EN BANC

CARLOS SUPERDRUG CORP., G.R. No. 166494

doing business under the name

and style Carlos Superdrug, Present:

ELSIE M. CANO, doing business

under the name and style Advance PUNO, C.J.,

Drug, Dr. SIMPLICIO L. YAP, JR., QUISUMBING,*

doing business under the name and YNARES-SANTIAGO,

style City Pharmacy, MELVIN S. SANDOVAL-GUTIERREZ,**

DELA SERNA, doing business under CARPIO,

the name and style Botica dela Serna, AUSTRIA-MARTINEZ,

and LEYTE SERV-WELL CORP., CORONA,

doing business under the name and CARPIO MORALES,

style Leyte Serv-Well Drugstore, AZCUNA,

Petitioners, TINGA,

CHICO-NAZARIO,

- versus - GARCIA,

VELASCO, JR., and

DEPARTMENT OF SOCIAL NACHURA, JJ.

WELFARE and DEVELOPMENT

(DSWD), DEPARTMENT OF Promulgated:

HEALTH (DOH), DEPARTMENT

OF FINANCE (DOF), DEPARTMENT June 29, 2007

OF JUSTICE (DOJ), and

DEPARTMENT OF INTERIOR and

LOCAL GOVERNMENT (DILG),

Respondents.

x ---------------------------------------------------------------------------------------- x

DECISION

AZCUNA, J.:

This is a petition[1] for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of
Section 4(a) of Republic Act (R.A.) No. 9257,[2] otherwise known as the Expanded Senior Citizens Act of
2003.

Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

Public respondents, on the other hand, include the Department of Social Welfare and Development
(DSWD), the Department of Health (DOH), the Department of Finance (DOF), the Department of Justice
(DOJ), and the Department of Interior and Local Government (DILG) which have been specifically tasked
to monitor the drugstores compliance with the law; promulgate the implementing rules and regulations
for the effective implementation of the law; and prosecute and revoke the licenses of erring drugstore
establishments.

The antecedents are as follows:

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,[3] was signed into law by President Gloria
Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states:

SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase
of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral
and burial services for the death of senior citizens;

...

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on
the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted.
Provided, further, That the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as amended.[4]

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No.
9257, Rule VI, Article 8 of which states:

Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted under
Rule V, Section 4 Discounts for Establishments;[5] Section 9, Medical and Dental Services in Private
Facilities[,][6] and Sections 10[7] and 11[8] Air, Sea and Land Transportation as tax deduction based on
the net cost of the goods sold or services rendered. Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted;
Provided, further, That the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as amended; Provided,
finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations to be
issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).[9]

On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through
Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under
the Expanded Senior Citizens Act).

1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%)
discount from all establishments relative to the utilization of transportation services, hotels and similar
lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in the
country, the costs of which may be claimed by the private establishments concerned as tax credit.

Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the government
of the amount of discounts such establishment has granted to a senior citizen. The establishment
recovers the full amount of discount given to a senior citizen and hence, the government shoulders 100%
of the discounts granted.

It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover this
tax payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is, therefore,
inapplicable since no tax payments have previously occurred.

1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment
concerned may claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross
income, based on the net cost of goods sold or services rendered.

Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing
for its tax liability, the amount of discounts granted to senior citizens. Effectively, the government loses in
terms of foregone revenues an amount equivalent to the marginal tax rate the said establishment is
liable to pay the government. This will be an amount equivalent to 32% of the twenty percent (20%)
discounts so granted. The establishment shoulders the remaining portion of the granted discounts.

It may be necessary to note that while the burden on [the] government is slightly diminished in terms of
its percentage share on the discounts granted to senior citizens, the number of potential establishments
that may claim tax deductions, have however, been broadened. Aside from the establishments that may
claim tax credits under the old law, more establishments were added under the new law such as:
establishments providing medical and dental services, diagnostic and laboratory services, including
professional fees of attending doctors in all private hospitals and medical facilities, operators of domestic
air and sea transport services, public railways and skyways and bus transport services.

A simple illustration might help amplify the points discussed above, as follows:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x

Less : Cost of goods sold x x x x x x x x x x

Net Sales x x x x x x x x x x x x

Less: Operating Expenses:

Tax Deduction on Discounts x x x x --

Other deductions: x x x x x x x x

Net Taxable Income x x x x x x x x x x

Tax Due x x x x x x

Less: Tax Credit -- ______x x

Net Tax Due -- x x

As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted from
Net Sales together with other deductions which are considered as operating expenses before the Tax
Due was computed based on the Net Taxable Income. On the other hand, under a tax credit scheme, the
amount of discounts which is the tax credit item, was deducted directly from the tax due amount.[10]

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise known as the Expanded Senior
Citizens Act of 2003[11] was issued by the DOH, providing the grant of twenty percent (20%) discount in
the purchase of unbranded generic medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177[12] amending A.O. No. 171. Under
A.O. No. 177, the twenty percent discount shall not be limited to the purchase of unbranded generic
medicines only, but shall extend to both prescription and non-prescription medicines whether branded
or generic. Thus, it stated that [t]he grant of twenty percent (20%) discount shall be provided in the
purchase of medicines from all establishments dispensing medicines for the exclusive use of the senior
citizens.

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the
following grounds:[13]

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides
that private property shall not be taken for public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which
states that no person shall be deprived of life, liberty or property without due process of law, nor shall
any person be denied of the equal protection of the laws; and

3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section
11 that makes essential goods, health and other social services available to all people at affordable cost.
[14]

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in a
loss of profit

and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores will be justly compensated for the discount.

Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%)
discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners
for the discount privilege accorded to senior citizens. This is because the discount is treated as a
deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower
taxable income. Stated otherwise, it is an amount that is allowed by law[15] to reduce the income prior
to the application of the tax rate to compute the amount of tax which is due.[16] Being a tax deduction,
the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed.

Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of the
gross sales of the private establishments, were it not for R.A. No. 9257.

The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit.[17] This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation.

Just compensation is defined as the full and fair equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify
the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for
the property to be taken shall be real, substantial, full and ample.[18]

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation.[19]

Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a
government program.

The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for their improvement and well-being as the State
considers them an integral part of our society.[20]
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus,
the Act provides:

SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the Constitution, it
is the duty of the family to take care of its elderly members while the State may design programs of
social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies
provides: The State shall provide social justice in all phases of national development. Further, Article XIII,
Section 11, provides: The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services available to
all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women and children. Consonant with these constitutional principles the following are the
declared policies of this Act:

...

(f) To recognize the important role of the private sector in the improvement of the welfare of senior
citizens and to actively seek their partnership.[21]

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical
and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert
halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic
land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants
and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens.
As a form of reimbursement, the law provides that business establishments extending the twenty
percent discount to senior citizens may claim the discount as a tax deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely
veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough
room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest
benefits. [22] Accordingly, it has been described as the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs.[23] It is [t]he power vested in the legislature
by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws,
statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they
shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same.[24]

For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights, though sheltered by due process, must
yield to general welfare.[25]

Police power as an attribute to promote the common good would be diluted considerably if on the mere
plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in view of the presumption of validity which
every law has in its favor.[26]

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and come up
with a financial report, so that they have not been able to show properly whether or not the tax
deduction scheme really works greatly to their disadvantage.[27]

In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring
to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug
Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at P37.57 per
tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an
amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which translates to a loss from
capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53 per tablet will
be refunded and not the full amount of the discount which is P7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores.[28]
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income,[29] the amount of income derived from all sources
before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a
loss on a per transaction basis, which should not be the case. An income statement, showing an
accounting of petitioners sales, expenses, and net profit (or loss) for a given period could have accurately
reflected the effect of the discount on their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss should they give the discount. In addition,
the computation was erroneously based on the assumption that their customers consisted wholly of
senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their
medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of
petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by
petitioners, is merely a result of this decision. Inasmuch as pricing is a property right, petitioners cannot
reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of
losing their customers to competition.

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects property rights, petitioners must accept the
realities of business and the State, in the exercise of police power, can intervene in the operations of a
business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the
precept for the protection of property, various laws and jurisprudence, particularly on agrarian reform
and the regulation of contracts and public utilities, continuously serve as a reminder that the right to
property can be relinquished upon the command of the State for the promotion of public good.[30]

Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means employed in
invoking the active participation of the private sector, in order to achieve the purpose or objective of the
law, is reasonably and directly related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is
arbitrary, and that the continued implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act.[31]

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.

SO ORDERED.

ADOLFO S. AZCUNA

Associate Justice

WE CONCUR:

REYNATO S. PUNO

Chief Justice

(On Official Leave)

LEONARDO A. QUISUMBING

Associate Justice
(On Leave)

CONSUELO YNARES-SANTIAGO

Associate Justice

ANGELINA SANDOVAL-GUTIERREZ

Associate Justice

ANTONIO T. CARPIO

Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

RENATO C. CORONA

Associate Justice

CONCHITA CARPIO MORALES

Associate Justice

DANTE O. TINGA

Associate Justice

MINITA V. CHICO-NAZARIO

Associate Justice

CANCIO C. GARCIA

Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice
CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the
above Decision were reached in consultation before the case was assigned to the writer of the opinion of
the Court.

REYNATO S. PUNO

Chief Justice
* On Official Leave.

** On Leave.

[1] Under Rule 65 of the Rules of Court.

[2] An Act Granting Additional Benefits and Privileges to Senior Citizens Amending for the Purpose
Republic Act No. 7432, otherwise known as An Act to Maximize the Contribution of Senior Citizens to
Nation Building, Grant Benefits and Special Privileges and for other Purposes.

[3] Otherwise known as the Senior Citizens Act.

[4] Emphasis supplied.

[5] Section 4. Discounts from Establishments The grant of twenty percent (20%) discount on all prices of
goods and services offered to the general public regardless of the amount purchased from all
establishments, irrespective of classification, relative to the utilization of services for the exclusive use of
senior citizen in the following:

...

d) DRUG STORES, HOSPITAL PHARMACIES, MEDICAL AND OPTICAL CLINICS AND SIMILAR
ESTABLISHMENTS DISPENSING MEDICINES The discount for purchases of drugs/medicines shall be
subject to the Guidelines to be issued by the Bureau of Food and Drugs, Department of Health (BFAD-
DOH), in coordination with the Philippine Health Insurance Corporation (PHILHEALTH).

[6] Section 9. Medical and Dental Services in Private Facilities. - The senior citizen shall be granted twenty
percent (20%) discount on medical and dental services and diagnostic and laboratory fees such as but
not limited to x-ray, computerized tomography scans and blood tests, including professional fees of
attending doctors in all private hospitals and medical facilities, in accordance with the rules and
regulations to be issued by the Department of Health, in coordination with the Philippine Health
Insurance Corporation.
[7] Section 10. Air and Transportation Privileges. At least twenty percent (20%) discount in fare for
domestic air, and sea travel based on the actual fare, including the promotional fare, advance booking
and similar discounted fare shall be granted for the exclusive use and enjoyment of senior citizens.

[8] Section 11. Public Land Transportation Privileges. - Twenty percent (20%) discount in public railways,
including LRT, MRT, PNR, Skyways and fares in buses (PUB), jeepneys (PUJ), taxi and shuttle services
(AUV) shall be granted for the exclusive use and enjoyment of senior citizens.

[9] Rollo, p. 57.

[10] Id. at 67-69; emphasis supplied.

[11] The A.O. became effective on October 9, 2004, after its publication in two national newspapers of
general circulation.

[12] Amendment to Administrative Order No. 171, s. 2004 on the Policies and Guidelines to Implement
the Relevant Provisions of Republic Act 9257, otherwise known as the Expanded Senior Citizens Act of
2003.

[13] Rollo, pp. 17-24.

[14] According to petitioners, of the five (5) million Filipinos who are 60 years old and above, only
500,000 are in Metro Manila and thus, have access to Mercury Drug which, because of the bulk
discounts it gets from pharmaceutical companies and suppliers, can afford to give the 20% discount.
Unlike Mercury Drug, small- to medium-scale drugstores similar to those of petitioners, however, can
only impose minimal mark-ups for competitive pricing but are constrained to raise the prices of their
medicines so that they would be able to recoup the 20% discount that they extend to senior citizens. In
the end, roughly 4.5 million senior citizens in the provinces or in the areas where Mercury Drug is not
present will not be able to benefit fully from the discount that the law provides.

[15] Under Section 34 of the Tax Code, the itemized deductions considered as allowable deductions from
gross income include ordinary and necessary expenses, interest, taxes, losses, bad debts, depreciation,
depletion of oil and gas wells and mines, charitable and other contributions, research and development
expenditures, and pension trust contributions.

[16] Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 15,
2005, 456 SCRA 414, 428-429 citing Smith, Wests Tax Law Dictionary (1993), pp. 177-178, 196.

[17] The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, and public convenience. The
discount privilege to which senior citizens are entitled is actually a benefit enjoyed by the general public
to which these citizens belong (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,
supra note 14, at 444; Land Bank of the Philippines v. De Leon, 437 Phil. 347, 359 [2002] citing Estate of
Salud Jimenez v. Philippine Export Processing Zone, G.R. No. 137285, January 16, 2001, 349 SCRA 240,
264).

[18] National Power Corporation v. Manubay Agro-Industrial Development Corporation, G.R. No. 150936,
August 18, 2004, 437 SCRA 60, 68 citing Association of Small Landowners in the Philippines, Inc. v.
Secretary of Agrarian Reform, G.R. No. 78742, July 14, 1989, 175 SCRA 343.

[19] In the case of Commissioner of Internal Revenue v. Central Luzon Drug Corporation, supra note 14,
the Court held that just compensation confers the right to receive an equivalent amount for the discount
given and the prompt payment of such amount. The advantage of a tax deduction is that the cost of the
discount can immediately be refunded, though not fully, by declaring it as a deductible expense in
computing for taxable income. In a tax credit, one has to await the issuance of a tax credit certificate
indicating the correct amount of the discounts given before the latter can be refunded. Thus, the
availment of a tax credit necessitates prior payment of income tax.

[20] Article XV of the Constitution states: Section 1. The State recognizes the Filipino family as the
foundation of the nation. Accordingly, it shall strengthen its solidarity and actively promote its total
development.

[21] Emphasis supplied.

[22] Sangalang v. IAC, G.R. No. 71169, August 25, 1989, 176 SCRA 719.

[23] Ermita-Malate Hotel and Motel Operators Association , Inc. v. City Mayor of Manila, L-24693, July
31, 1967, 20 SCRA 849 citing Noble State Bank v. Haskell, 219 U.S. 412 (1911).

[24] U.S. v. Toribio, 15 Phil.85 (1910) citing Commonwealth v. Alger, 7 Cush., 53 (Mass. 1851); U.S. v.
Pompeya, 31 Phil. 245, 253-254 (1915).

[25] Alalayan v. National Power Corporation, 24 Phil. 172 (1968).

[26] Id.

[27] The person who impugns the validity of a statute must have personal interest in the case such that
he has sustained, or will sustain, direct injury as a result of its enforcement (People v. Vera, 65 Phil. 56
[1937]).

[28] Rollo, p. 11.

[29] Section 27(E)(4) of the National Internal Revenue Code (NIRC) provides that for purposes of applying
the minimum corporate income tax on domestic corporations, the term gross income shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold. For a trading or merchandising
concern, cost of goods sold shall include the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold including insurance while the
goods are in transit.
[30] By the general police power of the State, persons and property are subjected to all kinds of
restraints and burdens, in order to secure the general comfort, health, and prosperity of the State; of the
perfect right in the legislature to do which, no question ever was, or, upon acknowledged and general
principles, ever can be made, so far as natural persons are concerned. (U.S. v. Toribio, supra note 24, at
98-99, citing Thorpe v. Rutland & Burlington R.R. Co. (27 Vt., 140, 149).

[31] Subject to the determination of the courts as to what is a proper exercise of police power using the
due process clause and the equal protection clause as yardsticks, the State may interfere wherever the
public interests demand it, and in this particular a large discretion is necessarily vested in the legislature
to determine, not only what interests of the public require, but what measures are necessary for the
protection of such interests (U.S. v. Toribio, supra note 24, at 98, citing Lawton v. Steele, 152 U.S.
133,136; Barbier v. Connoly, 113 U.S. 27; Kidd v. Pearson, 128 U.S. 1).

Today is Wednesday, August 02, 2017

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.

PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as appointed and Acting
Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL
ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting Members of the BOARD OF
ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila,
respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:

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

The facts of the case are as follows:

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

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

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

The Reyeses appealed to the Central Board of Assessment Appeals.1wphi1 They submitted, among
others, the summary of the yearly rentals to show the income derived from the properties. Respondent
City Assessor, on the other hand, submitted three (3) deeds of sale showing the different market values
of the real property situated in the same vicinity where the subject properties of petitioners are located.
To better appreciate the locational and physical features of the land, the Board of Hearing
Commissioners conducted an ocular inspection with the presence of two representatives of the City
Assessor prior to the healing of the case. Neither the owners nor their authorized representatives were
present during the said ocular inspection despite proper notices served them. It was found that certain
parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).

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

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

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

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

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

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH" METHOD IN
FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question.
Petitioners maintain that the "Income Approach" method would have been more realistic for in
disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new
assessed values at levels so high and successive that the resulting annual real estate taxes would
admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under P.D.
20. Hence, petitioners protested against the levels of the values assigned to their properties as revised
and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable, confiscatory
and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the
income approach is used in determining land values in some vicinities, it maintains that when income is
affected by some sort of price control, the same is rejected in the consideration and study of land values
as in the case of properties affected by the Rent Control Law for they do not project the true market
value in the open market (Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales
Approach" on the ground that the value estimate of the properties predicated upon prices paid in actual,
market transactions would be a uniform and a more credible standards to use especially in case of mass
appraisal of properties (Ibid.). Otherwise stated, public respondents would have this Court completely
ignore the effects of the restrictions of P.D. No. 20 on the market value of properties within its coverage.
In any event, it is unquestionable that both the "Comparable Sales Approach" and the "Income
Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one
as against the other would of course depend on several factors. Hence, as early as 1923 in the case of
Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that
the assessors, in finding the value of the property, have to consider all the circumstances and elements
of value and must exercise a prudent discretion in reaching conclusions.

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

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

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of
taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second
Edition). Thus, the need to examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive
when its rate goes up depending on the resources of the person affected (Ibid.).

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

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the privileges conferred and the liabilities imposed
(Ibid., p. 662).

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

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

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject properties
under the "comparable sales approach" were presented by the public respondents, namely: (1) that the
sale must represent a bonafide arm's length transaction between a willing seller and a willing buyer and
(2) the property must be comparable property (Rollo, p. 27). Nothing can justify or support their view as
it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there
were hardly any willing buyers. As a general rule, there were no takers so that there can be no
reasonable basis for the conclusion that these properties were comparable with other residential
properties not burdened by P.D. 20. Neither can the given circumstances be nonchalantly dismissed by
public respondents as imposed under distressed conditions clearly implying that the same were merely
temporary in character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is
the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue Inc.,
et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened by the
government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social
justice should not now be penalized by the same government by the imposition of excessive taxes
petitioners can ill afford and eventually result in the forfeiture of their properties.

By the public respondents' own computation the assessment by income approach would amount to only
P10.00 per sq. meter at the time in question.

