of taxes by government owned and controlled
corporation per Sections after the effectivity of said Code on January 1, 1992, to wit:
[proceeds to quote Sections 193 and 234]

tax cases: inherent limitations

19

DAVIDE, JR., J.:

o)
Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis supplied)

Page

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J.
MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu
City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEA, and
EUSTAQUIO B. CESA, respondents.

With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption
provided for in RA 6958 creating petitioner had been expressly repealed by the provisions of
the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties effective
after January 1, 1992 until the present.
This Court's ruling finds expression to give impetus and meaning to the overall objectives of
the New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the
State that the territorial and political subdivisions of the State shall enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them more effective partners in the attainment of national goals.
Towards this end, the State shall provide for a more responsive and accountable local
government structure instituted through a system of decentralization whereby local
government units shall be given more powers, authority, responsibilities, and resources. The
process of decentralization shall proceed from the national government to the local
government units. . . . 5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:
I
RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS
VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II
RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people. 6 Considering its task "not merely to efficiently operate and manage the MactanCebu International Airport, but more importantly, to carry out the Government policies of
promoting and developing the Central Visayas and Mindanao regions as centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country," 7 and that it is an attached agency of the
Department of Transportation and Communication (DOTC), 8 the petitioner "may stand in
[sic] the same footing as an agency or instrumentality of the national government." Hence,
its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn
with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section
133 thereof specifically states that the taxing powers of local government units shall not
extend to the levy of taxes of fees or charges of any kind on the national government its
agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming Corporation; 9

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually
is exempt from local taxes. Otherwise, its operation might be burdened, impeded or
subjected to control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat
316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over local
government.
Justice Holmes, speaking for the Supreme Court, make references to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the instrumentalities
of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
political subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the
accomplishment of them. (Antieau Modern Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to
tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called
by Justice Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity which has the inherent
power to wield it. (Emphasis supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to all government corporations." For it
is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges that as local a government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction.
Such power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it
may be true that under its Charter the petitioner was exempt from the payment of realty
taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In response to the
petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing
governmental and purely proprietary functions. Respondent city of Cebu urges this the
Manila International Airport Authority is a governmental-owned corporation, 12 and to reject
the application of Basco because it was "promulgated . . . before the enactment and the
singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit
and intention of the framers of the said law.

tax cases: inherent limitations

20

However, RA 7160 expressly provides that "All general and special laws, acts, city charters,
decress [sic], executive orders, proclamations and administrative regulations, or part or
parts thereof which are inconsistent with any of the provisions of this Code are hereby
repealed or modified accordingly." ([f], Section 534, RA 7160).

Local governments have no power to tax instrumentalities of the National Government.

PAGCOR is a government owned or controlled corporation with an original character, PD
1869. All its shares of stock are owned by the National Government. . . .

Page

Petitioners claimed that its real properties assessed by respondent City Government of Cebu
are exempted from paying realty taxes in view of the exemption granted under RA 6958 to
pay the same (citing Section 14 of RA 6958).

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from
the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133.
Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
(a)

Income tax, except when levied on banks and other financial institutions;

(b)

Documentary stamp tax;

(c)
Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided herein
(d)
Customs duties, registration fees of vessels and wharfage on wharves, tonnage
dues, and all other kinds of customs fees charges and dues except wharfage on wharves
constructed and maintained by the local government unit concerned:

(f)
Taxes fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(g)
Taxes on business enterprise certified to be the Board of Investment as pioneer or
non-pioneer for a period of six (6) and four (4) years, respectively from the date of
registration;
(h)
Excise taxes on articles enumerated under the National Internal Revenue Code, as
amended, and taxes, fees or charges on petroleum products;
(i)
Percentage or value added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
(j)
Taxes on the gross receipts of transportation contractor and person engage in the
transportation of passengers of freight by hire and common carriers by air, land, or water,
except as provided in this code;
(k)

Taxes on premiums paid by ways reinsurance or retrocession;

(l)
Taxes, fees, or charges for the registration of motor vehicles and for the issuance
of all kinds of licenses or permits for the driving of thereof, except, tricycles;
(m)
Taxes, fees, or other charges on Philippine product actually exported, except as
otherwise provided herein;
(n)
Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and
Cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine
hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the
Philippines; and
(o)
TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis
supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in the light of the above enumeration. The term "fees" means charges fixed by law or
Ordinance for the regulation or inspection of business activity, 24 while "charges" are
pecuniary liabilities such as rents or fees against person or property. 25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:
Sec. 232.
Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real property
such as land, building, machinery and other improvements not hereafter specifically
exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons,
including government owned and controlled corporations, except as provided therein. It
provides:

tax cases: inherent limitations

21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.
22 Under the latter, the exercise of the power may be subject to such guidelines and
limitations as the Congress may provide which, however, must be consistent with the basic
policy of local autonomy.