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

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Grio-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.

Footnotes

1 Penned by former Chairman and Acting Minister Pedro Almanzor and concurred in by the then
Minister of Justice Vicente Abad Santos and Minister of Local Government and Community Development
Jose Rono.

2 Rendered by then Acting Register of Deeds of Manila Teresita H. Noblejas and concurred in by former
City Engineer of Manila Romulo M. del Rosario and OIC of the Office of the City of Auditor Raul C. Flores.

The Lawphil Project - Arellano Law Foundation

Today is Wednesday, August 02, 2017

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Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 119761 August 29, 1996

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION,
respondents.

VITUG, J.:p

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of
respondent Court of Appeals 1 affirming the 10th August 1994 decision and the 11th October 1994
resolution of the Court of Tax Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco
Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of
cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of
trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January
1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz
of the Presidential Commission on Good Government, "the initial position of the Commission was to
classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World Tobacco
Directory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to
'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand
category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an
original Fortune Tobacco Corporation register and therefore a local brand." 3 Ad Valorem taxes were
imposed on these brands, 4 at the following rates:

BRAND AD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956

06-23-86 07-25-87 06-18-90

07-01-86 01-01-88 07-05-90

Hope Luxury M. 100's

Sec. 142, (c), (2)40% 45%

Hope Luxury M. King

Sec. 142, (c), (2)40% 45%

More Premium M. 100's

Sec. 142, (c), (2)40% 45%

More Premium International

Sec. 142, (c), (2)40% 45%

Champion Int'l. M. 100's

Sec. 142, (c), (2)40% 45%

Champion M. 100's

Sec. 142, (c), (2)40% 45%

Champion M. King

Sec. 142, (c), last par. 15% 20%

Champion Lights

Sec. 142, (c), last par. 15% 20% 5

A bill, which later became Republic Act ("RA") No. 7654, 6 was enacted, on 10 June 1993, by the
legislature and signed into law, on 14 June 1993, by the President of the Philippines. The new law
became effective on 03 July 1993. It amended Section 142(c)(1) of the National Internal Revenue Code
("NIRC") to read; as follows:

Sec. 142. Cigars and Cigarettes.

xxx xxx xxx

(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price, whichever is higher:

(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent
(55%) or the exportation of which is not authorized by contract or otherwise, fifty-five (55%) provided
that the minimum tax shall not be less than Five Pesos (P5.00) per pack.

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum
tax shall not be less than Three Pesos (P3.00) per pack.

xxx xxx xxx

When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price
whichever is higher of existing brands of cigarettes, including the amounts intended to cover the taxes,
of cigarettes packed in twenties does not exceed Four Pesos and eighty centavos (P4.80) per pack, the
rate shall be twenty percent (20%). 7 (Emphasis supplied)

About a month after the enactment and two (2) days before the effectivity of RA 7654, Revenue
Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full text of which expressed:

REPUBLIKA NG PILIPINAS

KAGAWARAN NG PANANALAPI

KAWANIHAN NG RENTAS INTERNAS

July 1, 1993
REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT: Reclassification of Cigarettes Subject to Excise Tax

TO: All Internal Revenue Officers and Others Concerned.

In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION" cigarettes which are locally
manufactured are appropriately considered as locally manufactured cigarettes bearing a foreign brand,
this Office is compelled to review the previous rulings on the matter.

Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No. 6956, provides:

On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided, That this
rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or
transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a
cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the locally
manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the
foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however,
not definitely determinable, ". . . the listing of brands manufactured in foreign countries appearing in the
current World Tobacco Directory shall govern. . . ."

"HOPE" is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco, Japan and
(b) Fortune Tobacco, Philippines. "MORE" is listed in the said directory as being manufactured by: (a) Fills
de Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-Macdonald Canada; (d) Rettig-Strenberg, Finland;
(e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds,
Switzerland; and (m) R.J. Reynolds, USA. "Champion" is registered in the said directory as being
manufactured by (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune
Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.
Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the said
brands are the real owner/s thereof, then it follows that the same shall be considered foreign brand for
purposes of determining the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be established
or there is dearth of evidence as to whether a brand is foreign or not, resort to the World Tobacco
Directory should be made."

In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being
manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD) LIWAYWAY VINZONS-CHATO

Commissioner

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr., sent via telefax a
copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On 15 July 1993,
Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune Tobacco requested
for a review, reconsideration and recall of RMC 37-93. The request was denied on 29 July 1993. The
following day, or on 30 July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency
amounting to P9,598,334.00.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA. 8

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:
WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz:
"HOPE," "MORE" and "CHAMPION" being manufactured by Fortune Tobacco Corporation as locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found
to be defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the
brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1)
of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified as other locally
manufactured cigarettes and taxed at 45% or 20% as the case may be.

Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco Corporation
in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby canceled for lack of legal
basis.

Respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency tax
assessment made and issued on petitioner in relation to the implementation of RMC No. 37-93.

SO ORDERED. 9

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for
reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's 10th August
1994 decision and 11th October 1994 resolution. On 31 March 1993, the appellate court's Special
Thirteenth Division affirmed in all respects the assailed decision and resolution.

In the instant petition, the Solicitor General argues: That

I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF INTERNAL REVENUE

INTERPRETING THE PROVISIONS OF THE TAX CODE.
II. BEING AN INTERPRETATIVE RULING OR OPINION, THE PUBLICATION OF RMC 37-93, FILING OF
COPIES THEREOF WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY,
EFFECTIVITY AND ENFORCEABILITY.

III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR RMC 37-93 ON JULY 2, 1993.

IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL LOCALLY MANUFACTURED
CIGARETTES SIMILARLY SITUATED AS "HOPE," "MORE" AND "CHAMPION" CIGARETTES.

V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM RECLASSIFYING "HOPE," "MORE" AND
"CHAMPION" CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654.

VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS NOT INTO ITS VALIDITY,
EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT. 10

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which can thus
become effective without any prior need for notice and hearing, nor publication, and that its issuance is
not discriminatory since it would apply under similar circumstances to all locally manufactured
cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective
implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such
authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR
may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative
powers.

Let us first distinguish between two kinds of administrative issuances a legislative rule and an
interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance Secretary, 11 the Court
expressed:

. . . a legislative rule is in the nature of subordinate legislation, designed to implement a primary

legislation by providing the details thereof . In the same way that laws must have the benefit of public
hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this
connection, the Administrative Code of 1987 provides:

Public Participation. If not otherwise required by law, an agency shall, as far as practicable, publish or
circulate notices of proposed rules and afford interested parties the opportunity to submit their views
prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have
been published in a newspaper of general circulation at least two (2) weeks before the first hearing
thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition such rule must be published. On the other hand, interpretative rules are designed to provide
guidelines to the law which the administrative agency is in charge of enforcing. 12

It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than
what the law itself has already prescribed. When, upon the other hand, the administrative rule goes
beyond merely providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to
be duly informed, before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process
the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as
amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium
More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign
brands and to thereby have them covered by RA 7654. Specifically, the new law would have its
amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity
were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope
Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured
cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the
enactment of RA 7654, would have had no new tax rate consequence on private respondent's products.
Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope
of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to
be issued. In so doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements of notice, of hearing, and of publication
should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax
rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due
notice, due compliance therewith may not be reasonably expected. And most importantly, their strict
enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on "due
process of law" and the essence of the Civil Code provision concerning effectivity of laws, whereby due
notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).

In order that there shall be a just enforcement of rules and regulations, in conformity with the basic
element of due process, the following procedures are hereby prescribed for the drafting, issuance and
implementation of the said Revenue Tax Issuances:

(1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum
Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal
revenue tax rules and regulations.
(2) Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances
shall not begin to be operative until after due notice thereof may be fairly presumed.

Due notice of the said issuances may be fairly presumed only after the following procedures have been
taken;

xxx xxx xxx

(5) Strict compliance with the foregoing procedures is

enjoined. 13

Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and
comply with the above requirements before giving effect to its questioned circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and
equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated
alike or put on equal footing both in privileges and liabilities. 14 Thus, all taxable articles or kinds of
property of the same class must be taxed at the same rate 15 and the tax must operate with the same
force and effect in every place where the subject may be found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and "Champion" cigarettes
and, unless petitioner would be willing to concede to the submission of private respondent that the
circular should, as in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his separate
opinion, be considered adjudicatory in nature and thus violative of due process following the Ang Tibay
16 doctrine, the measure suffers from lack of uniformity of taxation. In its decision, the CTA has keenly
noted that other cigarettes bearing foreign brands have not been similarly included within the scope of
the circular, such as

1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a) "PALM TREE" is listed as manufactured by office of Monopoly, Korea (Exhibit "R")

2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a) "GOLDEN KEY" is listed being manufactured by United Tobacco, Pakistan (Exhibit "S")

(b) "CANNON" is listed as being manufactured by Alpha Tobacco, Bangladesh (Exhibit "T")

3. Locally manufactured by LA PERLA INDUSTRIES, INC.

(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U")

(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks, Sweden (Exhibit "V-1")

4. Locally manufactured by MIGHTY CORPORATION

(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U-1")

5. Locally manufactured by STERLING TOBACCO CORPORATION

(a) "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia and Brown and
Williamson, USA (Exhibit "U-3")

(b) "WINNER" is listed as being manufactured by Alpha Tobacco, Bangladesh; Nangyang, Hongkong;
Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit
"U-4"). 17
The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the
Committee on Ways and Means of the House of Representatives; viz:

THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have
specific information on other tobacco manufacturers. Now, there are other brands which are similarly
situated. They are locally manufactured bearing foreign brands. And may I enumerate to you all these
brands, which are also listed in the World Tobacco Directory . . . Why were these brand not reclassified at
55 if your want to give a level playing filed to foreign manufacturers?

MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular that
was supposed to come after RMC No. 37-93 which have really named specifically the list of locally
manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all these brands
that you mentioned at 55 percent except that at that time, when we had to come up with this, we were
forced to study the brands of Hope, More and Champion because we were given documents that would
indicate the that these brands were actually being claimed or patented in other countries because we
went by Revenue Memorandum Circular 1488 and we wanted to give some rationality to how it came
about but we couldn't find the rationale there. And we really found based on our own interpretation that
the only test that is given by that existing law would be registration in the World Tobacco Directory. So
we came out with this proposed revenue memorandum circular which we forwarded to the Secretary of
Finance except that at that point in time, we went by the Republic Act 7654 in Section 1 which amended
Section 142, C-1, it said, that on locally manufactured cigarettes which are currently classified and taxed
at 55 percent. So we were saying that when this law took effect in July 3 and if we are going to come up
with this revenue circular thereafter, then I think our action would really be subject to question but we
feel that . . . Memorandum Circular Number 37-93 would really cover even similarly situated brands. And
in fact, it was really because of the study, the short time that we were given to study the matter that we
could not include all the rest of the other brands that would have been really classified as foreign brand
if we went by the law itself. I am sure that by the reading of the law, you would without that ruling by
Commissioner Tan they would really have been included in the definition or in the classification of
foregoing brands. These brands that you referred to or just read to us and in fact just for your
information, we really came out with a proposed revenue memorandum circular for those brands.
(Emphasis supplied)

(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).

xxx xxx xxx

MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I felt that we . . . I
wanted to come up with a more extensive coverage and precisely why I asked that revenue
memorandum circular that would cover all those similarly situated would be prepared but because of
the lack of time and I came out with a study of RA 7654, it would not have been possible to really come
up with the reclassification or the proper classification of all brands that are listed there. . . (emphasis
supplied) (Exhibit "FF-2d," page IX-1)

xxx xxx xxx

HON. DIAZ. But did you not consider that there are similarly situated?

MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memorandum
Circular No. 37-93, the other brands came about the would have also clarified RMC 37-93 by I was saying
really because of the fact that I was just recently appointed and the lack of time, the period that was
allotted to us to come up with the right actions on the matter, we were really caught by the July 3
deadline. But in fact, We have already prepared a revenue memorandum circular clarifying with the
other . . . does not yet, would have been a list of locally manufactured cigarettes bearing a foreign brand
for excise tax purposes which would include all the other brands that were mentioned by the Honorable
Chairman. (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and
effective administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is
AFFIRMED. No costs.

SO ORDERED.

Kapunan, J., concurs.

Separate Opinions

BELLOSILLO, J.: separate opinion:

RA 7654 was enacted by Congress on 10 June 1993, signed into law by the President on 14 June 1993,
and took effect 3 July 1993. It amended partly Sec. 142, par. (c), of the National Internal Revenue Code
(NIRC) to read

Sec. 142. Cigars and cigarettes. . . . . (c) Cigarettes packed by machine. There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the
constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is
higher.

(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent
(55%) or the exportation of which is not authorized by contract or otherwise, fifty-five percent (55%)
provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack (emphasis supplied).

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum
tax shall not be less than Three Pesos (P3.00) per pack.
Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium More and Champion were
considered local brands subjected to an ad valorem tax at the rate of 20-45%. However, on 1 July 1993 or
two (2) days before RA 7654 took effect, petitioner Commissioner of Internal Revenue issued RMC 37-93
reclassifying "Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . . (as)
locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes."
1 RMC 37-93 in effect subjected Hope Luxury, Premium More and Champion cigarettes to the provisions
of Sec. 142, par. (c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these cigarette brands an
ad valorem tax of "fifty-five percent (55%) provided that the minimum tax shall not be less than Five
Pesos (P5.00) per pack."

On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours before the effectivity of RA
7654, a copy of RMC 37-93 with a cover letter signed by Deputy Commissioner Victor A. Deoferio of the
Bureau of Internal Revenue was sent by facsimile to the factory of respondent corporation in Parang,
Marikina, Metro Manila. It appears that the letter together with a copy of RMC 37-93 did not
immediately come to the knowledge of private respondent as it was addressed to no one in particular. It
was only when the reclassification of respondent corporation's cigarette brands was reported in the
column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of respondent corporation
learned of the matter, prompting him to inquire into its veracity and to request from petitioner a copy of
RMC 37-93. On 15 July 1993 respondent corporation received by ordinary mail a certified machine copy
of RMC 37-93.

Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith
denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on 30 July 1993
private respondent was assessed an ad valorem tax deficiency amounting to P9,598,334.00. Respondent
corporation went to the Court of Tax Appeals (CTA) on a petition for review.

On 10 August 1994, after due hearing, the CTA found the petition meritorious and ruled

Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz: Hope, More and
Champion being manufactured by Fortune Tobacco Corporation as locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid
and unenforceable . . . . Accordingly, the deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is
hereby cancelled for lack of legal basis. 2
The CTA held that petitioner Commissioner of Internal Revenue failed to observe due process of law in
issuing RMC 37-93 as there was no prior notice and hearing, and that RMC 37-93 was in itself
discriminatory. The motion to reconsider its decision was denied by the CTA for lack of merit. On 31
March 1995 respondent Court of Appeals affirmed in toto the decision of the CTA. 3 Hence, the instant
petition for review.

Petitioner now submits through the Solicitor General that RMC 37-93 reclassifying Hope Luxury,
Premium More and Champion as locally manufactured cigarettes bearing brands is merely an
interpretative ruling which needs no prior notice and hearing as held in Misamis Oriental Association of
Coco Traders, Inc. v. Department of Finance Secretary. 4 It maintains that neither is the assailed revenue
memorandum circular discriminatory as it merely "lays down the test in determining whether or not a
locally manufactured cigarette bears a foreign brand using (only) the cigarette brands Hope, More and
Champion as specific examples." 5

Respondent corporation on the other hand contends that RMC 37-93 is not a mere interpretative ruling
but is adjudicatory in nature where prior notice and hearing are mandatory, and that Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary on which the Solicitor General relies
heavily is not applicable. Respondent Fortune Tobacco Corporation also argues that RMC 37-93
discriminates against its cigarette brands since those of its competitors which are similarly situated have
not been reclassified.

The main issues before us are (a) whether RMC 37-93 is merely an interpretative rule the issuance of
which needs no prior notice and hearing, or an adjudicatory ruling which calls for the twin requirements
of prior notice and hearing, and, (b) whether RMC 37-93 is discriminatory in nature.

A brief discourse on the powers and functions of administrative bodies may be instructive.

Administrative agencies posses quasi-legislative or rule making powers and quasi-judicial or

administrative adjudicatory powers. Quasi-legislative or rule making power is the power to make rules
and regulations which results in delegated legislation that is within the confines of the granting statute
and the doctrine of nondelegability and separability of powers.

Interpretative rule, one of the three (3) types of quasi-legislative or rule making powers of an
administrative agency (the other two being supplementary or detailed legislation, and contingent
legislation), is promulgated by the administrative agency to interpret, clarify or explain statutory
regulations under which the administrative body operates. The purpose or objective of an interpretative
rule is merely to construe the statute being administered. It purports to do no more than interpret the
statute. Simply, the rule tries to say what the statute means. Generally, it refers to no single person or
party in particular but concerns all those belonging to the same class which may be covered by the said
interpretative rule. It need not be published and neither is a hearing required since it is issued by the
administrative body as an incident of its power to enforce the law and is intended merely to clarify
statutory provisions for proper observance by the people. In Taada v. Tuvera, 6 this Court expressly said
that "[i]interpretative regulations . . . . need not be published."

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the administrative
agency to adjudicate the rights of persons before it. It is the power to hear and determine questions of
fact to which the legislative policy is to apply and to decide in accordance with the standards laid down
by the law itself in enforcing and administering the same law. 7 The administrative body exercises its
quasi-judicial power when it performs in a judicial manner an act which is essentially of an executive or
administrative nature, where the power to act in such manner is incidental to or reasonably necessary
for the performance of the executive or administrative duty entrusted to it. 8 In carrying out their quasi-
judicial functions the administrative officers or bodies are required to investigate facts or ascertain the
existence of facts, hold hearings, weigh evidence, and draw conclusions from them as basis for their
official action and exercise of discretion in a judicial nature. Since rights of specific persons are affected it
is elementary that in the proper exercise of quasi-judicial power due process must be observed in the
conduct of the proceedings.

The importance of due process cannot be underestimated. Too basic is the rule that no person shall be
deprived of life, liberty or property without due process of law. Thus when an administrative proceeding
is quasi-judicial in character, notice and fair open hearing are essential to the validity of the proceeding.
The right to reasonable prior notice and hearing embraces not only the right to present evidence but
also the opportunity to know the claims of the opposing party and to meet them. The right to submit
arguments implies that opportunity otherwise the right may as well be considered impotent. And those
who are brought into contest with government in a quasi-judicial proceeding aimed at the control of
their activities are entitled to be fairy advised of what the government proposes and to be heard upon
its proposal before it issues its final command.

There are cardinal primary rights which must be respected in administrative proceedings. The landmark
case of Ang Tibay v. The Court of Industrial Relations 9 enumerated these rights: (1) the right to a
hearing, which includes the right of the party interested or affected to present his own case and submit
evidence in support thereof; (2) the tribunal must consider the evidence presented; (3) the decision
must have something to support itself; (4) the evidence must be substantial; (5) the decision must be
rendered on the evidence presented at the hearing, or at least contained in the record and disclosed to
the parties affected; (6) the tribunal or any of its judges must act on its or his own independent
consideration of the law and facts of the controversy, and not simply accept the views of a subordinate in
arriving at a decision; and, (7) the tribunal should in all controversial questions render its decision in such
manner that the parties to the proceeding may know the various issues involved and the reasons for the
decision rendered.