(e)
Taxes, fees and charges and other imposition upon goods carried into or out of, or
passing through, the territorial jurisdictions of local government units in the guise or charges
for wharfages, tolls for bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

Page

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
are to pay it. Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance, provides that the rule of
taxation shall be uniform and equitable and Congress shall evolve a progressive system of
taxation. 14 So potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy." 15 Verily, taxation is a destructive power which interferes
with the personal and property for the support of the government. Accordingly, tax statutes
must be construed strictly against the government and liberally in favor of the taxpayer. 16
But since taxes are what we pay for civilized society, 17 or are the lifeblood of the nation, the
law frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority.
18 A claim of exemption from tax payment must be clearly shown and based on language in
the law too plain to be mistaken. 19 Elsewise stated, taxation is the rule, exemption therefrom
is the exception. 20 However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of
the exemption is merely to reduce the amount of money that has to be handled by the
government in the course of its operations. 21

(b)
Charitable institutions, churches, parsonages or convents appurtenants thereto,
mosques nonprofits or religious cemeteries and all lands, building and improvements
actually, directly, and exclusively used for religious charitable or educational purposes;
(c)
All machineries and equipment that are actually, directly and exclusively used by
local water districts and government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power;

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
Sec. 192.
Authority to Grant Tax Exemption Privileges. Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem necessary.

(d)
All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and;

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by
the following clauses:

(e)

Machinery and equipment used for pollution control and environmental protection.

(1)

"unless otherwise provided herein" in the opening paragraph of Section 133;

Except as provided herein, any exemptions from payment of real property tax previously
granted to or presently enjoyed by, all persons whether natural or juridical, including all
government owned or controlled corporations are hereby withdrawn upon the effectivity of
his Code.

(2)

"Unless otherwise provided in this Code" in section 193;

(3)

"not hereafter specifically exempted" in Section 232; and

(4)

"Except as provided herein" in the last paragraph of Section 234

These exemptions are based on the ownership, character, and use of the property. Thus;
(a)
Ownership Exemptions.
Exemptions from real property taxes on the basis of
ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a
municipality, (v) a barangay, and (vi) registered cooperatives.
(b)
Character Exemptions.
Exempted from real property taxes on the basis of their
character are: (i) charitable institutions, (ii) houses and temples of prayer like churches,
parsonages or convents appurtenant thereto, mosques, and (iii) non profit or religious
cemeteries.
(c)
Usage exemptions.
Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all lands buildings and
improvements which are actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually, directly and exclusively
used or by local water districts or by government-owned or controlled corporations engaged
in the supply and distribution of water and/or generation and transmission of electric power;
and (iii) all machinery and equipment used for pollution control and environmental
protection.
To help provide a healthy environment in the midst of the modernization of the country, all
machinery and equipment for pollution control and environmental protection may not be
taxed by local governments.
2.
Other Exemptions Withdrawn.
All other exemptions previously granted to
natural or juridical persons including government-owned or controlled corporations are
withdrawn upon the effectivity of the Code. 26
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and other
financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees,
and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items
(c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the power to
levy real property tax, except those exempted therefrom under Section 234, then Section 232
must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section
232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial used thereof has been granted,
for consideration or otherwise, to a taxable person", as provided in item (a) of the first
paragraph of Section 234.

tax cases: inherent limitations

22

(a)
Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof had been granted, for reconsideration
or otherwise, to a taxable person;

Sec. 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
this code, tax exemptions or incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned, or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non stock and
non profit hospitals and educational constitutions, are hereby withdrawn upon the effectivity
of this Code.

Page

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

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:
(o)
taxes, fees, or charges of any kind on the National Government, its agencies, or
instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property.
Most likely, it could only be the first, but not under any explicit provision of the said section,
for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to embrace . . . . . .
"instrumentalities" and "agencies" or expediency we quote:
(a)
real property owned by the Republic of the Philippines, or any of the Philippines, or
any of its political subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government." 27 These autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy; usually
through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations". 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the
agencies and instrumentalities of the National Government mentioned in Section 133(o), then
it should have restated the wording of the latter. Yet, it did not Moreover, that Congress did
not wish to expand the scope of the exemption in Section 234(a) to include real property
owned by other instrumentalities or agencies of the government including governmentowned and controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code,
which reads:

Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a)
Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporations so exempt by is charter:
Provided, however, that this exemption shall not apply to real property of the above
mentioned entities the beneficial use of which has been granted, for consideration or
otherwise, to a taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments 33 and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. 34 The
power to tax is the most effective instrument to raise needed revenues to finance and support
myriad activities of local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity
of the people. It may also be relevant to recall that the original reasons for the withdrawal of
tax exemption privileges granted to government-owned and controlled corporations and all
other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for this
entities to share in the requirements of the development, fiscal or otherwise, by paying the
taxes and other charges due from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:

tax cases: inherent limitations

23

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The
National Government then is composed of the three great departments the executive, the
legislative and the judicial. 30

Page

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption
is withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other properties, movable or immovable, belonging
to or presently administered by the airports, and all assets, powers, rights, interests and
privileges relating on airport works, or air operations, including all equipment which are
necessary for the operations of air navigation, acrodrome control towers, crash, fire, and
rescue facilities are hereby transferred to the Authority: Provided however, that the
operations control of all equipment necessary for the operation of radio aids to air
navigation, airways communication, the approach control office, and the area control center
shall be retained by the Air Transportation Office. No equipment, however, shall be removed
by the Air Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