In determining whether RMC No. 37-93 is merely an interpretative rule which requires no prior notice
and hearing, or an adjudicatory rule which demands the observance of due process, a close examination
of RMC 37-93 is in order. Noticeably, petitioner Commissioner of Internal Revenue at first interprets Sec.
142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and clarifying or explaining what it
means

Section 142 (c) (1), National Internal Revenue Code, as amended by R.A. No. 6956, provides: On locally
manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided, That this rate shall
apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by
its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World
Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the locally
manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the
foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however,
not definitely determinable,

". . . the listing of brands manufactured in foreign countries appearing in the current World Tobacco
Directory shall govern . . ."

Then petitioner makes a factual finding by declaring that Hope (Luxury), (Premium) More and Champion
are manufactured by other foreign manufacturers

Hope is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco, Japan and (b)
Fortune Tobacco, Philippines. More is listed in the said directory as being manufactured by: (a) Fills de
Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-MacDonald, Canada; (d) Rettig-Strenberg, Finland;
(e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds,
Switzerland; and (m) R.J. Reynolds, USA. "Champion" is registered in the said directory as being
manufactured by: (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

From this finding, petitioner thereafter formulates an inference that since it cannot be determined who
among the manufacturers are the real owners of the brands in question, then these cigarette brands
should be considered foreign brands

Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the said
brands are the real owner/s thereof, then it follows that the same shall be considered foreign brand for
purposes of determining the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be established
or there is dearth of evidence as to whether a brand is foreign or not, resort to the World Tobacco
Directory should be made."

Finally, petitioner caps RMC 37-93 with a disposition specifically directed at respondent corporation
reclassifying its cigarette brands as locally manufactured bearing foreign brands

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

It is evident from the foregoing that in issuing RMC 37-93 petitioner Commissioner of Internal Revenue
was exercising her quasi-judicial or administrative adjudicatory power. She cited and interpreted the law,
made a factual finding, applied the law to her given set of facts, arrived at a conclusion, and issued a
ruling aimed at a specific individual. Consequently prior notice and hearing are required. It must be
emphasized that even the text alone of RMC 37-93 implies that reception of evidence during a hearing is
appropriate if not necessary since it invokes BIR Ruling No. 410-88, dated August 24, 1988, which
provides that "in cases where it cannot be established or there is dearth of evidence as to whether a
brand is foreign or not . . . ." Indeed, it is difficult to determine whether a brand is foreign or not if it is
not established by, or there is dearth of, evidence because no hearing has been called and conducted for
the reception of such evidence. In fine, by no stretch of the imagination can RMC 37-93 be considered
purely as an interpretative rule requiring no previous notice and hearing and simply interpreting,
construing, clarifying or explaining statutory regulations being administered by or under which the
Bureau of Internal Revenue operates.

It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders v. Department of Finance
Secretary, and RMC 37-93 in the instant case reclassify certain products for purposes of taxation. But the
similarity between the two revenue memorandum circulars ends there. For in properly determining
whether a revenue memorandum circular is merely an interpretative rule or an adjudicatory rule, its very
tenor and text, and the circumstances surrounding its issuance will have no to be considered.

We quote RMC 47-91 promulgated 11 June 1991

Revenue Memorandum Circular No. 47-91

SUBJECT : Taxability of Copra

TO : All Revenue Officials and Employees and Others Concerned.

For the information and guidance of all officials and employees and others concerned, quoted hereunder
in its entirety is VAT Ruling No. 190-90 dated August 17, 1990:

COCOFED MARKETING RESEARCH CORPORATION

6th Floor Cocofed Building

144 Amorsolo Street

Legaspi Village, Makati

Metro Manila

Attention: Ms. Esmyrna E. Reyes

Vice President Finance

Sirs:

This has reference to your letter dated January 16, 1990 wherein you represented that inspite of your
VAT registration of your copra trading company, you are supposed to be exempt from VAT on the basis of
BIR Ruling dated January 8, 1988 which considered copra as an agricultural food product in its original
state. In this connection, you request for a confirmation of your opinion as aforestated.

In reply, please be informed that copra, being an agricultural non-food product, is exempt from VAT only
if sale is made by the primary producer pursuant to Section 103 (a) of the Tax Code, as amended. Thus as
a trading company and a subsequent seller, your sale of copra is already subject to VAT pursuant to
Section 9(b) (1) of Revenue Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-88.

Very truly yours,

(Sgd.) JOSE U. ONG

Commissioner of Internal Revenue

As a clarification, this is the present and official stand of this Office unless sooner revoked or amended.
All revenue officials and employees are enjoined to give this Circular as wide a publicity as possible.

(Sgd.) JOSE U. ONG

Commissioner of Internal Revenue

Quite obviously, the very text of RMC 47-91 itself shows that it is merely an interpretative rule as it
simply quotes a VAT Ruling and reminds those concerned that the ruling is the present and official stand
of the Bureau of Internal Revenue. Unlike in RMC 37-93 where petitioner Commissioner manifestly
exercised her quasi-judicial or administrative adjudicatory power, in RMC 47-91 there were no factual
findings, no application of laws to a given set of facts, no conclusions of law, and no dispositive portion
directed at any particular party.

Another difference is that in the instant case, the issuance of the assailed revenue memorandum circular
operated to subject the taxpayer to the new law which was yet to take effect, while in Misamis, the
disputed revenue memorandum circular was issued simply to restate and then clarify the prevailing
position and ruling of the administrative agency, and no new law yet to take effect was involved. It
merely interpreted an existing law which had already been in effect for some time and which was not set
to be amended. RMC 37-93 is thus prejudicial to private respondent alone.

A third difference, and this likewise resolves the issue of discrimination, is that RMC 37-93 was ostensibly
issued to subject the cigarette brands of respondent corporation to a new law as it was promulgated two
days before the expiration of the old law and a few hours before the effectivity of the new law. That RMC
37-93 is particularly aimed only at respondent corporation and its three (3) cigarette brands can be seen
from the dispositive portion of the assailed revenue memorandum circular

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More, and Champion being
manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory as "[i]t merely lays
down the test in determining whether or not a locally manufactured cigarette bears a foreign brand
using the cigarette brands Hope, More and Champion as specific examples," cannot be accepted, much
less sustained. Without doubt, RMC 37-93 has a tremendous effect on respondent corporation and
solely on respondent corporation as its deficiency ad valorem tax assessment on its removals of Hope,
Luxury, Premium More, and Champion cigarettes for six (6) hours alone, i.e., from six o'clock in the
evening of 2 July 1993 which is presumably the time respondent corporation was supposed to have
received the facsimile message sent by Deputy Commissioner Victor A. Deoferio, until twelve o'clock
midnight upon the effectivity of the new law, was already P9,598,334.00. On the other hand, RMC 47-91
was issued with no purpose except to state and declare what has been the official stand of the
administrative agency on the specific subject matter, and was indiscriminately directed to all copra
traders with no particular individual in mind.

That petitioner Commissioner of Internal Revenue is an expert in her filed is not attempted to be
disputed; hence, we do not question the wisdom of her act in reclassifying the cigarettes. Neither do we
deny her the exercise of her quasi-legislative or quasi-judicial powers. But most certainly, by
constitutional mandate, the Court must check the exercise of these powers and ascertain whether
petitioner has gone beyond the legitimate bounds of her authority.

In the final analysis, the issue before us in not the expertise, the authority to promulgate rules, or the
wisdom of petitioner as Commissioner of Internal Revenue is reclassifying the cigarettes of private
respondents. It is simply the faithful observance by government by government of the basic
constitutional right of a taxpayer to due process of law and equal protection of the laws. This is what
distresses me no end the manner and the circumstances under which the cigarettes of private
respondent were reclassified and correspondingly taxed under RMC 37-93, and adjudicatory rule which
therefore requires reasonable notice and hearing before its issuance. It should not be confused with
RMC 47-91, which is a mere interpretative rule.

In the earlier case of G.R. No. 119322, which practically involved the same opposing interests, I also
voted to uphold the constitutional right of the taxpayer concerned to due process and equal protection
of the laws. By a vote of 3-2, that view prevailed. In sequela, we in the First Division who constituted the
majority found ourselves unjustly drawn into the vortex of a nightmarish episode. The strong ripples
whipped up by my opinion expressed therein and of the majority have yet to varnish when we are
again in the imbroglio of a similar dilemma. The unpleasant experience should be reason enough to
simply steer clear of this controversy and surf on a pretended loss of judicial objectivity. Such would have
been an easy way out, a gracious exit, so to speak, albeit lame. But to camouflage my leave with a sham
excuse would be to turn away from a professional vow I keep at all times; I would not be true to myself,
and to the people I am committed to serve. Thus, as I have earlier expressed, if placed under similar
circumstances in some future time, I shall have to brave again the prospect of another vilification and a
tarnished image if only to show proudly to the whole world that under the present dispensation judicial
independence in our country is a true component of our democracy.

In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as well as the effect of such
issuance. For it cannot be denied that the circumstances clearly demonstrate that it was hastily issued
without prior notice and hearing, and singling out private respondent alone when two days before a
new tax law was to take effect petitioner reclassified and taxed the cigarette brands of private
respondent at a higher rate. Obviously, this was to make it appear that even before the anticipated date
of effectivity of the statute which was undeniably priorly known to petitioner these brands were
already currently classified and taxed at fifty-five percent (55%), thus shoving them into the purview of
the law that was to take effect two days after!

For sure, private respondent was not properly informed before the issuance of the questioned
memorandum circular that its cigarette brands Hope Luxury, Premium More and Champion were being
reclassified and subjected to a higher tax rate. Naturally, the result would be to lose financially because
private respondent was still selling its cigarettes at a price based on the old, lower tax rate. Had there
been previous notice and hearing, as claimed by private respondent, it could have very well presented its
side, either by opposing the reclassification, or by acquiescing thereto but increasing the price of its
cigarettes to adjust to the higher tax rate. The reclassification and the ensuing imposition of a tax rate
increase therefore could not be anything but confiscatory if we are also to consider the claim of private
respondent that the new tax is even higher than the cost of its cigarettes.

Accordingly, I vote to deny the petition.

HERMOSISIMA, JR., J.: dissenting

Private respondent Fortune Tobacco Corporation in the instant case disputes its liability for deficiency ad
valorem excise taxes on its removals of "Hope," "More," and "Champion" cigarettes from 6:00 p.m. to
12:00 midnight of July 2, 1993, in the total amount of P9,598,334.00. It claims that the circular, upon
which the assessment was based and made, is defective, invalid and unenforceable for having been
issued without notice and hearing and in violation of the equal protection clause guaranteed by the
Constitution.

The majority upholds these claims of private respondent, convinced that the Circular in question, in the
first place, did not give prior notice and hearing, and so, it could not have been valid and effective. It
proceeds to affirm the factual findings of the Court of Tax Appeals, which findings were considered
correct by respondent Court of Appeals, to the effect that the petitioner Commissioner of Internal
Revenue had indeed blatantly failed to comply with the said twin requirements of notice and hearing,
thereby rendering the issuance of the questioned Circular to be in violation of the due process clause of
the Constitution. It is also its dominant opinion that the questioned Circular discriminates against private
respondent Fortune Tobacco Corporation insofar as it seems to affect only its "Hope," "More," and
"Champion" cigarettes, to the exclusion of other cigarettes apparently of the same kind or classification
as these cigarettes manufactured by private respondent.

With all due respect, I disagree with the majority in its disquisition of the issues and its resulting
conclusions.

Section 245 of the National Internal Revenue Code,

as amended, empowers the Commissioner of Internal

Revenue to issue the questioned Circular

Section 245 of the National Internal Revenue Code, as amended, provides:

Sec. 245. Authority of Secretary of Finance to promulgate rules and regulations. The Secretary
of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of this Code . . . without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.

The subject of the questioned Circular is the reclassification of cigarettes subject to excise taxes. It was
issued in connection with Section 142 (c) (1) of the National Internal Revenue Code, as amended, which
imposes ad valorem excise taxes on locally manufactured cigarettes bearing a foreign brand. The same
provision prescribes the ultimate criterion that determines which cigarettes are to be considered "locally
manufactured cigarettes bearing a foreign brand." It provides:

. . . Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of
brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern.
There is only one World Tobacco Directory for a given current year, and the same is mandated by law to
be the BIR Commissioner's controlling basis for determining whether or not a particular locally
manufactured cigarette is one bearing a foreign brand. In so making a determination, petitioner should
inquire into the entries in the World Tobacco Directory for the given current year and shall be held
bound by such entries therein. She is not required to subject the results of her inquiries to feedback
from the concerned cigarette manufacturers, and it is doubtlessly not desirable nor managerially sound
to court dispute thereon when the law does not, in the first place, require debate or hearing thereon.
Petitioner may make such a determination because she is the Chief Executive Officer of the
administrative agency that is the Bureau of Internal Revenue in which are vested quasi-legislative powers
entrusted to it by the legislature in recognition of its more encompassing and unequalled expertise in the
field of taxation.

The vesture of quasi-legislative and quasi-judicial powers in administrative bodies is not unconstitutional,
unreasonable and oppressive. It has been necessitated by "the growing complexity of the modern
society" (Solid Homes, Inc. vs. Payawal, 177 SCRA 72, 79). More and more administrative bodies are
necessary to help in the regulation of society's ramified activities. "Specialized in the particular field
assigned to them, they can deal with the problems thereof with more expertise and dispatch than can be
expected from the legislature or the courts of justice" . . . 1

Statutorily empowered to issue rulings or opinions embodying the proper determination in respect to
classifying articles, including cigarettes, for purposes of tax assessment and collection, petitioner was
acting well within her prerogatives when she issued the questioned Circular. And in the exercise of such
prerogatives under the law, she has in her favor the presumption of regular performance of official duty
which must be overcome by clearly persuasive evidence of stark error and grave abuse of discretion in
order to be overturned and disregarded.

It is irrelevant that the Court of Tax Appeals makes much of the effect of the passing of Republic Act No.
7654 2 on petitioner's power to classify cigarettes. Although the decisions assailed and sought to be
reviewed, as well as the pleadings of private respondent, are replete with alleged admissions of our
legislators to the effect that the said Act was intended to freeze the current classification of cigarettes
and make the same an integral part of the said Act, certainly the repeal, if any, of petitioner's power to
classify cigarettes must be reckoned from the effectivity of the said Act and not before. Suffice it to say
that indisputable is the plain fact that the questioned Circular was issued on July 1, 1993, while the said
Act took effect on July 3, 1993.

The contents of the questioned circular have not

been proven to be erroneous or illegal as to render

issuance thereof an act of grave abuse of

discretion on the part of petitioner Commissioner

Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National Internal Revenue Code, as
amended, levies the following ad valorem taxes on cigarettes in accordance with their predetermined
classifications as established by the Commissioner of Internal Revenue:

. . . based on the manufacturer's registered wholesale price:

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided,
That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was
sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or
not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.

(2) Other locally manufactured cigarettes, forty five percent (45%).

xxx xxx xxx

Prior to the issuance of the questioned Circular, assessed against and paid by private respondent as ad
valorem excise taxes on their removals of "Hope," "More," and "Champion" cigarettes were amounts
based on paragraph (2) above, i.e., the tax rate made applicable on the said cigarettes was 45% at the
most. The reason for this is that apparently, petitioner's predecessors have all made determinations to
the effect that the said cigarettes were to be considered "other locally manufactured cigarettes" and not
"locally manufactured cigarettes bearing a foreign brand." Even petitioner, until her issuance of the
questioned Circular, adhered to her predecessors' determination as to the proper classification of the
above-mentioned cigarettes for purposes of ad valorem excise taxes. Apparently, the past determination
that the said cigarettes were to be classified as "other locally manufactured cigarettes" was based on
private respodnent's convenient move of changing the names of "Hope" to "Hope Luxury" and "More" to
"Premium More." It also submitted proof that "Champion" was an original Fortune Tobacco Corporation
register and, therefore, a local brand. Having registered these brands with the Philippine Patent Office
and with corresponding evidence to the effect, private respondent paid ad valorem excise taxes
computed at the rate of not more than 45% which is the rate applicable to cigarettes considered as
locally manufactured brands.

How these past determinations pervaded notwithstanding their erroneous basis is only tempered by
their innate quality of being merely errors in interpretative ruling, the formulation of which does not
bind the government. Advantage over such errors may precipitously be withdrawn from those who have
been benefiting from them once the same have been discovered and rectified.

Petitioner correctly emphasizes that:

. . . the registration of said brands in the name of private respondent is proof only that it is the exclusive
owner thereof in the Philippines; it does not necessarily follow, however, that it is the exclusive owner
thereof in the whole world. Assuming arguendo that private respondent is the exclusive owner of said
brands in the Philippines, it does not mean that they are local. Otherwise, they would not have been
listed in the WTD as international brands manufactured by different entities in different countries.
Moreover, it cannot be said that the brands registered in the names of private respondent are not the
same brands listed in the WTD because private respondent is one of the manufacturers of said brands
listed in the WTD. 3

Private respondent attempts to cast doubt on the determination made by petitioner in the questioned
Circular that Japan is a manufacturer of "Hope" cigarettes. Private respondent's own inquiry into the
World Tobacco Directory reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing this
out, private respondent concludes that the entire Circular is erroneous and makes such error the
principal proof of its claim that the nature of the determination embodied in the questioned Circular
requires a hearing on the facts and a debate on the applicable law. Such a determination is adjudicatory
in nature and, therefore, requires notice and hearing. Private respondent is, however, apparently only
eager to show error on the part of petitioner for acting with grave abuse of discretion. Private
respondent conveniently forgets that petitioner, equipped with the expertise in taxation, recognized in
that expertise by the legislature that vested in her the power to make rules respecting classification of
articles for taxation purposes, and presumed to have regularly exercised her prerogatives within the
scope of her statutory power to issue determinations specifically under Section 142 (c) (1) in relation to
Section 245 of the National Internal Revenue Code, as amended, simply followed the law as she
understood it. Her task was to determine which cigarette brands were foreign, and she was directed by
the law to look into the World Tobacco Directory. Foreign cigarette brands were legislated to be taxed at
higher rates because of their more extensive public exposure and international reputation; their
competitive edge against local brands may easily be checked by imposition of higher tax rates. Private
respondent makes a mountain of the mole hill circumstance that "Hope" is listed, not as being
"manufactured" by Japan but as being "used" by Japan. Whether manufactured or used by Japan,
however, "Hope" remains a cigarette brand that can not be said to be limited to local manufacture in the
Philippines. The undeniable fact is that it is a foreign brand the sales in the Philippines of which are
greatly boosted by its international exposure and reputation. The petitioner was well within her
prerogatives, in the exercise of her rule-making power, to classify articles for taxation purposes, to
interpret the laws which she is mandated to administer. In interpreting the same, petitioner must, in
general, be guided by the principles underlying taxation, i.e., taxes are the lifeblood of Government, and
revenue laws ought to be interpreted in favor of the Government, for Government can not survive
without the funds to underwrite its varied operational expenses in pursuit of the welfare of the society
which it serves and protects.