G.R. No. 155650

July 20, 2006
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. COURT OF APPEALS, CITY
OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG PANGLUNGSOD NG
PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY TREASURER OF PARAAQUE,
respondents.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu", 36 which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO). 37

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand
E. Marcos. Subsequently, Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports." 38 Hence, the petitioner is now the owner of the
land in question and the exception in Section 234(c) of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege only
in respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs.
Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided before
the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be
subject to tax. Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

The Antecedents

As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately
600 hectares of land,3 including the runways and buildings ("Airport Lands and Buildings")
then under the Bureau of Air Transportation.4 The MIAA Charter further provides that no
portion of the land transferred to MIAA shall be disposed of through sale or any other mode
unless specifically approved by the President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion
No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Paraaque to pay the real estate tax imposed by the City.
MIAA then paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City
of Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken
down as follows:
TAX
DECLARATION
E-016-01370
E-016-01374
E-016-01375
E-016-01376
E-016-01377
E-016-01378
E-016-01379
E-016-01380
*E-016-013-85
*E-016-01387
*E-016-01396
GRAND TOTAL

TAXABLE
YEAR
1992-2001
1992-2001
1992-2001
1992-2001
1992-2001
1992-2001
1992-2001
1992-2001
1998-2001
1998-2001
1998-2001

TAX DUE

PENALTY

TOTAL

19,558,160.00
111,689,424.90
20,276,058.00
58,144,028.00
18,134,614.65
111,107,950.40
4,322,340.00
7,776,436.00
6,444,810.00
34,876,800.00
75,240.00
P392,435,861.95

11,201,083.20
68,149,479.59
12,371,832.00
35,477,712.00
11,065,188.59
67,794,681.59
2,637,360.00
4,744,944.00
2,900,164.50
5,694,560.00
33,858.00
P232,070,863.47

30,789,243.20
179,838,904.49
32,647,890.00
93,621,740.00
29,199,803.24
178,902,631.99
6,959,700.00
12,521,380.00
9,344,974.50
50,571,360.00
109,098.00
P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006

24

SO ORDERED.

CARPIO, J.:

Page

No pronouncement as to costs.

DECISION

tax cases: inherent limitations

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Paraaque from imposing real estate tax on, levying
against, and auctioning for public sale the Airport Lands and Buildings. The petition was
docketed as CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAA's motion for reconsideration and supplemental motion for reconsideration. Hence,
MIAA filed on 5 December 2002 the present petition for review.7
Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City of
Paraaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily
Inquirer, a newspaper of general circulation in the Philippines. The notices announced the
public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February
2003, 10:00 a.m., at the Legislative Session Hall Building of Paraaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents the City of Paraaque, City Mayor of
Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the
City Assessor of Paraaque ("respondents") from auctioning the Airport Lands and
Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public
auction the Airport Lands and Buildings. Respondents received the TRO on the same day
that the Court issued it. However, respondents received the TRO only at 1:25 p.m. or three
hours after the conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor
General subsequently submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in
the name of MIAA. However, MIAA points out that it cannot claim ownership over these
properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for
the benefit of the general public. Since the Airport Lands and Buildings are devoted to public
use and public service, the ownership of these properties remains with the State. The Airport
Lands and Buildings are thus inalienable and are not subject to real estate tax by local
governments.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew
the tax exemption privileges of "government-owned and-controlled corporations" upon the
effectivity of the Local Government Code. Respondents also argue that a basic rule of
statutory construction is that the express mention of one person, thing, or act excludes all
others. An international airport is not among the exceptions mentioned in Section 193 of the
Local Government Code. Thus, respondents assert that MIAA cannot claim that the Airport
Lands and Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8
where we held that the Local Government Code has withdrawn the exemption from real
estate tax granted to international airports. Respondents further argue that since MIAA has
already paid some of the real estate tax assessments, it is now estopped from claiming that
the Airport Lands and Buildings are exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA
are exempt from real estate tax under existing laws. If so exempt, then the real estate tax
assessments issued by the City of Paraaque, and all proceedings taken pursuant to such
assessments, are void. In such event, the other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of
the National Government and thus exempt from local taxation. Second, the real properties of
MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not
exempt from real estate tax. Respondents claim that the deletion of the phrase "any
government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or
controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real
Property Tax Code enumerating the entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from
real estate tax. However, MIAA is not a government-owned or controlled corporation.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a
government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock
or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its

tax cases: inherent limitations

25

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the
MIAA Charter is the proof that MIAA is exempt from real estate tax.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under
Section 234 of the Local Government Code because the Airport Lands and Buildings are
owned by the Republic. To justify the exemption, MIAA invokes the principle that the
government cannot tax itself. MIAA points out that the reason for tax exemption of public
property is that its taxation would not inure to any public advantage, since in such a case the
tax debtor is also the tax creditor.

Page

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay
the real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock
is divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation
must have members. Even if we assume that the Government is considered as the sole
member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations
cannot distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National
Treasury.11 This prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory
Provisions of the Administrative Code defines a government "instrumentality" as follows:

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain,12 police authority13 and the levying of fees and charges.14 At the same
time, MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions of this Executive Order."15
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated
with the department framework. The MIAA Charter expressly states that transforming MIAA
into a "separate and autonomous body"16 will make its operation more "financially
viable."17
Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an agency
or instrumentality is deemed a government-owned or controlled corporation. Examples are
the Mactan International Airport Authority, the Philippine Ports Authority, the University of
the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities
exercise corporate powers but they are not organized as stock or non-stock corporations as
required by Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense as
understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government
Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax.
While the 1987 Constitution now includes taxation as one of the powers of local governments,
local governments may only exercise such power "subject to such guidelines and limitations
as the Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt whether
a person, article or activity is taxable is resolved against taxation. This rule applies with
greater force when local governments seek to tax national government instrumentalities.

tax cases: inherent limitations

26

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders
or voting shares. Section 10 of the MIAA Charter9 provides:

SEC. 2. General Terms Defined. x x x x

Page

instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government
pocket to another.
There is also no reason for local governments to tax national government instrumentalities
for rendering essential public services to inhabitants of local governments. The only
exception is when the legislature clearly intended to tax government instrumentalities for the
delivery of essential public services for sound and compelling policy considerations. There
must be express language in the law empowering local governments to tax national
government instrumentalities. Any doubt whether such power exists is resolved against local
governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in
the Code, local governments cannot tax national government instrumentalities. As this Court
held in Basco v. Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the instrumentalities
of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
political subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the
accomplishment of them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis
supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil
Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used by the
public for international and domestic travel and transportation. The fact that the MIAA
collects terminal fees and other charges from the public does not remove the character of
the Airport Lands and Buildings as properties for public use. The operation by the
government of a tollway does not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road
through the toll fees they pay upon using the road. The tollway system is even a more efficient
and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether
it is of public dominion or not. Article 420 of the Civil Code defines property of public dominion
as one "intended for public use." Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of the road do not affect the
public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed user's tax. This means taxing those among the public who actually
use a public facility instead of taxing all the public including those who never use the
particular public facility. A user's tax is more equitable a principle of taxation mandated in
the 1987 Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public
dominion because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties
of public dominion. As properties of public dominion, the Airport Lands and Buildings are

tax cases: inherent limitations

27

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

ARTICLE 419. Property is either of public dominion or of private ownership.

Page

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the
national government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it
for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the commerce
of man may be the object of a contract, and plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which
says: "Communal things that cannot be sold because they are by their very nature outside of
commerce are those for public use, such as the plazas, streets, common lands, rivers,
fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion
are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and cannot
be disposed of or even leased by the municipality to private parties. While in case of war or
during an emergency, town plazas may be occupied temporarily by private individuals, as
was done and as was tolerated by the Municipality of Pozorrubio, when the emergency has
ceased, said temporary occupation or use must also cease, and the town officials should see
to it that the town plazas should ever be kept open to the public and free from encumbrances
or illegal private constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of
man, cannot be the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction
sale of any property of public dominion is void for being contrary to public policy. Essential
public services will stop if properties of public dominion are subject to encumbrances,
foreclosures and auction sale. This will happen if the City of Paraaque can foreclose and
compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real estate
tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which "remains to this day the existing general law
governing the classification and disposition of lands of the public domain other than timber
and mineral lands,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation

SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-three
shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or other
disposition until again declared alienable under the provisions of this Act or by proclamation
of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and
Buildings from public use, these properties remain properties of public dominion and are
inalienable. Since the Airport Lands and Buildings are inalienable in their present status as
properties of public dominion, they are not subject to levy on execution or foreclosure sale.
As long as the Airport Lands and Buildings are reserved for public use, their ownership
remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. (1)
The President shall have the power to reserve for settlement or public use, and for specific
public purposes, any of the lands of the public domain, the use of which is not otherwise
directed by law. The reserved land shall thereafter remain subject to the specific public
purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn
by law or presidential proclamation from public use, they are properties of public dominion,
owned by the Republic and outside the commerce of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA
to hold title to real properties owned by the Republic, thus:
SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.
(2) For property belonging to the Republic of the Philippines but titled in the name of any
political subdivision or of any corporate agency or instrumentality, by the executive head of
the agency or instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer
because even its executive head cannot sign the deed of conveyance on behalf of the
Republic. Only the President of the Republic can sign such deed of conveyance.28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:

tax cases: inherent limitations

28

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters,
the promenades, and public works of general service supported by said towns or provinces."

systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

Page

outside the commerce of man. The Court has ruled repeatedly that properties of public
dominion are outside the commerce of man. As early as 1915, this Court already ruled in
Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus:

SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.
x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;
WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a financially
viable operation, will best be achieved by a separate and autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the National
Government, which authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA.
The purpose was merely to reorganize a division in the Bureau of Air Transportation into a
separate and autonomous body. The Republic remains the beneficial owner of the Airport
Lands and Buildings. MIAA itself is owned solely by the Republic. No party claims any
ownership rights over MIAA's assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines." This only means that the Republic retained the beneficial