Private respondent claims that its business will be destroyed by the imposition of additional ad valorem
taxes as a result of the effectivity of the questioned Circular. It claims that under the vested rights theory,
it cannot now be made to pay higher taxes after having been assessed for less in the past. Of course
private respondent will trumpet its losses, its interests, after all, being its sole concern. What private
respondent fails to see is the loss of revenue by the Government which, because of erroneous
determinations made by its past revenue commissioners, collected lesser taxes than what it was entitled
to in the first place. It is every citizen's duty to pay the correct amount of taxes. Private respondent will
not be shielded by any vested rights, for there are not vested rights to speak of respecting a wrong
construction of the law by administrative officials, and such wrong interpretation does not place the
Government in estoppel to correct or overrule the same. 4

The Questioned Circular embodies an interpretative

ruling of petitioner Commissioner which as such does

not require notice and hearing

As one of the public offices of the Government, the Bureau of Internal Revenue, through its
Commissioner, has grown to be a typical administrative agency vested with a fusion of different
governmental powers: the power to investigate, initiate action and control the range of investigation, the
power to promulgate rules and regulations to better carry out statutory policies, and the power to
adjudicate controversies within the scope of their activities. 5 In the realm of administrative law, we
understand that such an empowerment of administrative agencies was evolved in response to the needs
of a changing society. This development arose as the need for broad social control over complex
conditions and activities became more and more pressing, and such complexity could no longer be dealt
with effectivity and directly by the legislature or the judiciary. The theory which underlies the
empowerment of administrative agencies like the Bureau of Internal Revenue, is that the issues with
which such agencies deal ought to be decided by experts, and not be a judge, at least not in the first
instance or until the facts have been sifted and arranged. 6

One of the powers of administrative agencies like the Bureau of Internal Revenue, is the power to make
rules. The necessity for vesting administrative agencies with this power stems from the impracticability
of the lawmakers providing general regulations for various and varying details pertinent to a particular
legislation. 7

The rules that administrative agencies may promulgate may either be legislative or interpretative. The
former is a form of subordinate legislation whereby the administrative agency is acting in a legislative
capacity, supplementing the statute, filling in the details, pursuant to a specific delegation of legislative
power. 8

Interpretative rules, on the other hand, are "those which purport to do no more than interpret the
statute being administered, to say what it means." 9

There can be no doubt that there is a distinction between an administrative rule or regulation and an
administrative interpretation of a law whose enforcement is entrusted to an administrative body. When
an administrative agency promulgates rules and regulations, it "makes" a new law with the force and
effect of a valid law, while when it renders an opinion or gives a statement of policy, it merely interprets
a pre-existing law (Parker, Administrative Law, p. 197; Davis Administrative Law, p. 194). Rules and
regulations when promulgated in pursuance of the procedure or authority conferred upon the
administrative agency by law, partake of the nature of a statute, and compliance therewith may be
enforced by a penal sanction provided in the law. This is so because statutes are usually couched in
general terms, after expressing the policy, purposes, objectives, remedies and sanctions intended by the
legislature. The details and the manner of carrying out the law are often times left to the administrative
agency entrusted with its enforcement. In this sense, it has been said that rules and regulations are the
product of a delegated power to create new or additional legal provisions that have the effect of law.
(Davis, op. cit. p. 194.)

A rule is binding on the courts as long as the procedure fixed for its promulgation is followed and its
scope is within the statutory authority granted by the legislature, even if the courts are not in agreement
with the policy stated therein or its innate wisdom (Davis, op. cit. pp. 195-197). On the other hand,
administrative interpretation of the law is at best merely advisory, for it is the courts that finally
determine what the law means. 10

"Whether a given statutory delegation authorizes legislative or interpretative regulations depends upon
whether the statute places specific 'sanctions' behind the regulations authorized, as for example, by
making it a criminal offense to disobey them, or by making conformity with their provisions a condition
of the exercise of legal privileges." 11 This is because interpretative regulations are by nature simply
statutory interpretations, which have behind them no statutory sanction. Such regulations, whether so
expressly authorized by statute or issued only as an incident of statutory administration, merely embody
administrative findings of law which are always subject to judicial determination as to whether they are
erroneous or not, even when their issuance is authorized by statute.

The questioned Circular has undisputedly been issued by petitioner in pursuance of her rule-making
powers under Section 245 of the National Internal Revenue Code, as amended. Exercising such powers,
petitioner re-classified "Hope," "More" and "Champion" cigarettes as locally manufactured cigarettes
bearing foreign brands. The re-classification, as previously explained, is the correct interpretation of
Section 142 (c) (1) of the said Code. The said legal provision is not accompanied by any penal sanction,
and no detail had to be filled in by petitioner. The basis for the classification of cigarettes has been
provided for by the legislature, and all petitioner has to do, on behalf of the government agency she
heads, is to proceed to make the proper determination using the criterion stipulated by the lawmaking
body. In making the proper determination, petitioner gave it a liberal construction consistent with the
rule that revenue laws are to be construed in favor of the Government whose survival depends on the
contributions that taxpayers give to the public coffers that finance public services and other
governmental operations.

The Bureau of Internal Revenue which petitioner heads, is the government agency charged with the
enforcement of the laws pertinent to this case and so, the opinion of the Commissioner of Internal
Revenue, in the absence of a clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142 (c) (1) may not abruptly
be cut by a new interpretation of the said section, but precisely the said section is subject to various and
changing construction, and hence, any ruling issued by petitioner thereon is necessarily interpretative
and not legislative. Private respondent insists that the questioned circular is adjudicatory in nature
because it determined the rights of private respondent in a controversy involving his tax liability. It also
asseverates that the questioned circular involved administrative action that is particular and immediate,
thereby rendering it subject to the requirements of notice and hearing in compliance with the due
process clause of the Constitution.
We find private respondent's arguments to be rather strained.

Petitioner made a determination as to the classification of cigarettes as mandated by the aforecited

provisions in the National Internal Revenue Code, as amended. Such determination was an
interpretation by petitioner of the said legal provisions. If in the course of making the interpretation and
embodying the same in the questioned circular which the petitioner subsequently issued after making
such a determination, private respondent's cigarettes products, by their very nature of being foreign
brands as evidenced by their enlistment in the World Tobacco Directory, which is the controlling basis for
the proper classification of cigarettes as stipulated by the law itself, have come to be classified as locally
manufactured cigarettes bearing foreign brands and as such subject to a tax rate higher than what was
previously imposed thereupon based on past rulings of other revenue commissioners, such a situation is
simply a consequence of the performance by petitioner of here duties under the law. No adjudication
took place, much less was there any controversy ripe for adjudication. The natural consequences of
making a classification in accordance with law may not be used by private respondent in arguing that the
questioned circular is in fact adjudicatory in nature. Such an exercise in driving home a point is illogical as
it is fallacious and misplaced.

Private respondent concedes that under general rules of administrative law, "a ruling which is merely
'interpretative' in character may not require prior notice to affected parties before its issuance as well as
a hearing" and "for this reason, in most instances, interpretative regulations are not given the force of
law." 12 Indeed, "interpretative regulations and those merely internal in nature

. . . need not be published." 13 And it is now settled that only legislative regulations and not
interpretative rulings must have the benefit of public

hearing. 14

Because (1) the questioned circular merely embodied an interpretation or a way of reading and giving
meaning to Section 142 (c) (1) of the National Internal Revenue Code, as amended; (2) petitioner did not
fill in any details in the aforecited section but only classified cigarettes on the basis of the World Tobacco
Directory in the light of the paramount principle of construing revenue laws in favor of the Government
to the end that Government collects as much tax money as it is entitled to in order to fulfill its public
purposes for the general good of its citizens; (3) no penal sanction is provided in the aforecited section
that was construed by petitioner in the questioned circular; and (4) a similar circular declassifying copra
from being an agricultural food to non-food product for purposes of the value added tax laws, resulting
in the revocation of an exemption previously enjoyed by copra traders, has been ruled by us to be
merely an interpretative ruling and not a legislative, much less, an adjudicatory, action on the part of the
revenue commissioner, 15 this Court must not be blind to the fact that the questioned Circular is indeed
an interpretative ruling not subject to notice and hearing.

Neither is the questioned Circular tainted by a

violation of the equal protection clause under the

Constitution

Private respondent anchors its claim of violation of its equal protection rights upon the too obvious fact
that only its cigarette brands, i.e., "Hope," "More" and "Champion," are mentioned in the questioned
circular. Because only the cigarettes that they manufacture are enumerated in the questioned circular,
private respondent proceeded to attack the same as being discriminatory against it. On the surface,
private respondent seems to have a point there. A scrutiny of the questioned Circular, however, will
show that it is undisputedly one of general application for all cigarettes that are similarly situated as
private respondent's brands. The new interpretation of Section 142 (1) (c) has been well illustrated in its
application upon private respondent's brands, which illustration is properly a subject of the questioned
Circular. Significantly, indicated as the subject of the questioned circular is the "reclassification of
cigarettes subject to excise taxes." The reclassification resulted in the foregrounding of private
respondent's cigarette brands, which incidentally is largely due to the controversy spawned no less by
private respondent's own action of conveniently changing its brand names to avoid falling under a
classification that would subject it to higher ad valorem tax rates. This caused then Commissioner
Bienvenido Tan to depart from his initial determination that private respondent's cigarette brands are
foreign brands. The consequent specific mention of such brands in the questioned Circular, does not
change the fact that the questioned Circular has always been intended for and did cover, all cigarettes
similarly situated as "Hope," "More" and "Champion." Petitioner is thus correct in stating that:

. . . RMC 37-93 is not discriminatory. It lays down the test in determining whether or not a locally
manufactured cigarette bears a foreign brand using the cigarette brands "Hope," More and "Champion"
as specific examples. Such test applies to all locally manufactured cigarette brands similarly situated as
the cigarette brands aforementioned. While it is true that only "Hope," "More" and "Champion"
cigarettes are actually determined as locally manufactured cigarettes bearing a foreign brand, RMC 37-93
does not state that ONLY cigarettes fall under such classification to the exclusion of other cigarettes
similarly situated. Otherwise stated, RMC 37-93 does not exclude the coverage of other cigarettes
similarly situated. Otherwise stated, RMC 37-93 does not exclude the coverage of other cigarettes
similarly situated as locally manufactured cigarettes bearing a foreign brand. Hence, in itself, RMC 37-93
is not discriminatory. 16
Both the respondent Court of Appeals and the Court of Tax Appeals held that the questioned Circular
reclassifying "Hope," "More" and "Champion" cigarettes, is defective, invalid and unenforceable and has
rendered the assessment against private respondent of deficiency ad valorem excise taxes to be without
legal basis. The majority agrees with private respondent and respondent Courts. As the foregoing
opinion chronicles the fatal flaws in private respondent's arguments, it becomes more apparent that the
questioned Circular is in fact a valid and subsisting interpretative ruling that the petitioner had power to
promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the Court of Tax Appeals and the
Court of Appeals, respectively, and to reinstate the decision of petitioner Commissioner of Internal
Revenue denying private respondent's request for a review, reconsideration and recall of Revenue
Memorandum Circular No. 37-93 dated July 1, 1993.

Padilla, J., concurs.

Separate Opinions

BELLOSILLO, J.: separate opinion:

RA 7654 was enacted by Congress on 10 June 1993, signed into law by the President on 14 June 1993,
and took effect 3 July 1993. It amended partly Sec. 142, par. (c), of the National Internal Revenue Code
(NIRC) to read

Sec. 142. Cigars and cigarettes. . . . . (c) Cigarettes packed by machine. There shall be levied,
assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the
constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is
higher.
(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent
(55%) or the exportation of which is not authorized by contract or otherwise, fifty-five percent (55%)
provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack (emphasis supplied).

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum
tax shall not be less than Three Pesos (P3.00) per pack.

Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium More and Champion were
considered local brands subjected to an ad valorem tax at the rate of 20-45%. However, on 1 July 1993 or
two (2) days before RA 7654 took effect, petitioner Commissioner of Internal Revenue issued RMC 37-93
reclassifying "Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . . (as)
locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes."
1 RMC 37-93 in effect subjected Hope Luxury, Premium More and Champion cigarettes to the provisions
of Sec. 142, par. (c), subpar. (1), NIRC, as amended by RA 7654, imposing upon these cigarette brands an
ad valorem tax of "fifty-five percent (55%) provided that the minimum tax shall not be less than Five
Pesos (P5.00) per pack."

On 2 July 1993, Friday, at about five-fifty in the afternoon, or a few hours before the effectivity of RA
7654, a copy of RMC 37-93 with a cover letter signed by Deputy Commissioner Victor A. Deoferio of the
Bureau of Internal Revenue was sent by facsimile to the factory of respondent corporation in Parang,
Marikina, Metro Manila. It appears that the letter together with a copy of RMC 37-93 did not
immediately come to the knowledge of private respondent as it was addressed to no one in particular. It
was only when the reclassification of respondent corporation's cigarette brands was reported in the
column of Fil C. Sionil in Business Bulletin on 4 July 1993 that the president of respondent corporation
learned of the matter, prompting him to inquire into its veracity and to request from petitioner a copy of
RMC 37-93. On 15 July 1993 respondent corporation received by ordinary mail a certified machine copy
of RMC 37-93.

Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith
denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on 30 July 1993
private respondent was assessed an ad valorem tax deficiency amounting to P9,598,334.00. Respondent
corporation went to the Court of Tax Appeals (CTA) on a petition for review.
On 10 August 1994, after due hearing, the CTA found the petition meritorious and ruled

Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz: Hope, More and
Champion being manufactured by Fortune Tobacco Corporation as locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid
and unenforceable . . . . Accordingly, the deficiency ad valorem tax assessment issued on petitioner
Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is
hereby cancelled for lack of legal basis. 2

The CTA held that petitioner Commissioner of Internal Revenue failed to observe due process of law in
issuing RMC 37-93 as there was no prior notice and hearing, and that RMC 37-93 was in itself
discriminatory. The motion to reconsider its decision was denied by the CTA for lack of merit. On 31
March 1995 respondent Court of Appeals affirmed in toto the decision of the CTA. 3 Hence, the instant
petition for review.

Petitioner now submits through the Solicitor General that RMC 37-93 reclassifying Hope Luxury,
Premium More and Champion as locally manufactured cigarettes bearing brands is merely an
interpretative ruling which needs no prior notice and hearing as held in Misamis Oriental Association of
Coco Traders, Inc. v. Department of Finance Secretary. 4 It maintains that neither is the assailed revenue
memorandum circular discriminatory as it merely "lays down the test in determining whether or not a
locally manufactured cigarette bears a foreign brand using (only) the cigarette brands Hope, More and
Champion as specific examples." 5

Respondent corporation on the other hand contends that RMC 37-93 is not a mere interpretative ruling
but is adjudicatory in nature where prior notice and hearing are mandatory, and that Misamis Oriental
Association of Coco Traders, Inc. v. Department of Finance Secretary on which the Solicitor General relies
heavily is not applicable. Respondent Fortune Tobacco Corporation also argues that RMC 37-93
discriminates against its cigarette brands since those of its competitors which are similarly situated have
not been reclassified.

The main issues before us are (a) whether RMC 37-93 is merely an interpretative rule the issuance of
which needs no prior notice and hearing, or an adjudicatory ruling which calls for the twin requirements
of prior notice and hearing, and, (b) whether RMC 37-93 is discriminatory in nature.
A brief discourse on the powers and functions of administrative bodies may be instructive.

Administrative agencies posses quasi-legislative or rule making powers and quasi-judicial or

administrative adjudicatory powers. Quasi-legislative or rule making power is the power to make rules
and regulations which results in delegated legislation that is within the confines of the granting statute
and the doctrine of nondelegability and separability of powers.

Interpretative rule, one of the three (3) types of quasi-legislative or rule making powers of an
administrative agency (the other two being supplementary or detailed legislation, and contingent
legislation), is promulgated by the administrative agency to interpret, clarify or explain statutory
regulations under which the administrative body operates. The purpose or objective of an interpretative
rule is merely to construe the statute being administered. It purports to do no more than interpret the
statute. Simply, the rule tries to say what the statute means. Generally, it refers to no single person or
party in particular but concerns all those belonging to the same class which may be covered by the said
interpretative rule. It need not be published and neither is a hearing required since it is issued by the
administrative body as an incident of its power to enforce the law and is intended merely to clarify
statutory provisions for proper observance by the people. In Taada v. Tuvera, 6 this Court expressly said
that "[i]interpretative regulations . . . . need not be published."

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the administrative
agency to adjudicate the rights of persons before it. It is the power to hear and determine questions of
fact to which the legislative policy is to apply and to decide in accordance with the standards laid down
by the law itself in enforcing and administering the same law. 7 The administrative body exercises its
quasi-judicial power when it performs in a judicial manner an act which is essentially of an executive or
administrative nature, where the power to act in such manner is incidental to or reasonably necessary
for the performance of the executive or administrative duty entrusted to it. 8 In carrying out their quasi-
judicial functions the administrative officers or bodies are required to investigate facts or ascertain the
existence of facts, hold hearings, weigh evidence, and draw conclusions from them as basis for their
official action and exercise of discretion in a judicial nature. Since rights of specific persons are affected it
is elementary that in the proper exercise of quasi-judicial power due process must be observed in the
conduct of the proceedings.

The importance of due process cannot be underestimated. Too basic is the rule that no person shall be
deprived of life, liberty or property without due process of law. Thus when an administrative proceeding
is quasi-judicial in character, notice and fair open hearing are essential to the validity of the proceeding.
The right to reasonable prior notice and hearing embraces not only the right to present evidence but
also the opportunity to know the claims of the opposing party and to meet them. The right to submit
arguments implies that opportunity otherwise the right may as well be considered impotent. And those
who are brought into contest with government in a quasi-judicial proceeding aimed at the control of
their activities are entitled to be fairy advised of what the government proposes and to be heard upon
its proposal before it issues its final command.

There are cardinal primary rights which must be respected in administrative proceedings. The landmark
case of Ang Tibay v. The Court of Industrial Relations 9 enumerated these rights: (1) the right to a
hearing, which includes the right of the party interested or affected to present his own case and submit
evidence in support thereof; (2) the tribunal must consider the evidence presented; (3) the decision
must have something to support itself; (4) the evidence must be substantial; (5) the decision must be
rendered on the evidence presented at the hearing, or at least contained in the record and disclosed to
the parties affected; (6) the tribunal or any of its judges must act on its or his own independent
consideration of the law and facts of the controversy, and not simply accept the views of a subordinate in
arriving at a decision; and, (7) the tribunal should in all controversial questions render its decision in such
manner that the parties to the proceeding may know the various issues involved and the reasons for the
decision rendered.

In determining whether RMC No. 37-93 is merely an interpretative rule which requires no prior notice
and hearing, or an adjudicatory rule which demands the observance of due process, a close examination
of RMC 37-93 is in order. Noticeably, petitioner Commissioner of Internal Revenue at first interprets Sec.
142, par. (c), subpar. (1), of the NIRC, as amended, by citing the law and clarifying or explaining what it
means

Section 142 (c) (1), National Internal Revenue Code, as amended by R.A. No. 6956, provides: On locally
manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided, That this rate shall
apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by
its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World
Tobacco Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the locally
manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the
foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be
originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand is, however,
not definitely determinable,
". . . the listing of brands manufactured in foreign countries appearing in the current World Tobacco
Directory shall govern . . ."

Then petitioner makes a factual finding by declaring that Hope (Luxury), (Premium) More and Champion
are manufactured by other foreign manufacturers

Hope is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco, Japan and (b)
Fortune Tobacco, Philippines. More is listed in the said directory as being manufactured by: (a) Fills de
Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-MacDonald, Canada; (d) Rettig-Strenberg, Finland;
(e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco,
Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds,
Switzerland; and (m) R.J. Reynolds, USA. "Champion" is registered in the said directory as being
manufactured by: (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d)
Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

From this finding, petitioner thereafter formulates an inference that since it cannot be determined who
among the manufacturers are the real owners of the brands in question, then these cigarette brands
should be considered foreign brands

Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the said
brands are the real owner/s thereof, then it follows that the same shall be considered foreign brand for
purposes of determining the ad valorem tax pursuant to Section 142 of the National Internal Revenue
Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be established
or there is dearth of evidence as to whether a brand is foreign or not, resort to the World Tobacco
Directory should be made."

Finally, petitioner caps RMC 37-93 with a disposition specifically directed at respondent corporation
reclassifying its cigarette brands as locally manufactured bearing foreign brands

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More and Champion being
manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.
Any ruling inconsistent herewith is revoked or modified accordingly.

It is evident from the foregoing that in issuing RMC 37-93 petitioner Commissioner of Internal Revenue
was exercising her quasi-judicial or administrative adjudicatory power. She cited and interpreted the law,
made a factual finding, applied the law to her given set of facts, arrived at a conclusion, and issued a
ruling aimed at a specific individual. Consequently prior notice and hearing are required. It must be
emphasized that even the text alone of RMC 37-93 implies that reception of evidence during a hearing is
appropriate if not necessary since it invokes BIR Ruling No. 410-88, dated August 24, 1988, which
provides that "in cases where it cannot be established or there is dearth of evidence as to whether a
brand is foreign or not . . . ." Indeed, it is difficult to determine whether a brand is foreign or not if it is
not established by, or there is dearth of, evidence because no hearing has been called and conducted for
the reception of such evidence. In fine, by no stretch of the imagination can RMC 37-93 be considered
purely as an interpretative rule requiring no previous notice and hearing and simply interpreting,
construing, clarifying or explaining statutory regulations being administered by or under which the
Bureau of Internal Revenue operates.

It is true that both RMC 47-91 in Misamis Oriental Association of Coco Traders v. Department of Finance
Secretary, and RMC 37-93 in the instant case reclassify certain products for purposes of taxation. But the
similarity between the two revenue memorandum circulars ends there. For in properly determining
whether a revenue memorandum circular is merely an interpretative rule or an adjudicatory rule, its very
tenor and text, and the circumstances surrounding its issuance will have no to be considered.

We quote RMC 47-91 promulgated 11 June 1991

Revenue Memorandum Circular No. 47-91

SUBJECT : Taxability of Copra

TO : All Revenue Officials and Employees and Others Concerned.

For the information and guidance of all officials and employees and others concerned, quoted hereunder
in its entirety is VAT Ruling No. 190-90 dated August 17, 1990:
COCOFED MARKETING RESEARCH CORPORATION

6th Floor Cocofed Building

144 Amorsolo Street

Legaspi Village, Makati

Metro Manila

Attention: Ms. Esmyrna E. Reyes

Vice President Finance

Sirs:

This has reference to your letter dated January 16, 1990 wherein you represented that inspite of your
VAT registration of your copra trading company, you are supposed to be exempt from VAT on the basis of
BIR Ruling dated January 8, 1988 which considered copra as an agricultural food product in its original
state. In this connection, you request for a confirmation of your opinion as aforestated.

In reply, please be informed that copra, being an agricultural non-food product, is exempt from VAT only
if sale is made by the primary producer pursuant to Section 103 (a) of the Tax Code, as amended. Thus as
a trading company and a subsequent seller, your sale of copra is already subject to VAT pursuant to
Section 9(b) (1) of Revenue Regulations 5-27.

This revokes VAT Ruling Nos. 009-88 and 279-88.

Very truly yours,

(Sgd.) JOSE U. ONG

Commissioner of Internal Revenue

As a clarification, this is the present and official stand of this Office unless sooner revoked or amended.
All revenue officials and employees are enjoined to give this Circular as wide a publicity as possible.

(Sgd.) JOSE U. ONG

Commissioner of Internal Revenue

Quite obviously, the very text of RMC 47-91 itself shows that it is merely an interpretative rule as it
simply quotes a VAT Ruling and reminds those concerned that the ruling is the present and official stand
of the Bureau of Internal Revenue. Unlike in RMC 37-93 where petitioner Commissioner manifestly
exercised her quasi-judicial or administrative adjudicatory power, in RMC 47-91 there were no factual
findings, no application of laws to a given set of facts, no conclusions of law, and no dispositive portion
directed at any particular party.

Another difference is that in the instant case, the issuance of the assailed revenue memorandum circular
operated to subject the taxpayer to the new law which was yet to take effect, while in Misamis, the
disputed revenue memorandum circular was issued simply to restate and then clarify the prevailing
position and ruling of the administrative agency, and no new law yet to take effect was involved. It
merely interpreted an existing law which had already been in effect for some time and which was not set
to be amended. RMC 37-93 is thus prejudicial to private respondent alone.

A third difference, and this likewise resolves the issue of discrimination, is that RMC 37-93 was ostensibly
issued to subject the cigarette brands of respondent corporation to a new law as it was promulgated two
days before the expiration of the old law and a few hours before the effectivity of the new law. That RMC
37-93 is particularly aimed only at respondent corporation and its three (3) cigarette brands can be seen
from the dispositive portion of the assailed revenue memorandum circular

In view of the foregoing, the aforesaid brands of cigarettes, viz: Hope, More, and Champion being
manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes
bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

Thus the argument of the Solicitor General that RMC 37-93 is not discriminatory as "[i]t merely lays
down the test in determining whether or not a locally manufactured cigarette bears a foreign brand
using the cigarette brands Hope, More and Champion as specific examples," cannot be accepted, much
less sustained. Without doubt, RMC 37-93 has a tremendous effect on respondent corporation and
solely on respondent corporation as its deficiency ad valorem tax assessment on its removals of Hope,
Luxury, Premium More, and Champion cigarettes for six (6) hours alone, i.e., from six o'clock in the
evening of 2 July 1993 which is presumably the time respondent corporation was supposed to have
received the facsimile message sent by Deputy Commissioner Victor A. Deoferio, until twelve o'clock
midnight upon the effectivity of the new law, was already P9,598,334.00. On the other hand, RMC 47-91
was issued with no purpose except to state and declare what has been the official stand of the
administrative agency on the specific subject matter, and was indiscriminately directed to all copra
traders with no particular individual in mind.

That petitioner Commissioner of Internal Revenue is an expert in her filed is not attempted to be
disputed; hence, we do not question the wisdom of her act in reclassifying the cigarettes. Neither do we
deny her the exercise of her quasi-legislative or quasi-judicial powers. But most certainly, by
constitutional mandate, the Court must check the exercise of these powers and ascertain whether
petitioner has gone beyond the legitimate bounds of her authority.

In the final analysis, the issue before us in not the expertise, the authority to promulgate rules, or the
wisdom of petitioner as Commissioner of Internal Revenue is reclassifying the cigarettes of private
respondents. It is simply the faithful observance by government by government of the basic
constitutional right of a taxpayer to due process of law and equal protection of the laws. This is what
distresses me no end the manner and the circumstances under which the cigarettes of private
respondent were reclassified and correspondingly taxed under RMC 37-93, and adjudicatory rule which
therefore requires reasonable notice and hearing before its issuance. It should not be confused with
RMC 47-91, which is a mere interpretative rule.

In the earlier case of G.R. No. 119322, which practically involved the same opposing interests, I also
voted to uphold the constitutional right of the taxpayer concerned to due process and equal protection
of the laws. By a vote of 3-2, that view prevailed. In sequela, we in the First Division who constituted the
majority found ourselves unjustly drawn into the vortex of a nightmarish episode. The strong ripples
whipped up by my opinion expressed therein and of the majority have yet to varnish when we are
again in the imbroglio of a similar dilemma. The unpleasant experience should be reason enough to
simply steer clear of this controversy and surf on a pretended loss of judicial objectivity. Such would have
been an easy way out, a gracious exit, so to speak, albeit lame. But to camouflage my leave with a sham
excuse would be to turn away from a professional vow I keep at all times; I would not be true to myself,
and to the people I am committed to serve. Thus, as I have earlier expressed, if placed under similar
circumstances in some future time, I shall have to brave again the prospect of another vilification and a
tarnished image if only to show proudly to the whole world that under the present dispensation judicial
independence in our country is a true component of our democracy.

In fine, I am greatly perturbed by the manner RMC No. 37-93 was issued as well as the effect of such
issuance. For it cannot be denied that the circumstances clearly demonstrate that it was hastily issued
without prior notice and hearing, and singling out private respondent alone when two days before a
new tax law was to take effect petitioner reclassified and taxed the cigarette brands of private
respondent at a higher rate. Obviously, this was to make it appear that even before the anticipated date
of effectivity of the statute which was undeniably priorly known to petitioner these brands were
already currently classified and taxed at fifty-five percent (55%), thus shoving them into the purview of
the law that was to take effect two days after!

For sure, private respondent was not properly informed before the issuance of the questioned
memorandum circular that its cigarette brands Hope Luxury, Premium More and Champion were being
reclassified and subjected to a higher tax rate. Naturally, the result would be to lose financially because
private respondent was still selling its cigarettes at a price based on the old, lower tax rate. Had there
been previous notice and hearing, as claimed by private respondent, it could have very well presented its
side, either by opposing the reclassification, or by acquiescing thereto but increasing the price of its
cigarettes to adjust to the higher tax rate. The reclassification and the ensuing imposition of a tax rate
increase therefore could not be anything but confiscatory if we are also to consider the claim of private
respondent that the new tax is even higher than the cost of its cigarettes.

Accordingly, I vote to deny the petition.

HERMOSISIMA, JR., J.: dissenting

Private respondent Fortune Tobacco Corporation in the instant case disputes its liability for deficiency ad
valorem excise taxes on its removals of "Hope," "More," and "Champion" cigarettes from 6:00 p.m. to
12:00 midnight of July 2, 1993, in the total amount of P9,598,334.00. It claims that the circular, upon
which the assessment was based and made, is defective, invalid and unenforceable for having been
issued without notice and hearing and in violation of the equal protection clause guaranteed by the
Constitution.

The majority upholds these claims of private respondent, convinced that the Circular in question, in the
first place, did not give prior notice and hearing, and so, it could not have been valid and effective. It
proceeds to affirm the factual findings of the Court of Tax Appeals, which findings were considered
correct by respondent Court of Appeals, to the effect that the petitioner Commissioner of Internal
Revenue had indeed blatantly failed to comply with the said twin requirements of notice and hearing,
thereby rendering the issuance of the questioned Circular to be in violation of the due process clause of
the Constitution. It is also its dominant opinion that the questioned Circular discriminates against private
respondent Fortune Tobacco Corporation insofar as it seems to affect only its "Hope," "More," and
"Champion" cigarettes, to the exclusion of other cigarettes apparently of the same kind or classification
as these cigarettes manufactured by private respondent.

With all due respect, I disagree with the majority in its disquisition of the issues and its resulting
conclusions.

Section 245 of the National Internal Revenue Code,

as amended, empowers the Commissioner of Internal

Revenue to issue the questioned Circular

Section 245 of the National Internal Revenue Code, as amended, provides:

Sec. 245. Authority of Secretary of Finance to promulgate rules and regulations. The Secretary
of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of this Code . . . without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.

The subject of the questioned Circular is the reclassification of cigarettes subject to excise taxes. It was
issued in connection with Section 142 (c) (1) of the National Internal Revenue Code, as amended, which
imposes ad valorem excise taxes on locally manufactured cigarettes bearing a foreign brand. The same
provision prescribes the ultimate criterion that determines which cigarettes are to be considered "locally
manufactured cigarettes bearing a foreign brand." It provides:

. . . Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of
brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern.

There is only one World Tobacco Directory for a given current year, and the same is mandated by law to
be the BIR Commissioner's controlling basis for determining whether or not a particular locally
manufactured cigarette is one bearing a foreign brand. In so making a determination, petitioner should
inquire into the entries in the World Tobacco Directory for the given current year and shall be held
bound by such entries therein. She is not required to subject the results of her inquiries to feedback
from the concerned cigarette manufacturers, and it is doubtlessly not desirable nor managerially sound
to court dispute thereon when the law does not, in the first place, require debate or hearing thereon.
Petitioner may make such a determination because she is the Chief Executive Officer of the
administrative agency that is the Bureau of Internal Revenue in which are vested quasi-legislative powers
entrusted to it by the legislature in recognition of its more encompassing and unequalled expertise in the
field of taxation.

The vesture of quasi-legislative and quasi-judicial powers in administrative bodies is not unconstitutional,
unreasonable and oppressive. It has been necessitated by "the growing complexity of the modern
society" (Solid Homes, Inc. vs. Payawal, 177 SCRA 72, 79). More and more administrative bodies are
necessary to help in the regulation of society's ramified activities. "Specialized in the particular field
assigned to them, they can deal with the problems thereof with more expertise and dispatch than can be
expected from the legislature or the courts of justice" . . . 1

Statutorily empowered to issue rulings or opinions embodying the proper determination in respect to
classifying articles, including cigarettes, for purposes of tax assessment and collection, petitioner was
acting well within her prerogatives when she issued the questioned Circular. And in the exercise of such
prerogatives under the law, she has in her favor the presumption of regular performance of official duty
which must be overcome by clearly persuasive evidence of stark error and grave abuse of discretion in
order to be overturned and disregarded.

It is irrelevant that the Court of Tax Appeals makes much of the effect of the passing of Republic Act No.
7654 2 on petitioner's power to classify cigarettes. Although the decisions assailed and sought to be
reviewed, as well as the pleadings of private respondent, are replete with alleged admissions of our
legislators to the effect that the said Act was intended to freeze the current classification of cigarettes
and make the same an integral part of the said Act, certainly the repeal, if any, of petitioner's power to
classify cigarettes must be reckoned from the effectivity of the said Act and not before. Suffice it to say
that indisputable is the plain fact that the questioned Circular was issued on July 1, 1993, while the said
Act took effect on July 3, 1993.

The contents of the questioned circular have not

been proven to be erroneous or illegal as to render

issuance thereof an act of grave abuse of

discretion on the part of petitioner Commissioner

Prior to the effectivity of R.A. No. 7654, Section 142 (c) (1) of the National Internal Revenue Code, as
amended, levies the following ad valorem taxes on cigarettes in accordance with their predetermined
classifications as established by the Commissioner of Internal Revenue:

. . . based on the manufacturer's registered wholesale price:

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided,
That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was
sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or
not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.

(2) Other locally manufactured cigarettes, forty five percent (45%).

xxx xxx xxx

Prior to the issuance of the questioned Circular, assessed against and paid by private respondent as ad
valorem excise taxes on their removals of "Hope," "More," and "Champion" cigarettes were amounts
based on paragraph (2) above, i.e., the tax rate made applicable on the said cigarettes was 45% at the
most. The reason for this is that apparently, petitioner's predecessors have all made determinations to
the effect that the said cigarettes were to be considered "other locally manufactured cigarettes" and not
"locally manufactured cigarettes bearing a foreign brand." Even petitioner, until her issuance of the
questioned Circular, adhered to her predecessors' determination as to the proper classification of the
above-mentioned cigarettes for purposes of ad valorem excise taxes. Apparently, the past determination
that the said cigarettes were to be classified as "other locally manufactured cigarettes" was based on
private respodnent's convenient move of changing the names of "Hope" to "Hope Luxury" and "More" to
"Premium More." It also submitted proof that "Champion" was an original Fortune Tobacco Corporation
register and, therefore, a local brand. Having registered these brands with the Philippine Patent Office
and with corresponding evidence to the effect, private respondent paid ad valorem excise taxes
computed at the rate of not more than 45% which is the rate applicable to cigarettes considered as
locally manufactured brands.

How these past determinations pervaded notwithstanding their erroneous basis is only tempered by
their innate quality of being merely errors in interpretative ruling, the formulation of which does not
bind the government. Advantage over such errors may precipitously be withdrawn from those who have
been benefiting from them once the same have been discovered and rectified.

Petitioner correctly emphasizes that:

. . . the registration of said brands in the name of private respondent is proof only that it is the exclusive
owner thereof in the Philippines; it does not necessarily follow, however, that it is the exclusive owner
thereof in the whole world. Assuming arguendo that private respondent is the exclusive owner of said
brands in the Philippines, it does not mean that they are local. Otherwise, they would not have been
listed in the WTD as international brands manufactured by different entities in different countries.
Moreover, it cannot be said that the brands registered in the names of private respondent are not the
same brands listed in the WTD because private respondent is one of the manufacturers of said brands
listed in the WTD. 3

Private respondent attempts to cast doubt on the determination made by petitioner in the questioned
Circular that Japan is a manufacturer of "Hope" cigarettes. Private respondent's own inquiry into the
World Tobacco Directory reveals that Japan is not a manufacturer of "Hope" cigarettes. In pointing this
out, private respondent concludes that the entire Circular is erroneous and makes such error the
principal proof of its claim that the nature of the determination embodied in the questioned Circular
requires a hearing on the facts and a debate on the applicable law. Such a determination is adjudicatory
in nature and, therefore, requires notice and hearing. Private respondent is, however, apparently only
eager to show error on the part of petitioner for acting with grave abuse of discretion. Private
respondent conveniently forgets that petitioner, equipped with the expertise in taxation, recognized in
that expertise by the legislature that vested in her the power to make rules respecting classification of
articles for taxation purposes, and presumed to have regularly exercised her prerogatives within the
scope of her statutory power to issue determinations specifically under Section 142 (c) (1) in relation to
Section 245 of the National Internal Revenue Code, as amended, simply followed the law as she
understood it. Her task was to determine which cigarette brands were foreign, and she was directed by
the law to look into the World Tobacco Directory. Foreign cigarette brands were legislated to be taxed at
higher rates because of their more extensive public exposure and international reputation; their
competitive edge against local brands may easily be checked by imposition of higher tax rates. Private
respondent makes a mountain of the mole hill circumstance that "Hope" is listed, not as being
"manufactured" by Japan but as being "used" by Japan. Whether manufactured or used by Japan,
however, "Hope" remains a cigarette brand that can not be said to be limited to local manufacture in the
Philippines. The undeniable fact is that it is a foreign brand the sales in the Philippines of which are
greatly boosted by its international exposure and reputation. The petitioner was well within her
prerogatives, in the exercise of her rule-making power, to classify articles for taxation purposes, to
interpret the laws which she is mandated to administer. In interpreting the same, petitioner must, in
general, be guided by the principles underlying taxation, i.e., taxes are the lifeblood of Government, and
revenue laws ought to be interpreted in favor of the Government, for Government can not survive
without the funds to underwrite its varied operational expenses in pursuit of the welfare of the society
which it serves and protects.