At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal
property owned by the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment
of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing "[t]axes, fees or charges of any kind on the
National Government, its agencies and instrumentalities x x x." The real properties owned by
the Republic are titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government. The Administrative Code allows real property
owned by the Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to be exempt
from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality
of the national government. This happens when title of the real property is transferred to an
agency or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption
only if the "beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person." MIAA, as a government instrumentality, is not a taxable person under
Section 133(o) of the Local Government Code. Thus, even if we assume that the Republic has
granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does not
make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted
the beneficial use of such land area for a consideration to a taxable person and therefore
such land area is subject to real estate tax. In Lung Center of the Philippines v. Quezon City,
the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt from real property taxes.29
3. Refutation of Arguments of Minority

tax cases: inherent limitations

29

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau
of Lands and other appropriate government agencies shall undertake an actual survey of the
area transferred within one year from the promulgation of this Executive Order and the
corresponding title to be issued in the name of the Authority. Any portion thereof shall not be
disposed through sale or through any other mode unless specifically approved by the
President of the Philippines. (Emphasis supplied)

ownership of the Airport Lands and Buildings because under Article 428 of the Civil Code,
only the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose of the
Airport Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

Page

SECTION 3. Creation of the Manila International Airport Authority. x x x x

The minority states that MIAA is indisputably a juridical person. The minority argues that
since the Local Government Code withdrew the tax exemption of all juridical persons, then
MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the withdrawn
exemptions from realty tax cover not just GOCCs, but all persons. To repeat, the provisions
lay down the explicit proposition that the withdrawal of realty tax exemption applies to all
persons. The reference to or the inclusion of GOCCs is only clarificatory or illustrative of the
explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our laws,
natural and juridical persons. Obviously, MIAA is not a natural person. Thus, the
determinative test is not just whether MIAA is a GOCC, but whether MIAA is a juridical person
at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation
is its status whether MIAA is a juridical person or not. The minority also insists that
"Sections 193 and 234 may be examined in isolation from Section 133(o) to ascertain MIAA's
claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in
this Code." Now, Section 133(o) of the Local Government Code expressly provides
otherwise, specifically prohibiting local governments from imposing any kind of tax on
national government instrumentalities. Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. Local governments are
devoid of power to tax the national government, its agencies and instrumentalities. The
taxing powers of local governments do not extend to the national government, its agencies
and instrumentalities, "[u]nless otherwise provided in this Code" as stated in the saving
clause of Section 133. The saving clause refers to Section 234(a) on the exception to the
exemption from real estate tax of real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical
persons are subject to tax by local governments. The minority insists that the juridical
persons exempt from local taxation are limited to the three classes of entities specifically
enumerated as exempt in Section 193. Thus, the minority states:

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193.
Under this theory, local governments can impose any kind of local tax, and not only real
estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some
of the national government instrumentalities vested by law with juridical personalities are:
Bangko Sentral ng Pilipinas,30 Philippine Rice Research Institute,31 Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion
Development Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port Authority,36
San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether
MIAA is exempt from local taxation is not whether MIAA is a juridical person, but whether it
is a national government instrumentality under Section 133(o) of the Local Government
Code. Section 133(o) is the specific provision of law prohibiting local governments from
imposing any kind of tax on the national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies
and instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local
governments may tax the national government, its agencies and instrumentalities only if the
Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a)
of the Code, which makes the national government subject to real estate tax when it gives
the beneficial use of its real properties to a taxable entity. Section 234(a) of the Local
Government Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax.
The exception to this exemption is when the government gives the beneficial use of the real
property to a taxable entity.

tax cases: inherent limitations

30

SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions are hereby withdrawn upon effectivity of this Code.
(Emphasis supplied)

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)

Page

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of
the Local Government Code of 1991 withdrew the tax exemption of "all persons, whether
natural or juridical" upon the effectivity of the Code. Section 193 provides:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one
hand, and Sections 193 and 234 on the other. No one has urged that there is such a conflict,
much less has any one presenteda persuasive argument that there is such a conflict. The
minority's assumption of an irreconcilable conflict in the statutory provisions is an egregious
error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states
"[u]nless otherwise provided in this Code." By its own words, Section 193 admits the
superiority of other provisions of the Local Government Code that limit the exercise of the
taxing power in Section 193. When a provision of law grants a power but withholds such
power on certain matters, there is no conflict between the grant of power and the withholding
of power. The grantee of the power simply cannot exercise the power on matters withheld
from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to tax,
and not merely the exercise of a delegated power to tax. Section 133 states that the taxing
powers of local governments "shall not extend to the levy" of any kind of tax on the national
government, its agencies and instrumentalities. There is no clearer limitation on the taxing
power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local
governments such taxing powers. By their very meaning and purpose, the "common
limitations" on the taxing power prevail over the grant or exercise of the taxing power. If the
taxing power of local governments in Section 193 prevails over the limitations on such taxing
power in Section 133, then local governments can impose any kind of tax on the national
government, its agencies and instrumentalities a gross absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to
the saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This
exception which is an exception to the exemption of the Republic from real estate tax
imposed by local governments refers to Section 234(a) of the Code. The exception to the
exemption in Section 234(a) subjects real property owned by the Republic, whether titled in
the name of the national government, its agencies or instrumentalities, to real estate tax if
the beneficial use of such property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points out

SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is "flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in the
Administrative Code does not apply to the Local Government Code. Section 2 of the
Administrative Code clearly states that "unless the specific words x x x of a particular statute
shall require a different meaning," the definition in Section 2 of the Administrative Code shall
apply. Thus, unless there is specific language in the Local Government Code defining the
phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code, the definition in the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining the
phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation." The Administrative
Code, however, expressly defines the phrase "government-owned or controlled
corporation." The inescapable conclusion is that the Administrative Code definition of the
phrase "government-owned or controlled corporation" applies to the Local Government
Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities.
Unless a statute expressly provides for a different status and relationship for a specific
government unit or entity, the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled corporation"
should apply only to corporations organized under the Corporation Code, the general
incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock.
Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the
Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

tax cases: inherent limitations

31

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

that Section 2 of the Introductory Provisions of the Administrative Code admits that its
definitions are not controlling when it provides:

Page

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any
other tax. The justification for the exception to the exemption is that the real property,
although owned by the Republic, is not devoted to public use or public service but devoted
to the private gain of a taxable person.

SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty million
preferred shares with a par value of ten pesos each, which shall be issued in accordance
with the provisions of Sections seventy-seven and eighty-three of this Code. (Emphasis
supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid
for by the Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special
charters are the Philippine Crop Insurance Corporation,42 Philippine International Trading
Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations
organized under special charters as stock corporations are subject to real estate tax on real
properties owned by them. To rule that they are not government-owned or controlled
corporations because they are not registered with the Securities and Exchange Commission
would remove them from the reach of Section 234 of the Local Government Code, thus
exempting them from real estate tax.
Third, the government-owned or controlled corporations created through special charters
are those that meet the two conditions prescribed in Section 16, Article XII of the
Constitution. The first condition is that the government-owned or controlled corporation
must be established for the common good. The second condition is that the governmentowned or controlled corporation must meet the test of economic viability. Section 16, Article
XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned or
controlled corporations" through special charters only if these entities are required to meet
the twin conditions of common good and economic viability. In other words, Congress has
no power to create government-owned or controlled corporations with special charters
unless they are made to comply with the two conditions of common good and economic
viability. The test of economic viability applies only to government-owned or controlled
corporations that perform economic or commercial activities and need to compete in the
market place. Being essentially economic vehicles of the State for the common good
meaning for economic development purposes these government-owned or controlled

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically
viable since the government may even subsidize their entire operations. These
instrumentalities are not the "government-owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or
public functions. Congress has plenary authority to create government instrumentalities
vested with corporate powers provided these instrumentalities perform essential
government functions or public services. However, when the legislature creates through
special charters corporations that perform economic or commercial activities, such entities
known as "government-owned or controlled corporations" must meet the test of
economic viability because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their
income to meet operating expenses solely from commercial transactions in competition with
the private sector. The intent of the Constitution is to prevent the creation of governmentowned or controlled corporations that cannot survive on their own in the market place and
thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the
test of economic performance. We know what happened in the past. If a government
corporation loses, then it makes its claim upon the taxpayers' money through new equity
infusions from the government and what is always invoked is the common good. That is the
reason why this year, out of a budget of P115 billion for the entire government, about P28
billion of this will go into equity infusions to support a few government financial institutions.
And this is all taxpayers' money which could have been relocated to agrarian reform, to social
services like health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse
themselves from the responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committee's consideration and I am glad that I
am joined in this proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC
VIABILITY OR THE ECONOMIC TEST," together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in
his textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial terms.46
(Emphasis supplied)

tax cases: inherent limitations

32

Second, Congress has created through special charters several government-owned

corporations organized as stock corporations. Prime examples are the Land Bank of the
Philippines and the Development Bank of the Philippines. The special charter40 of the Land
Bank of the Philippines provides:

corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.

Page

First, the Administrative Code definition of the phrase "government-owned or controlled

corporation" does not distinguish between one incorporated under the Corporation Code or
under a special charter. Where the law does not distinguish, courts should not distinguish.