Private respondent claims that its business will be destroyed by the imposition of additional ad valorem
taxes as a result of the effectivity of the questioned Circular. It claims that under the vested rights theory,
it cannot now be made to pay higher taxes after having been assessed for less in the past. Of course
private respondent will trumpet its losses, its interests, after all, being its sole concern. What private
respondent fails to see is the loss of revenue by the Government which, because of erroneous
determinations made by its past revenue commissioners, collected lesser taxes than what it was entitled
to in the first place. It is every citizen's duty to pay the correct amount of taxes. Private respondent will
not be shielded by any vested rights, for there are not vested rights to speak of respecting a wrong
construction of the law by administrative officials, and such wrong interpretation does not place the
Government in estoppel to correct or overrule the same. 4

The Questioned Circular embodies an interpretative

ruling of petitioner Commissioner which as such does

not require notice and hearing

As one of the public offices of the Government, the Bureau of Internal Revenue, through its
Commissioner, has grown to be a typical administrative agency vested with a fusion of different
governmental powers: the power to investigate, initiate action and control the range of investigation, the
power to promulgate rules and regulations to better carry out statutory policies, and the power to
adjudicate controversies within the scope of their activities. 5 In the realm of administrative law, we
understand that such an empowerment of administrative agencies was evolved in response to the needs
of a changing society. This development arose as the need for broad social control over complex
conditions and activities became more and more pressing, and such complexity could no longer be dealt
with effectivity and directly by the legislature or the judiciary. The theory which underlies the
empowerment of administrative agencies like the Bureau of Internal Revenue, is that the issues with
which such agencies deal ought to be decided by experts, and not be a judge, at least not in the first
instance or until the facts have been sifted and arranged. 6

One of the powers of administrative agencies like the Bureau of Internal Revenue, is the power to make
rules. The necessity for vesting administrative agencies with this power stems from the impracticability
of the lawmakers providing general regulations for various and varying details pertinent to a particular
legislation. 7

The rules that administrative agencies may promulgate may either be legislative or interpretative. The
former is a form of subordinate legislation whereby the administrative agency is acting in a legislative
capacity, supplementing the statute, filling in the details, pursuant to a specific delegation of legislative
power. 8

Interpretative rules, on the other hand, are "those which purport to do no more than interpret the
statute being administered, to say what it means." 9

There can be no doubt that there is a distinction between an administrative rule or regulation and an
administrative interpretation of a law whose enforcement is entrusted to an administrative body. When
an administrative agency promulgates rules and regulations, it "makes" a new law with the force and
effect of a valid law, while when it renders an opinion or gives a statement of policy, it merely interprets
a pre-existing law (Parker, Administrative Law, p. 197; Davis Administrative Law, p. 194). Rules and
regulations when promulgated in pursuance of the procedure or authority conferred upon the
administrative agency by law, partake of the nature of a statute, and compliance therewith may be
enforced by a penal sanction provided in the law. This is so because statutes are usually couched in
general terms, after expressing the policy, purposes, objectives, remedies and sanctions intended by the
legislature. The details and the manner of carrying out the law are often times left to the administrative
agency entrusted with its enforcement. In this sense, it has been said that rules and regulations are the
product of a delegated power to create new or additional legal provisions that have the effect of law.
(Davis, op. cit. p. 194.)

A rule is binding on the courts as long as the procedure fixed for its promulgation is followed and its
scope is within the statutory authority granted by the legislature, even if the courts are not in agreement
with the policy stated therein or its innate wisdom (Davis, op. cit. pp. 195-197). On the other hand,
administrative interpretation of the law is at best merely advisory, for it is the courts that finally
determine what the law means. 10

"Whether a given statutory delegation authorizes legislative or interpretative regulations depends upon
whether the statute places specific 'sanctions' behind the regulations authorized, as for example, by
making it a criminal offense to disobey them, or by making conformity with their provisions a condition
of the exercise of legal privileges." 11 This is because interpretative regulations are by nature simply
statutory interpretations, which have behind them no statutory sanction. Such regulations, whether so
expressly authorized by statute or issued only as an incident of statutory administration, merely embody
administrative findings of law which are always subject to judicial determination as to whether they are
erroneous or not, even when their issuance is authorized by statute.

The questioned Circular has undisputedly been issued by petitioner in pursuance of her rule-making
powers under Section 245 of the National Internal Revenue Code, as amended. Exercising such powers,
petitioner re-classified "Hope," "More" and "Champion" cigarettes as locally manufactured cigarettes
bearing foreign brands. The re-classification, as previously explained, is the correct interpretation of
Section 142 (c) (1) of the said Code. The said legal provision is not accompanied by any penal sanction,
and no detail had to be filled in by petitioner. The basis for the classification of cigarettes has been
provided for by the legislature, and all petitioner has to do, on behalf of the government agency she
heads, is to proceed to make the proper determination using the criterion stipulated by the lawmaking
body. In making the proper determination, petitioner gave it a liberal construction consistent with the
rule that revenue laws are to be construed in favor of the Government whose survival depends on the
contributions that taxpayers give to the public coffers that finance public services and other
governmental operations.

The Bureau of Internal Revenue which petitioner heads, is the government agency charged with the
enforcement of the laws pertinent to this case and so, the opinion of the Commissioner of Internal
Revenue, in the absence of a clear showing that it is plainly wrong, is entitled to great weight. Private
respondent claims that its rights under previous interpretations of Section 142 (c) (1) may not abruptly
be cut by a new interpretation of the said section, but precisely the said section is subject to various and
changing construction, and hence, any ruling issued by petitioner thereon is necessarily interpretative
and not legislative. Private respondent insists that the questioned circular is adjudicatory in nature
because it determined the rights of private respondent in a controversy involving his tax liability. It also
asseverates that the questioned circular involved administrative action that is particular and immediate,
thereby rendering it subject to the requirements of notice and hearing in compliance with the due
process clause of the Constitution.

We find private respondent's arguments to be rather strained.

Petitioner made a determination as to the classification of cigarettes as mandated by the aforecited

provisions in the National Internal Revenue Code, as amended. Such determination was an
interpretation by petitioner of the said legal provisions. If in the course of making the interpretation and
embodying the same in the questioned circular which the petitioner subsequently issued after making
such a determination, private respondent's cigarettes products, by their very nature of being foreign
brands as evidenced by their enlistment in the World Tobacco Directory, which is the controlling basis for
the proper classification of cigarettes as stipulated by the law itself, have come to be classified as locally
manufactured cigarettes bearing foreign brands and as such subject to a tax rate higher than what was
previously imposed thereupon based on past rulings of other revenue commissioners, such a situation is
simply a consequence of the performance by petitioner of here duties under the law. No adjudication
took place, much less was there any controversy ripe for adjudication. The natural consequences of
making a classification in accordance with law may not be used by private respondent in arguing that the
questioned circular is in fact adjudicatory in nature. Such an exercise in driving home a point is illogical as
it is fallacious and misplaced.

Private respondent concedes that under general rules of administrative law, "a ruling which is merely
'interpretative' in character may not require prior notice to affected parties before its issuance as well as
a hearing" and "for this reason, in most instances, interpretative regulations are not given the force of
law." 12 Indeed, "interpretative regulations and those merely internal in nature

. . . need not be published." 13 And it is now settled that only legislative regulations and not
interpretative rulings must have the benefit of public

hearing. 14

Because (1) the questioned circular merely embodied an interpretation or a way of reading and giving
meaning to Section 142 (c) (1) of the National Internal Revenue Code, as amended; (2) petitioner did not
fill in any details in the aforecited section but only classified cigarettes on the basis of the World Tobacco
Directory in the light of the paramount principle of construing revenue laws in favor of the Government
to the end that Government collects as much tax money as it is entitled to in order to fulfill its public
purposes for the general good of its citizens; (3) no penal sanction is provided in the aforecited section
that was construed by petitioner in the questioned circular; and (4) a similar circular declassifying copra
from being an agricultural food to non-food product for purposes of the value added tax laws, resulting
in the revocation of an exemption previously enjoyed by copra traders, has been ruled by us to be
merely an interpretative ruling and not a legislative, much less, an adjudicatory, action on the part of the
revenue commissioner, 15 this Court must not be blind to the fact that the questioned Circular is indeed
an interpretative ruling not subject to notice and hearing.

Neither is the questioned Circular tainted by a

violation of the equal protection clause under the

Constitution

Private respondent anchors its claim of violation of its equal protection rights upon the too obvious fact
that only its cigarette brands, i.e., "Hope," "More" and "Champion," are mentioned in the questioned
circular. Because only the cigarettes that they manufacture are enumerated in the questioned circular,
private respondent proceeded to attack the same as being discriminatory against it. On the surface,
private respondent seems to have a point there. A scrutiny of the questioned Circular, however, will
show that it is undisputedly one of general application for all cigarettes that are similarly situated as
private respondent's brands. The new interpretation of Section 142 (1) (c) has been well illustrated in its
application upon private respondent's brands, which illustration is properly a subject of the questioned
Circular. Significantly, indicated as the subject of the questioned circular is the "reclassification of
cigarettes subject to excise taxes." The reclassification resulted in the foregrounding of private
respondent's cigarette brands, which incidentally is largely due to the controversy spawned no less by
private respondent's own action of conveniently changing its brand names to avoid falling under a
classification that would subject it to higher ad valorem tax rates. This caused then Commissioner
Bienvenido Tan to depart from his initial determination that private respondent's cigarette brands are
foreign brands. The consequent specific mention of such brands in the questioned Circular, does not
change the fact that the questioned Circular has always been intended for and did cover, all cigarettes
similarly situated as "Hope," "More" and "Champion." Petitioner is thus correct in stating that:
. . . RMC 37-93 is not discriminatory. It lays down the test in determining whether or not a locally
manufactured cigarette bears a foreign brand using the cigarette brands "Hope," More and "Champion"
as specific examples. Such test applies to all locally manufactured cigarette brands similarly situated as
the cigarette brands aforementioned. While it is true that only "Hope," "More" and "Champion"
cigarettes are actually determined as locally manufactured cigarettes bearing a foreign brand, RMC 37-93
does not state that ONLY cigarettes fall under such classification to the exclusion of other cigarettes
similarly situated. Otherwise stated, RMC 37-93 does not exclude the coverage of other cigarettes
similarly situated. Otherwise stated, RMC 37-93 does not exclude the coverage of other cigarettes
similarly situated as locally manufactured cigarettes bearing a foreign brand. Hence, in itself, RMC 37-93
is not discriminatory. 16

Both the respondent Court of Appeals and the Court of Tax Appeals held that the questioned Circular
reclassifying "Hope," "More" and "Champion" cigarettes, is defective, invalid and unenforceable and has
rendered the assessment against private respondent of deficiency ad valorem excise taxes to be without
legal basis. The majority agrees with private respondent and respondent Courts. As the foregoing
opinion chronicles the fatal flaws in private respondent's arguments, it becomes more apparent that the
questioned Circular is in fact a valid and subsisting interpretative ruling that the petitioner had power to
promulgate and enforce.

WHEREFORE, I vote to grant the petition and set aside the decisions of the Court of Tax Appeals and the
Court of Appeals, respectively, and to reinstate the decision of petitioner Commissioner of Internal
Revenue denying private respondent's request for a review, reconsideration and recall of Revenue
Memorandum Circular No. 37-93 dated July 1, 1993.

Padilla, J., concurs.

Footnotes

1 Through Associate Justices Justo P. Torres, Jr. ( ponente ), Corona Ibay-Somera and Conrado M.
Vasquez, Jr. (members).

2 Penned by Presiding Judge Ernesto D. Acosta and concurred in by Associate Judges Ramon O. De
Veyra and Manuel K. Gruba.
3 Emphasis supplied. Rollo, pp. 55-58.

4 Since the institution of Executive Order No. 22 on 23 June 1986.

5 Rollo, p. 56.

6 An Act Revising The Excise Tax Base, Allocating a Portion Of The Incremental Revenue Collected
For The Emergency Employment Program For Certain Workers Amending For The Purpose Section 142 Of
The National Internal Revenue Code, As Amended, And For Other Purposes.

7 Official Gazette, Vol. 89., No. 32, 09 August 1993, p. 4476.

8 The petition was subsequently amended on 12 August 1993.

9 Rollo, pp. 115-116.

10 Rollo, pp. 21-22.

11 238 SCRA 63.

12 Emphasis supplied. At p. 69.

13 Rollo, pp. 65-66.

14 See Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371.

15 City of Baguio vs. De Leon, 25 SCRA 938.

16 Ang Tibay vs. Court of Industrial Relations, 69 Phil. 635.

17 Rollo, pp. 97-98.

18 Rollo, pp. 98-100.

Bellosillo, J.; concurring

1 See penultimate paragraph of RMC 37-93.

2 Decision penned by Presiding Judge Ernesto D. Acosta, concurred in by Associate Jusges Manuel
K. Gruba and Ramon O. De Veyra.

3 Special Thirteenth Division; Decision penned by Associate Justice Justo P. Torres as Chairman,
concurred in by Associate Justices Corona Ibay-Somera and Conrado M. Vasquez, Jr.

4 G.R. No. 108524, 10 November 1994; 238 SCRA 63.

5 Petition for Review, p. 28; Rollo, p. 38.

6 No. L-63915, 29 December 1986, 146 SCRA 446.

7 Hormed v. Helvering, 312 U.S. 552; Reetz v. Michigan, 188 U.S. 505; Gudmindson v. Cardollo, 126
F 2d. 521.
8 Collins v. Selectmen of Brookline, 91 N.E. 2d, 747.

9 69 Phil. 635 (1940).

Hermosisima, Jr., J., dissenting

1 Phil. Association of Service Exporters, Inc. vs. Torres, 212 SCRA 304.

2 Entitled, "An Act Revising the Excise Tax Base, Allocting a Portion of the Incremental Revenue
Collected for the Emergency Employment Program for Certain Workers Amending for the Purpose
Section 142 of the National Internal Revenue Code, as amended, and for Other Purposes," 89 O.G. 4475-
4480, August 9, 1993.

3 Petition for Review dated May 9, 1995, p. 38, Rollo, p. 48.

4 Tan Guan vs. Court of Appeals, 19 SCRA 903; Compania General de Tabacos de Filipinas vs. City
of Manila, 8 SCRA 367.

5 1 Am. Jur. 2d., p. 816.

6 73 C.J.S. pp. 295-296.

7 1 Am. Jur. 2d., p. 890.

8 1 Am. Jur. 2d., p. 892.

9 de Leon, Hector, Administrative Law, 1989 ed., p. 67.

10 Victorias Milling Co. Inc. vs. Social Security Commission, 114 Phil. 558.

11 de Leon, supra, p. 69.

12 Comment of Fortune Tobacco Corporation, p. 52; Rollo, p. 199.

13 Tanada vs. Tuvera, 146 SCRA 454.

14 Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary, 238
SCRA 63.

15 Ibid.

16 Petition for Review dated May 9, 1995, pp. 28-29, Rollo, pp. 38-39.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

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

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.

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

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

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and Solicitor
Dominador L. Quiroz for respondents-appellants.

CASTRO, J.:

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

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

The respondent Postmaster General, in implementation of the law, thereafter issued four (4)
administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July
15, 1960). All these administrative orders were issued with the approval of the respondent Secretary of
Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:

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

xxx xxx xxx

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

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

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

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

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

1. Second-class mail. Aside from the postage at the second-class rate, the extra charge of five
centavos for the Philippine Tuberculosis Society shall be collected on each separately-addressed piece of
second-class mail matter, and the total sum thus collected shall be entered in the same official receipt to
be issued for the postage at the second-class rate. In making such entry, the total number of pieces of
second-class mail posted shall be stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The
extra charge shall be entered separate from the postage in both of the official receipt and the Record of
Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed under
permits issued by this Bureau shall each be charged the usual postage, in addition to the five-centavo
extra charge intended for said society. The total extra charge thus received shall be entered in the same
official receipt to be issued for the postage collected, as in subparagraph 1.

3. Metered mail. For each piece of mail matter impressed by postage meter under metered mail
permit issued by this Bureau, the extra charge of five centavos for said society shall be collected in cash
and an official receipt issued for the total sum thus received, in the manner indicated in subparagraph 1.

4. Business reply cards and envelopes. Upon delivery of business reply cards and envelopes to
holders of business reply permits, the five-centavo charge intended for said society shall be collected in
cash on each reply card or envelope delivered, in addition to the required postage which may also be
paid in cash. An official receipt shall be issued for the total postage and total extra charge received, in the
manner shown in subparagraph 1.

5. Mails entitled to franking privilege. Government agencies, officials, and other persons entitled
to the franking privilege under existing laws may pay in cash such extra charge intended for said society,
instead of affixing the semi-postal stamps to their mails, provided that such mails are presented at the
post-office window, where the five-centavo extra charge for said society shall be collected on each piece
of such mail matter. In such case, an official receipt shall be issued for the total sum thus collected, in the
manner stated in subparagraph 1.

Mail under permits, metered mails and franked mails not presented at the post-office window shall be
affixed with the necessary semi-postal stamps. If found in mail boxes without such stamps, they shall be
treated in the same way as herein provided for other mails.

Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as
amended, exempts "copies of periodical publications received for mailing under any class of mail matter,
including newspapers and magazines admitted as second-class mail."

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

In view of this development, the petitioner brough suit for declaratory relief in the Court of First Instance
of Pampanga, to test the constitutionality of the statute, as well as the implementing administrative
orders issued, contending that it violates the equal protection clause of the Constitution as well as the
rule of uniformity and equality of taxation. The lower court declared the statute and the orders
unconstitutional; hence this appeal by the respondent postal authorities.

For the reasons set out in this opinion, the judgment appealed from must be reversed.

I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention that
declaratory relief is unavailing because this suit was filed after the petitioner had committed a breach of
the statute. While conceding that the mailing by the petitioner of a letter without the additional anti-TB
stamp was a violation of Republic Act 1635, as amended, the trial court nevertheless refused to dismiss
the action on the ground that under section 6 of Rule 64 of the Rules of Court, "If before the final
termination of the case a breach or violation of ... a statute ... should take place, the action may
thereupon be converted into an ordinary action."

The prime specification of an action for declaratory relief is that it must be brought "before breach or
violation" of the statute has been committed. Rule 64, section 1 so provides. Section 6 of the same rule,
which allows the court to treat an action for declaratory relief as an ordinary action, applies only if the
breach or violation occurs after the filing of the action but before the termination thereof.3

Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing of this
action, then indeed the remedy of declaratory relief cannot be availed of, much less can the suit be
converted into an ordinary action.

Nor is there merit in the petitioner's argument that the mailing of the letter in question did not
constitute a breach of the statute because the statute appears to be addressed only to postal authorities.
The statute, it is true, in terms provides that "no mail matter shall be accepted in the mails unless it
bears such semi-postal stamps." It does not follow, however, that only postal authorities can be guilty of
violating it by accepting mails without the payment of the anti-TB stamp. It is obvious that they can be
guilty of violating the statute only if there are people who use the mails without paying for the additional
anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so in the matter of the
anti-TB stamp the mere attempt to use the mails without the stamp constitutes a violation of the statute.
It is not required that the mail be accepted by postal authorities. That requirement is relevant only for
the purpose of fixing the liability of postal officials.

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

II.