The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
essential public service as the primary domestic and international airport of the Philippines.
The operation of an international airport requires the presence of personnel from the
following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;
3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of
the Administrative Code. More importantly, as long as MIAA renders essential public
services, it need not comply with the test of economic viability. Thus, MIAA is outside the
scope of the phrase "government-owned or controlled corporations" under Section 16,
Article XII of the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase "governmentowned or controlled corporation" as merely "clarificatory or illustrative." This is fatal. The
1987 Constitution prescribes explicit conditions for the creation of "government-owned or
controlled corporations." The Administrative Code defines what constitutes a "governmentowned or controlled corporation." To belittle this phrase as "clarificatory or illustrative" is
grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section
2(13) of the Introductory Provisions of the Administrative Code because it is not organized
as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled
corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not
required to meet the test of economic viability. MIAA is a government instrumentality vested
with corporate powers and performing essential public services pursuant to Section 2(10) of
the Introductory Provisions of the Administrative Code. As a government instrumentality,
MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local
Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such exception
applies only if the beneficial use of real property owned by the Republic is given to a taxable
entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and
thus are properties of public dominion. Properties of public dominion are owned by the State
or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

All these agencies of government perform government functions essential to the operation
of an international airport.

The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are owned by the Republic and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.

MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes
on passengers and airlines. The terminal fees that MIAA charges every passenger are
regulatory or administrative fees47 and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the

tax cases: inherent limitations

33

However, government-owned or controlled corporations with special charters, organized

essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized
under their special charters as stock corporations, like the Land Bank of the Philippines and
the Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.

SEC. 2. General Terms Defined. x x x x

Page

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The
non-economic viability of rendering such essential public service does not excuse the State
from withholding such essential services from the public.

entire government machinery, MIAA is a government instrumentality and not a governmentowned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA
as a government instrumentality is not a taxable person because it is not subject to "[t]axes,
fees or charges of any kind" by local governments. The only exception is when MIAA leases
its real property to a "taxable person" as provided in Section 234(a) of the Local Government
Code, in which case the specific real property leased becomes subject to real estate tax.
Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private
parties are subject to real estate tax by the City of Paraaque.

G.R. No. 163072

April 2, 2009
MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner, vs. CITY OF PASAY,
SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF PASAY, CITY TREASURER OF
PASAY, and CITY ASSESSOR OF PASAY, Respondents.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted
to public use, are properties of public dominion and thus owned by the State or the Republic
of the Philippines. Article 420 specifically mentions "ports x x x constructed by the State,"
which includes public airports and seaports, as properties of public dominion and owned by
the Republic. As properties of public dominion owned by the Republic, there is no doubt
whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax
under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled
that properties of public dominion are not subject to execution or foreclosure sale.

This is a petition for review on certiorari1 of the Decision2 dated 30 October 2002 and the
Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court
of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE
the Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from
the real estate tax imposed by the City of Paraaque. We declare VOID all the real estate tax
assessments, including the final notices of real estate tax delinquencies, issued by the City
of Paraaque on the Airport Lands and Buildings of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased
to private parties. We also declare VOID the assailed auction sale, and all its effects, of the
Airport Lands and Buildings of the Manila International Airport Authority.

The Facts
Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy
Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO 903),3
otherwise known as the Revised Charter of the Manila International Airport Authority. EO 903
was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections 34 and
225 of EO 903, approximately 600 hectares of land, including the runways, the airport tower,
and other airport buildings, were transferred to MIAA. The NAIA Complex is located along
the border between Pasay City and Paraaque City.
On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the
City of Pasay for the taxable years 1992 to 2001. MIAAs real property tax delinquency for its
real properties located in NAIA Complex, Ninoy Aquino Avenue, Pasay City (NAIA Pasay
properties) is tabulated as follows:
TAX DECLATAXABLE
RATION
YEAR
A7-183-08346
1997-2001
A7-183-05224
1992-2001
A7-191-00843
1992-2001
A7-191-00140
1992-2001
A7-191-00139
1992-2001
A7-183-05409
1992-2001
A7-183-05410
1992-2001
A7-183-05413
1992-2001
A7-183-05412
1992-2001
A7-183-05411
1992-2001
A7-183-05245
1992-2001
GRAND TOTAL

TAX DUE

PENALTY

TOTAL

243,522,855.00
113,582,466.00
54,454,800.00
1,632,960.00
6,068,448.00
59,129,520.00
20,619,720.00
7,908,240.00
18,441,981.20
109,946,736.00
7,440,000.00
P642,747,726.20

123,351,728.18
71,159,414.98
34,115,932.20
1,023,049.44
3,801,882.85
37,044,644.28
12,918,254.58
4,954,512.36
11,553,901.13
68,881,630.13
4,661,160.00
P373,466,110.13

366,874,583.18
184,741,880.98
88,570,732.20
2,656,009.44
9,870,330.85
96,174,164.28
33,537,974.58
12,862,752.36
29,995,882.33
178,828,366.13
12,101,160.00
P1,016,213,836.33

On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy and
warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of
levy on 28 August 2001. Thereafter, the City Mayor of Pasay threatened to sell at public
auction the NAIA Pasay properties if the delinquent real property taxes remain unpaid.
On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and
injunction with prayer for preliminary injunction or temporary restraining order. The petition
sought to enjoin the City of Pasay from imposing real property taxes on, levying against, and
auctioning for public sale the NAIA Pasay properties.
On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power of the
City of Pasay to impose and collect realty taxes on the NAIA Pasay properties. MIAA filed a
motion for reconsideration, which the Court of Appeals denied. Hence, this petition.
The Court of Appeals Ruling
tax cases: inherent limitations

34

SO ORDERED.

CARPIO, J.:

Page

No costs.

DECISION

The issue raised in this petition is whether the NAIA Pasay properties of MIAA are exempt
from real property tax.
The Courts Ruling
The petition is meritorious.
In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government Code which read:
SECTION 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code.
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise to
a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and
(e) Machinery and equipment used for pollution control and environment protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
this Code.
The Court of Appeals held that as a government-owned corporation, MIAAs tax exemption
under Section 21 of EO 903 has already been withdrawn upon the effectivity of the Local
Government Code in 1992.

To summarize, MIAA is not a government-owned or controlled corporation under Section

2(13) of the Introductory Provisions of the Administrative Code because it is not organized
as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled
corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not
required to meet the test of economic viability. MIAA is a government instrumentality vested
with corporate powers and performing essential public services pursuant to Section 2(10) of
the Introductory Provisions of the Administrative Code. As a government instrumentality,
MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local
Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such exception
applies only if the beneficial use of real property owned by the Republic is given to a taxable
entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and
thus are properties of public dominion. Properties of public dominion are owned by the State
or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth.
The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are owned by the Republic and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.7 (Emphasis in the original)
The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a
"government-owned or controlled corporation." Obviously, the term government
"instrumentality" is broader than the term "government-owned or controlled corporation."
Section 2(10) provides:

SEC. 2. General Terms Defined. x x x

(10) Instrumentality refers to any agency of the national Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory agencies, chartered
institutions and government-owned or controlled corporations.

tax cases: inherent limitations

35

The Issue

In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport lands and buildings of MIAA are exempt
from tax under existing laws. The 2006 MIAA case originated from a petition for prohibition
and injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of
Paraaque from imposing real property tax on, levying against, and auctioning for public sale
the airport lands and buildings located in Paraaque City. The only difference between the
2006 MIAA case and this case is that the 2006 MIAA case involved airport lands and buildings
located in Paraaque City while this case involved airport lands and buildings located in
Pasay City. The 2006 MIAA case and this case raised the same threshold issue: whether the
local government can impose real property tax on the airport lands, consisting mostly of the
runways, as well as the airport buildings, of MIAA. In the 2006 MIAA case, this Court held:

Page

The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1 January 1992, withdrew the exemption from
payment of real property taxes granted to natural or juridical persons, including governmentowned or controlled corporations, except local water districts, cooperatives duly registered
under Republic Act No. 6938, non-stock and non-profit hospitals and educational institutions.
Since MIAA is a government-owned corporation, it follows that its tax exemption under
Section 21 of EO 903 has been withdrawn upon the effectivity of the Local Government Code.

The term "government-owned or controlled corporation" has a separate definition under

Section 2(13)8 of the Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock
or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: Provided, That governmentowned or controlled corporations may further be categorized by the department of Budget,
the Civil Service Commission, and the Commission on Audit for the purpose of the exercise
and discharge of their respective powers, functions and responsibilities with respect to such
corporations.
The fact that two terms have separate definitions means that while a government
"instrumentality" may include a "government-owned or controlled corporation," there may
be a government "instrumentality" that will not qualify as a "government-owned or controlled
corporation."
A close scrutiny of the definition of "government-owned or controlled corporation" in Section
2(13) will show that MIAA would not fall under such definition. MIAA is a government
"instrumentality" that does not qualify as a "government-owned or controlled corporation."
As explained in the 2006 MIAA case:
A government-owned or controlled corporation must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders
or voting shares. x x x

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. x x x
When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain, police authority and the levying of fees and charges. At the same time, MIAA
exercises "all the powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order."9
Thus, MIAA is not a government-owned or controlled corporation but a government
instrumentality which is exempt from any kind of tax from the local governments. Indeed, the
exercise of the taxing power of local government units is subject to the limitations
enumerated in Section 133 of the Local Government Code.10 Under Section 133(o)11 of the
Local Government Code, local government units have no power to tax instrumentalities of
the national government like the MIAA. Hence, MIAA is not liable to pay real property tax for
the NAIA Pasay properties.
Furthermore, the airport lands and buildings of MIAA are properties of public dominion
intended for public use, and as such are exempt from real property tax under Section 234(a)
of the Local Government Code. However, under the same provision, if MIAA leases its real
property to a taxable person, the specific property leased becomes subject to real property
tax.12 In this case, only those portions of the NAIA Pasay properties which are leased to
taxable persons like private parties are subject to real property tax by the City of Pasay.

Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock
is divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002
and the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.
We DECLARE the NAIA Pasay properties of the Manila International Airport Authority
EXEMPT from real property tax imposed by the City of Pasay. We declare VOID all the real
property tax assessments, including the final notices of real property tax delinquencies,
issued by the City of Pasay on the NAIA Pasay properties of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased
to private parties.

xxx

No costs.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation
must have members. Even if we assume that the Government is considered as the sole
member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations
cannot distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National Treasury.
This prevents MIAA from qualifying as a non-stock corporation.

SO ORDERED.

Page

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?

36

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.

tax cases: inherent limitations