We now consider the constitutional objections raised against the statute and the implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution. More
specifically the claim is made that it constitutes mail users into a class for the purpose of the tax while
leaving untaxed the rest of the population and that even among postal patrons the statute
discriminatorily grants exemption to newspapers while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax, laid
upon the exercise of a privilege, namely, the privilege of using the mails. As such the objections levelled
against it must be viewed in the light of applicable principles of taxation.

To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation
and to grant exemptions.4 This power has aptly been described as "of wide range and flexibility."5
Indeed, it is said that in the field of taxation, more than in other areas, the legislature possesses the
greatest freedom in classification.6 The reason for this is that traditionally, classification has been a
device for fitting tax programs to local needs and usages in order to achieve an equitable distribution of
the tax burden.7

That legislative classifications must be reasonable is of course undenied. But what the petitioner asserts
is that statutory classification of mail users must bear some reasonable relationship to the end sought to
be attained, and that absent such relationship the selection of mail users is constitutionally
impermissible. This is altogether a different proposition. As explained in Commonwealth v. Life
Assurance Co.:8

While the principle that there must be a reasonable relationship between classification made by the
legislation and its purpose is undoubtedly true in some contexts, it has no application to a measure
whose sole purpose is to raise revenue ... So long as the classification imposed is based upon some
standard capable of reasonable comprehension, be that standard based upon ability to produce revenue
or some other legitimate distinction, equal protection of the law has been afforded. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of
Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).

We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution forbids. The
remedy for unwise legislation must be sought in the legislature. Now, the classification of mail users is
not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege, and on
administrative convinience. In the allocation of the tax burden, Congress must have concluded that the
contribution to the anti-TB fund can be assured by those whose who can afford the use of the mails.

The classification is likewise based on considerations of administrative convenience. For it is now a

settled principle of law that "consideration of practical administrative convenience and cost in the
administration of tax laws afford adequate ground for imposing a tax on a well recognized and defined
class."9 In the case of the anti-TB stamps, undoubtedly, the single most important and influential
consideration that led the legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five centavos does not
justify the great expense and inconvenience of collecting through the regular means of collection. On the
other hand, by placing the duty of collection on postal authorities the tax was made almost self-
enforcing, with as little cost and as little inconvenience as possible.

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

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

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

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

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

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

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a
public purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates
the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means
benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit
to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of
living in an organized society, established and safeguarded by the devotion of taxes to public purposes.
Any other view would preclude the levying of taxes except as they are used to compensate for the
burden on those who pay them and would involve the abandonment of the most fundamental principle
of government that it exists primarily to provide for the common good.15

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than
a graduated tax. A tax need not be measured by the weight of the mail or the extent of the service
rendered. We have said that considerations of administrative convenience and cost afford an adequate
ground for classification. The same considerations may induce the legislature to impose a flat tax which
in effect is a charge for the transaction, operating equally on all persons within the class regardless of the
amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act which imposed a
flat rate of two cents on every $100 face value of stock transferred:

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

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

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

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

It is true that the law does not expressly authorize the collection of five centavos except through the sale
of anti-TB stamps, but such authority may be implied in so far as it may be necessary to prevent a failure
of the undertaking. The authority given to the Postmaster General to raise funds through the mails must
be liberally construed, consistent with the principle that where the end is required the appropriate
means are given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional
charge but also that of the regular postage. In the case of business reply cards, for instance, it is obvious
that to require mailers to affix the anti-TB stamp on their cards would be to make them pay much more
because the cards likewise bear the amount of the regular postage.

It is likewise true that the statute does not provide for the disposition of mails which do not bear the
anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in the mails unless it
bears such semi-postal stamp" is a declaration that such mail matter is nonmailable within the meaning
of section 1952 of the Administrative Code. Administrative Order 7 of the Postmaster General is but a
restatement of the law for the guidance of postal officials and employees. As for Administrative Order 9,
we have already said that in listing the offices and entities of the Government exempt from the payment
of the stamp, the respondent Postmaster General merely observed an established principle, namely, that
the Government is exempt from taxation.

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

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano, JJ., concur.

Zaldivar, J., is on leave.

Separate Opinions

FERNANDO, J., concurring:

I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635 as amended by
Republic Act No. 2631 and the majority opinion expounded with Justice Castro's usual vigor and lucidity
subject to one qualification. With all due recognition of its inherently persuasive character, it would
seem to me that the same result could be achieved if reliance be had on police power rather than the
attribute of taxation, as the constitutional basis for the challenged legislation.

1. For me, the state in question is an exercise of the regulatory power connected with the
performance of the public service. I refer of course to the government postal function, one of
respectable and ancient lineage. The United States Constitution of 1787 vests in the federal government
acting through Congress the power to establish post offices.1 The first act providing for the organization
of government departments in the Philippines, approved Sept. 6, 1901, provided for the Bureau of Post
Offices in the Department of Commerce and Police.2 Its creation is thus a manifestation of one of the
many services in which the government may engage for public convenience and public interest. Such
being the case, it seems that any legislation that in effect would require increase cost of postage is well
within the discretionary authority of the government.
It may not be acting in a proprietary capacity but in fixing the fees that it collects for the use of the mails,
the broad discretion that it enjoys is undeniable. In that sense, the principle announced in Esteban v.
Cabanatuan City,3 in an opinion by our Chief Justice, while not precisely controlling furnishes for me
more than ample support for the validity of the challenged legislation. Thus: "Certain exactions,
imposable under an authority other than police power, are not subject, however, to qualification as to
the amount chargeable, unless the Constitution or the pertinent laws provide otherwise. For instance,
the rates of taxes, whether national or municipal, need not be reasonable, in the absence of such
constitutional or statutory limitation. Similarly, when a municipal corporation fixes the fees for the use of
its properties, such as public markets, it does not wield the police power, or even the power of taxation.
Neither does it assert governmental authority. It exercises merely a proprietary function. And, like any
private owner, it is in the absence of the aforementioned limitation, which does not exist in the
Charter of Cabanatuan City (Republic Act No. 526) free to charge such sums as it may deem best,
regardless of the reasonableness of the amount fixed, for the prospective lessees are free to enter into
the corresponding contract of lease, if they are agreeable to the terms thereof or, otherwise, not enter
into such contract."

2. It would appear likewise that an expression of one's personal view both as to the attitude and
awareness that must be displayed by inferior tribunals when the "delicate and awesome" power of
passing on the validity of a statute would not be inappropriate. "The Constitution is the supreme law,
and statutes are written and enforced in submission to its commands."4 It is likewise common place in
constitutional law that a party adversely affected could, again to quote from Cardozo, "invoke, when
constitutional immunities are threatened, the judgment of the courts."5

Since the power of judicial review flows logically from the judicial function of ascertaining the facts and
applying the law and since obviously the Constitution is the highest law before which statutes must
bend, then inferior tribunals can, in the discharge of their judicial functions, nullify legislative acts. As a
matter of fact, in clear cases, such is not only their power but their duty. In the language of the present
Chief Justice: "In fact, whenever the conflicting claims of the parties to a litigation cannot properly be
settled without inquiring into the validity of an act of Congress or of either House thereof, the courts
have, not only jurisdiction to pass upon said issue but, also, the duty to do so, which cannot be evaded
without violating the fundamental law and paving the way to its eventual destruction."6

Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must ever be kept in
mind. Thus: "It must be evident to any one that the power to declare a legislative enactment void is one
which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in any
case where he can conscientiously and with due regard to duty and official oath decline the
responsibility."7

There must be a caveat however to the above Cooley pronouncement. Such should not be the case, to
paraphrase Freund, when the challenged legislation imperils freedom of the mind and of the person, for
given such an undesirable situation, "it is freedom that commands a momentum of respect." Here then,
fidelity to the great ideal of liberty enshrined in the Constitution may require the judiciary to take an
uncompromising and militant stand. As phrased by us in a recent decision, "if the liberty involved were
freedom of the mind or the person, the standard of its validity of governmental acts is much more
rigorous and exacting."8

So much for the appropriate judicial attitude. Now on the question of awareness of the controlling
constitutional doctrines.

There is nothing I can add to the enlightening discussion of the equal protection aspect as found in the
majority opinion. It may not be amiss to recall to mind, however, the language of Justice Laurel in the
leading case of People v. Vera,9 to the effect that the basic individual right of equal protection "is a
restraint on all the three grand departments of our government and on the subordinate
instrumentalities and subdivisions thereof, and on many constitutional powers, like the police power,
taxation and eminent domain."10 Nonetheless, no jurist was more careful in avoiding the dire
consequences to what the legislative body might have deemed necessary to promote the ends of public
welfare if the equal protection guaranty were made to constitute an insurmountable obstacle.

A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite evident from the
various citations from his pen found in the majority opinion. For him, it would be a misreading of the
equal protection clause to ignore actual conditions and settled practices. Not for him the at times
academic and sterile approach to constitutional problems of this sort. Thus: "It would be a narrow
conception of jurisprudence to confine the notion of 'laws' to what is found written on the statute books,
and to disregard the gloss which life has written upon it. Settled state practice cannot supplant
constitutional guaranties, but it can establish what is state law. The Equal Protection Clause did not write
an empty formalism into the Constitution. Deeply embedded traditional ways of carrying out state policy,
such as those of which petitioner complains, are often tougher and truer law than the dead words of the
written text."11 This too, from the same distinguished jurist: "The Constitution does not require things
which are different in fact or opinion to be treated in law as though they were the same."12

Now, as to non-delegation. It is to be admitted that the problem of non-delegation of legislative power at

times occasions difficulties. Its strict view has been announced by Justice Laurel in the aforecited case of
People v. Vera in this language. Thus: "In testing whether a statute constitutes an undue delegation of
legislative power or not, it is usual to inquire whether the statute was complete in all its terms and
provisions when it left the hands of the legislature so that nothing was left to the judgment of any other
appointee or delegate of the legislature. .... In United States v. Ang Tang Ho ..., this court adhered to the
foregoing rule; it held an act of the legislature void in so far as it undertook to authorize the Governor-
General, in his discretion, to issue a proclamation fixing the price of rice and to make the sale of it in
violation of the proclamation a crime."13

Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor General,14
specially where the delegation deals not with an administrative function but one essentially and
eminently legislative in character. What could properly be stigmatized though to quote Justice Cardozo, is
delegation of authority that is "unconfined and vagrant, one not canalized within banks which keep it
from overflowing."15
This is not the situation as it presents itself to us. What was delegated was power not legislative in
character. Justice Laurel himself, in a later case, People v. Rosenthal,16 admitted that within certain
limits, there being a need for coping with the more intricate problems of society, the principle of
"subordinate legislation" has been accepted, not only in the United States and England, but in practically
all modern governments. This view was reiterated by him in a 1940 decision, Pangasinan Transportation
Co., Inc. v. Public Service Commission.17 Thus: "Accordingly, with the growing complexity of modern life,
the multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the delegation of greater powers
by the legislature, and toward the approval of the practice by the courts."

In the light of the above views of eminent jurists, authoritative in character, of both the equal protection
clause and the non-delegation principle, it is apparent how far the lower court departed from the path of
constitutional orthodoxy in nullifying Republic Act No. 1635 as amended. Fortunately, the matter has
been set right with the reversal of its decision, the opinion of the Court, manifesting its fealty to
constitutional law precepts, which have been reiterated time and time again and for the soundest of
reasons.

Footnotes

CASTRO, J.:

1 Approved on June 30, 1957.

2 Approved on June 18, 1960.

3 See 3 M. Moran, Comments on the Rules of Court, 138 (6th ed., 1963).

4 Carmichael v. Southern Coal & Coke Co., 301 U.S. 496 (1937) ; Lutz v. Araneta, 98 Phil. 148 (1955).

5 Louisville Gas & E. Co. v. Coleman, 277 U.S. 32 (1928).

6 Madden v. Kentucky, 309 U.S. 83 (1940); Citizens' Telephone Co. v. Fuller, 229 U.S. 322 (1913).

7 Madden v. Kentucky, supra, note 6.

8 419 Pa. 370, 214 A. 2d 209, 214-15 (1965), appeal dismissed, Life Assur. Co. v. Pennsylvania, 348 U.S.
(1966).

9 Fernandez v. Wiener, 327 U.S. 340, 360 (1945); accord, Carmichael v. Southern Coal & Coke Co., supra,
note 4; Weber v. City of New York, 195 N.Y.S. 2d 269 (1959).

10 Morey v. Doud, 354 U.S. 457, 472 (1957) (dissent).

11 Carmichael v. Southern Coal & Coke Co., supra, note 4, at 512.

12 Cf. Town of Indian Lake v. State Brd. of E. & A., 45 Misc. 2d 463, 257 N.Y.S. 2d 301 (1905).

13 Railway Express Agency v. New York, 336 U.S. 106 (1949).

14 Lutz v. Araneta, 98 Phil. 148, 153 (1955) ; accord, McLauhlin v. Florida, 379 U.S. 184 (1964).

15 Carmichael v. Southern Coal & Coke Co., supra, note 4 at 522-523.

16 See Weber v. City of New York, supra, note 9; North Am. Co. v. Green, 120 So. 2d 603 (1960).

17 New York ex rel. Hatch v. Reardon, 204 U.S. 152, 159-160 (1907).

18 Const. art. VI, sec. 23 (l).

19 See Lo Cham Ocampo, 77 Phil. 635 (1946); Rev. Adm. Code, sec. 551.

FERNANDO, J., concurring:

1 Section 8, par. 7, Article 1.

2 Section 2, Act No. 222.

3 L-13662, May 30, 1960.

4 Cardozo, J., Municipal Gas Co. v. Public Service Commission, 121 NE 772, 774 (1919).

5 Ibid, p. 774.

6 Taada v. Cuenco, 103 Phil. 1051, 1061-1062 (1957).

7 Cooley on Constitutional Limitations, Vol. 1, 8th ed., 332 (1927).

8 Ermita-Malate Hotel Assn. v. Mayor of Manila, L-24693, July 31, 1967.

9 65 Phil. 56 (1937).

10 Ibid, 125.

11 Nashville, C. & St. L. Railmay v. Browning, 84 L ed. 1254, 1258 (1940).

12 Tigner v. Texas, 84 L. ed. 1124, 1128 (1940).

13 65 Phil. 56, 115 (1937).

14 L-23825, December 24, 1965.

15 Cardozo, J., concurring, Schenchter Poultry Corp. v. U.S., 295 U.S. 495 (1935).

16 Citation omitted.

17 Citation omitted.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-1104 May 31, 1949

EASTERN THEATRICAL CO., INC., ET AL., plaintiffs-appellants,

vs.

VICTOR, ALFONSO as City Treasurer of Manila, THE MUNICIPAL BOARD OF THE CITY OF MANILA, and
JUAN NOLASCO, as Mayor of the City of Manila, defendants-appellees.

Francisco Zulueta and Poblador Jr. for appellants.

City Fiscal Jose P. Bengzon and Assistant City Fiscal Julio Villamor for appellees.

Assistant Solicitor General Carmelino G. Alvendia, Solicitor Guillermo E.Torres and Manuel D. Baldeo as
amicus curiae.

PERFECTO, J.:
Twelve corporation engaged in motion picture business have initiated these proceeding through a
complaint dated May 5, 1946, to impugn the validity of Ordinance No. 2958 of the City of Manila which
was enacted by the municipalBoard of said city on April 25 1946 approved by the Mayor on April 27,
1946 and took effect on May 1, 1946 said ordinance reading as follows:

AN ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET SOLD BY

CINEMATOGRAPHS, THEATERS VAUDEVILLE COMPANIES THEATRICAL SHOWS AND BOXING EXHIBITION
AND PROVIDING FOR OTHER PURPOSES.

SEC. 1. In addition to the fees paid by cinematographers, theaters, vaudeville companies, theatrical
shows and boxing exhibitions, as provided for in sections 633 and 778 of Ordinance No. 1600, known as
the Revised Ordinance of the City of Manila, as amended, there shall be collected from the place of
amusement which are specifically mentioned above the following fees on the price of every admission
ticket sold by such enterprises:

a. For every ticket sold the price of which is from P0.25 to P0.99

P0.05

b. For every ticket sold the price of which is from P1 to P1.99

0.10

c. For every ticket sold the price of which is from P2 to P2.99

0.15

d. for every ticket sold the price of which is from P3 to P4.99

0.20
e. or every ticket sold the price of which is from P5 to P5.99

0.25

f. For every ticket sold the price of which is from P0 to P14.99

0.35

g. For ticket sold thee price of which is from P15 or more

0.50

SEC. 2 It shall be the duty of every proprietor lessee, promoter, or operatorof such cinematographs,
theater, vaudeville companies, theatrical show and boxing exhibition to provide himself with tickets
which shall be serially numbered, indication therein the name of amusement place and the fee charge
for admission. Before such ticket are sold he same shall be presented to the office of the city Treasurer
for registration. Tickets once issued and presented at the gate of entrance shall be cut by the gatekeeper
into halves, the first half to be returned to the customer and the other half to be retained by the gate
keeper.

It shall also be the duty of said proprietor lessee promoter or operator to deliver to the Office of the City
Treasurer the fees corresponding to the number of ticket old by him within two days after the
performances or exhibition has taken place.

SEC. 3. The fees herein prescribed shall not be paid where the admission fees or charge are collection for
and in behalf of any charitable education or religion institution or association.

All place of amusement which are operate by U.S. Army and Navy with fund belonging to the U.S.
Government are hereby exempted from fees herein imposed.

SEC. 4. Any person violation any of the provision of this ordinance shall upon conviction thereof be
punished by a fine of not more than P200 or by imprisonment for not more than six months or by both
such fine and imprisonment in the discretion of the court. If the violation is committed by the club firm
or corporation the manager the managing director or person charged with the management of the
business of such club firm or corporation shall be criminally responsible therefor.
SEC. 5. This Ordinance shall take effect on the May 1, 1946.

Plaintiffs, operator of theaters in Manila And distributor of local or imported films allege that they are
interested in the provision of section 1,2 and 4 of said ordinance which they impugn as null and void
upon the following grounds: (a) For violation the Constitution more particular the provision regarding
the uniformity and equality of taxation and thee equal protection of the laws; (b) because the Municipal
Board of Manila exceeded and over-stepped the power granted it the Charter of the City of Manila; (c)
because it contravenes violates and is inconsistent with, existing nationallegislation more particularly
revenue and tax laws and (d) because it is unfair, unjust, arbitrary capricious unreasonable oppressive
and is contrary to and violation our basic and recognizes principles of taxation and licensing laws.

Defendants allege as affirmative defenses the following: (a) That the ordinance was passed by the
Municipal Board of Manila by virtue of its express legislative power to tax fix the license fee and regulate
the business of theaters, cinematographs and further to fix the location of and to tax, fix the license fee
for and regulate the business of theatrical performances public exhibition circus and other performances
and places of amusement; (b) that the graduated tax required by said ordinance being applied to all
cinematographs, theaters, vaudeville companies theatricalshow and boxing exhibitions similarly situated
and as a class without distinction or exception the same does not violate the prohibition against
uniformity and equality of taxation; (c) that the graduated tax onadmission tickets to theaters and other
places of amusement imposed by the National Internal Revenue Code (Commonwealth Act No. 466) is
collected by and for the purposes of the National Government, whereas, Ordinance No.2958 imposes
and requires the collection of a similar tax by and for the purposes of the Government of the City of
Manila, and there is no case of double taxation, (d) that said ordinance having been enacted under the
express power of the Municipal Board to tax for revenue as distinguishedfrom its power to license for
purely police purposes, the fact that the amount collected thereunder are higher than what are needed
for police regulation and supervision does not render said ordinance unfair unjust capricious
unreasonable and oppressive; (e) that consideration the nature of the business of the plaintiffs and the
enormous volume of business they handle the graduated tax fixed by the ordinance is not unreasonable.

Defendants allege also that since May 1, 1946, when the ordinance in question took effect plaintiffs have
been charging the theater-going public increased prices for admission to the cinematographs owned and
operated to the graduated tax imposed by said ordinance and as a result while refusing to pay said tax
but at the same time collecting an amount equal to said tax plaintiffs have taken undue advantage of
said ordinance to realized more profits.

On September 5, 1946, Judge Emilio Pena of the court of first Instance of Manila rendered a decision
upholding the validity of Ordinance No. 2958.

Plaintiffs appellants assign in the their brief three errors committed by the trial court. We will consider
them separately.

Appellants contend that the lower court erred in holding that under section 2444 (m) of the Revised
administrative Code the Municipal Board of the City ofManila had the power to enact Ordinance No.
2958.
Section 2444 (m) of the Revised Administrative code reads as follows:

To tax fix the license fee and regulate the business of hotels restaurants refreshment places, cafes,
lodging houses, boarding houses livery garages warehouses, pawnshops theaters, cinematographs; and
further to fix the location of and to tax fix the license fee for and regulate the businessof lively stables,
the license fee for and regulate the business of livery stable, boarding stables, embalmers, public billiard
table public pool tables, bowling alleys, dance halls, public dancing halls, cabarets, circusand other
similar parades, public vehicles, race tracks, horse races,Junk dealers, theatrical performances, public
exhibitions, circus andother performances and places of amusements, match factories, blacksmith
shops, foundries, steam boilers, lumber yards, shipyards, thestorage and sale of gunpowder, tar, pitch,
resin, coal, oil, gasoline,benzene, turpentine, 'hemp, cotton, nitroglycerin, petroleum or any Ofthe
products thereof and of all other highly combustible or explosivematerials and other establishment likely
to endanger the public safety or give rise to conflagration or explosion and subject to the provision of
ordinance issue by the (Philippines Health Service) Bureau of Health in accordance with law tanneries,
renders tallow chandlers bone factories and soap factories.

Appellants line of argument runs as follows:

By virtue of the specific power granted in the above quoted provision of the Revised Administration
Code Ordinance No. 2958 was enacted.

On August 7, 1940 the National Assembly enacted Commonwealth Act No. 466, known as the National
Internal Revenue Code section 18, 260 and 261 of which read as follows:

SEC. 18. Sources of revenue. The following taxes fees and charges are deemed to be national internal
revenue taxes:

(a) Income tax;

(b) Estate inheritance and gift taxes;

(c) Specific taxes on certain articles;

(d) Privilege taxes on business or occupation;

(e) Documentary stamp taxes;

(f) Mining taxes;

(g) Miscellaneous taxes fees and charges, namely, taxes on banks and insurance companies franchise
taxes on amusements charges on forest product fees for sealing weights and measures firearms license
fees radio registration fees and water rentals.

SEC. 260. Amusement taxes. There shall be collected from the proprietor, lessee, or operation of
theater cinematographs, concert halls, circuses, boxing exhibition and other places of amusement the
following taxes:
(a) When the amount paid for admission exceeds twenty-nine centavos, two centavos on each
admission;

(b) When the amount paid for admission exceeds twenty-nine but does not exceed thirty-nine centavos,
three centavos on each admission;

(c) When the amount paid for admission exceeds thirty-nine centavos but does not exceed forty-nine
centavos four centavos on each admission.

(d) When the amount paid for admission exceeds forty-nine centavos but does not exceed fifty-nine
centavos five admission.

(e) When the amount paid for admission exceeds fifty-nine centavos but does not exceed sixty-nine
centavos six centavos on each admission.

(f) When the amount paid for admission exceeds sixty-nine centavos but does not exceed seventy nine
centavos seven centavos on each admission.

(g) When the amount paid for admission exceeds seventy nine centavos but does not exceed eighty-nine
centavos eight centavos on each admission;

(h) When the amount paid for admission exceeds eighty-nine centavos but does not exceed ninty-nine
centavos, nine centavos on each admission;

(i) When the amount paid for admission exceeds ninety-nine centavos, ten centavos on each admission.

In the case of theaters or cinematographs, the taxes herein prescribed shall first be decuted and
withheld by the proprietros, lessees, or operators of such theaters or cinematogrphs and paid to the
Collector of Internal Revenue before the gross receipts are divided between the proprietros, lessees, or
operators of the theaters of cinematographs and the distributors of the cinematographic films.

In the case of cockpits, race tracks, and cabarets, there shall be collected from the proprietor, lessee, or
operator a tax equivalent to ten per centum of the gross receipts, irrespective of whether or not any
amount is charged or paid for admission: Provided, however, That in the case of race tracks, this tax is in
addition to the privilege tax prescribed in seciton 193. for the purpose of the amusement tax, the term
"gross receipts" embraces all the receipts of the proprietor, lessee, or operator of the amusement place,
excluding the receipts derived by him from the sale of liquors, beverages, or other articles subject to
specific tax, or from any business subject to tax under this Code. (This section was amended by section 8,
Republic Act No. 39, effective October 1, 1946. We are quoting the original provision to show the status
of the law when the Ordinance was passed.)

SEC. 261. Exemption. The tax herein imposed shall not be paid where the admission fee or charges are
collected by or for and in behalf of any religious, charitable, scientific, or educational institution or
association, and where no part of the net proceeds of such admission fees or charges inures to the
benefit of any private stockholder or individual.
Ordinance No. 2958 does not specify the kind of the tax sought to be imposed but the seven schedules
and other details of said ordinance are, in every respect, identical with the amusement tax provided by
section 260 of Commonwealth Act No. 466.

But, plaintiffs argue, that section 2444(m) of the Revised Administrative Code confers upon the City of
Manila the power to impose a tax on business but not on amusement and, consequently, Ordinance No.
2958 was enacted beyond the charter powers of the City of Manila.

The whole argument of plaintiffs hinges, therefore, on the assumption that the power granted to the City
of Manila by section 2444(m) of the Revised Administrative Code is limited to the authority to impose a
tax on business, with exclusion of the power to impose a tax amusement; but, the assumption is based
on an arbitrary labeling of the kind of tax authorized by said section 2444(m). The distinction made by
plaintiffs as to the power to tax on business and the power to tax on amusement has no ground under
the provisions of section 2444(m) of the Revised Administrative Code. The tax therein authorized cannot
be defined as tax on business and cannot be restricted within a smaller scope than what is authorized by
the words used, to the extent of excluding what plaintiffs describe as tax on amusement.

The very fact that section 2444 (m) of the Revised Administrative Code includes theaters,
cinematographs, public billiard tables, public pool tables, bowling alleys, dance halls, public dancing
halls, cabarets, circuses and other similar places, race tracks, horse races, theatrical performances, public
exhibition, circus and other performances and places of amusements, will show conclusively that the
power to tax amusement is expressly included within the power granted by section 2444(m) of the
Revised Administrative Code.

Plaintiffs-appellants contend that the lower court erred in not holding that section 2444 (m) of the
Revised Administrative Code was repealed or the power therein contained was withdrawn by the
National Assembly by the enactment of Commonwealth Act No. 466 known as the National Internal
Revenue Code.

In support of this contention, plaintiffs aver that the Charter of the City of Manila, containing section
2444(m) of the Revised Administrative Code, was enacted on December 8, 1929. On April 25, 1940, the
National Assembly enacted Commonwealth Act No. 466, including provisions on amusement tax,
covering the whole field on taxation and provided for more than what the ordinance in question has
provided. As a result, there are two taxing powers seeking to occupy exactly the same field of legislation,
and so the apparent conflict must be resolved with the conclusion that, with the enactment of
Commonwealth Act No. 466, as later amended by Republic Act No. 39, section 2444(m) of the Revised
Administrative Code has been impliedly repealed and the power therein delegated to the City of Manila
withdrawn.

We see absolutely no force in plaintiffs' contention. The conflict pointed out by them is imaginary. Both
provisions of law may stand together and be enforced at the same time without any incompatibility
among themselves.
Finally, plaintiffs contend that the trial court erred in not holding that Ordinance No. 2958 violated the
principle of equality and uniformity of taxation enjoined by the Constitution (sec. 22, sub-sec. 1, Art. VI,
Constitution of the philippines).

To support this contenttion, appellantts point out to the fact that the ordinance in question does not tax
"many more kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets,
concert halls, circuses, and other places of amusement." the argument has absolutely no merit. The fact
that some places of amusement are not taxed while others, such as cinematographs, theaters, vaudeville
companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places of
amusement are taxed, is no argument at all against the equality and uniformity of the tax imposition.
Equality and uniformity of the tax imposition. Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purposes of taxation; and the appellants
cannot point out what places of amusement taxed by the ordinance do not constitute a class by
themselves and which can be confused with those not included in the ordinance.

The judgment of the trial court is affirmed with costs against appellants.

Paras, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.

Perfecto, J., We certify that the Chief Justice voted to affirm the appealed judgment.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-2947 January 11, 1951

MANILA RACE HORSE TRAINERS ASSOCIATION, INC., and JUAN T. SORDAN, plaintiffs-appellants,

vs.

MANUEL DE LA FUENTE, defendant-appellee.

Soriano, Garde and Cervania for appellants.

City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellee.

TUASON, J.:

This action was instituted for a declaratory relief by the Manila Race Horses Trainers Association, Inc., a
non-stock corporation duly organized and existing under and by virtue of the laws of the Philippines,
who allege that they are owners of boarding stables for race horses and that their rights as such are
affected by Ordinance No. 3065 of the City of Manila approved on July 1, 1947.1 They made the Mayor
of Manila defendant and prayed that said ordinance be declared invalid as violative of the Philippine
Constitution.

The case was submitted on the pleadings, and the decision was that the ordinance in question "is
constitutional and valid and has been enacted in accordance with the powers of the Municipal Board
granted by the Charter of the City of Manila."

On appeal, the plaintiffs as appellants make three assignments of error, the first two of which are
discussed jointly in their brief under two separate topics.

First, it is maintained that the ordinance under consideration is a tax on race horses as distinct from
boarding stables. It is argued that by section 2 the basis of the license fees "is the number of race horses
kept or maintained in the boarding stables to be paid by the maintainers at the rate of P10.00 a year for
each race horse;" that "the fee is increased correspondingly P10 for each additional race horse
maintained or fed in the stable;" and that "by the same token, an empty stable for race horse pays no
license fee at all."

The spirit, rather than the letter, of an ordinance determines the construction thereof, and the court
looks less to its words and more to the context, subject matter, consequence and effect. Accordingly,
what is within the spirit is within the ordinance although it is not within the letter thereof, while that
which is in the letter, although not within the spirit, is not within the ordinance. (62 C. J. S., 845.) From
the context of Ordinance No. 3065, the intent to tax or license stables and not horses is clearly manifest.
The tax is assessed not on the owners of the horses but on the owners of the stables, as counsel admit in
their brief, although there is nothing, of course, to stop stable owners from shifting the tax to the horse
owners in the form of increased rents or fees, which is generally the case.

It is also plain from the text of the whole ordinance that the number of horses is used in the assessment
purely as a method of fixing an equitable and practical distribution of the burden imposed by the
measure. Far from being obnoxious, the method is fair and just. It is but fair and just that for a boarding
stable where only one horse is maintained proportionately less amount should be exacted than for a
stable where more horses are kept and from which greater income is derived.

We do not share plaintiff's opinion, apropos the second proposition, that the ordinance in question is
discriminatory and savors of class legislation. In taxing only boarding stables for race horses, we do not
believe that the ordinance, makes arbitrary classification. In the case of Eastern Theatrical Co. Inc., vs.
Alfonso, 46 Off. Gaz. Supp. to No. 11, p. 303,* it was said there is equality and uniformity in taxation if all
articles or kinds of property of the same class are taxed at the same rate. Thus, it was held in that case,
that "the fact that some places of amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of amusements
or places of amusement are taxed, is not argument at all against the equality and uniformity of tax
imposition." Applying this criterion to the present case, there would be discrimination if some boarding
stables of the same class used for the same number of horses were not taxed or were made to pay less
or more than others.

From the viewpoint of economics and public policy the taxing of boarding stables for race horses to the
exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The owners of
boarding stables for race horses and, for that matter, the race horse owners themselves, who in the
scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed
where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is
generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by
the public from the business or property taxed. Race horses are devoted to gambling if legalized, their
owners derive fat income and the public hardly any profit from horse racing, and this business demands
relatively heavy police supervision. Taking everything into account, the differentiation against which the
plaintiffs complain conforms to the practical dictates of justice and equity and is not discrimatory within
the meaning of the Constitution.

One ground of attack in the court below on the constitutionality of the ordinance variance between
the title and the subject matter apparently has been abandoned. In its place a new question is
brought up on the appeal in the third and last assignment of error. It is now contended, for the first time,
that "the Municipal Board of Manila (is) without power to enact ordinance taxing private stables for race
horses," and that the lower court erred in not so declaring. This assignment of error has reference to
Class B or the second sub-paragraph of section 1 of the ordinance.

Not having been raised in the pleading, this question was properly ignored, not to say that even it had
been raised it would not have been available as basis for a declaration of nullity of the ordinance. The
clause of the ordinance taxing or licensing boarding stables for race horses does not prejudice the
plaintiffs in any material way, and it is well settled that a person who is not adversely affected by a
licensing ordinance may not attack its validity. Stated differently, he may not complain that a licensing
ordinance is invalid as against a class other than that to which he belongs. (62 C. J. S.830, 831.) By
analogy, where a municipal ordinance is valid in some of its parts and invalid as to others and the valid
parts are separable from the invalid ones in which latter case the valid provisions stand as operative
the plaintiff may contest the validity of the provisions that injure his interest but not those that do
not.

We are of the opinion that the trial court committed no error and the judgment is affirmed with costs
against the plaintiff-appellants.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo and Bautista Angelo, JJ.,
concur.

Footnotes

1AN ORDINANCE PROVIDING FOR LICENSE FEES ON PERSONS MAINTAINING OR CONDUCTING ANY
BOARDING STABLE FOR HORSE RACES AND/OR HORSE STABLES, OR PLACES WHERE HORSE ARE KEPT,
FED, OR BOARDED FOR OTHERS, FOR COMPENSATION OR HIRE, AND/OR FOR PRIVATE, AND FOR OTHER
PURPOSES.

Be it ordained by the Municipal Board of the City of Manila, that:

SECTION 1. License. No person shall own, keep, maintain, or conduct any boarding stable, or place
where race horse are kept, fed, or boarded for others, for compensation or hire, and/or for race horse
stable privately owned not for hire, without first having obtained a permit from the Mayor and license
therefor from the City Treasurer.

SEC. 2. Fees. For every license granted under the provisions of this ordinance, there shall be paid an
annual license fee, which may be paid either annually, semestrally or quarterly at the option of the
taxpayer, to wit:

Boarding stable for race horses:

Class A For each race horse, kept, maintained, fed or boarded in boarding
stables........................................................

P10.00
Class B For each race horse, kept, maintained, or fed in private race horse
stables........................................................

P5.00

SEC. 3. Contents of application. Every application for the license in this ordinance required, shall be
accompanied by a sworn statement of the greatest number of animals to be kept by the applicant, which
statement shall be the basis for computing the amount of fees to be paid for such license.

SEC. 4. Effectivity. This ordinance shall take effect upon its approval.

* 83 Phil., 852.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-4817 May 26, 1954

SILVESTER M. PUNSALAN, ET AL., plaintiffs-appellants,

vs.

THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET AL., defendants-appellants.

Calanog and Alafriz for plaintiffs-appellants.

City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S. Serreno for defendants-appellants.

REYES, J.:

This suit was commenced in the Court of First Instance of Manila by two lawyers, a medical practitioner,
a public accountant, a dental surgeon and a pharmacist, purportedly "in their own behalf and in behalf
of other professionals practising in the City of Manila who may desire to join it." Object of the suit is the
annulment of Ordinance No. 3398 of the City of Manila together with the provision of the Manila charter
authorizing it and the refund of taxes collected under the ordinance but paid under protest.

The ordinance in question, which was approved by the municipal board of the City of Manila on July 25,
1950, imposes a municipal occupation tax on persons exercising various professions in the city and
penalizes non-payment of the tax "by a fine of not more than two hundred pesos or by imprisonment of
not more than six months, or by both such fine and imprisonment in the discretion of the court." Among
the professions taxed were those to which plaintiffs belong. The ordinance was enacted pursuant to
paragraph (1) of section 18 of the Revised Charter of the City of Manila (as amended by Republic Act No.
409), which empowers the Municipal Board of said city to impose a municipal occupation tax, not to
exceed P50 per annum, on persons engaged in the various professions above referred to.

Having already paid their occupation tax under section 201 of the National Internal Revenue Code,
plaintiffs, upon being required to pay the additional tax prescribed in the ordinance, paid the same
under protest and then brought the present suit for the purpose already stated. The lower court upheld
the validity of the provision of law authorizing the enactment of the ordinance but declared the
ordinance itself illegal and void on the ground that the penalty there in provided for non-payment of the
tax was not legally authorized. From this decision both parties appealed to this Court, and the only
question they have presented for our determination is whether this ruling is correct or not, for though
the decision is silent on the refund of taxes paid plaintiffs make no assignment of error on this point.

To begin with defendants' appeal, we find that the lower court was in error in saying that the imposition
of the penalty provided for in the ordinance was without the authority of law. The last paragraph (kk) of
the very section that authorizes the enactment of this tax ordinance (section 18 of the Manila Charter) in
express terms also empowers the Municipal Board "to fix penalties for the violation of ordinances which
shall not exceed to(sic) two hundred pesos fine or six months" imprisonment, or both such fine and
imprisonment, for a single offense." Hence, the pronouncement below that the ordinance in question is
illegal and void because it imposes a penalty not authorized by law is clearly without basis.

As to plaintiffs' appeal, the contention in substance is that this ordinance and the law authorizing it
constitute class legislation, are unjust and oppressive, and authorize what amounts to double taxation.

In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not that the
professions to which they respectively belong have been singled out for the imposition of this municipal
occupation tax; and in any event, the Legislature may, in its discretion, select what occupations shall be
taxed, and in the exercise of that discretion it may tax all, or it may select for taxation certain classes and
leave the others untaxed. (Cooley on Taxation, Vol. 4, 4th ed., pp. 3393-3395.) Plaintiffs' complaint is that
while the law has authorized the City of Manila to impose the said tax, it has withheld that authority
from other chartered cities, not to mention municipalities. We do not think it is for the courts to judge
what particular cities or municipalities should be empowered to impose occupation taxes in addition to
those imposed by the National Government. That matter is peculiarly within the domain of the political
departments and the courts would do well not to encroach upon it. Moreover, as the seat of the
National Government and with a population and volume of trade many times that of any other
Philippine city or municipality, Manila, no doubt, offers a more lucrative field for the practice of the
professions, so that it is but fair that the professionals in Manila be made to pay a higher occupation tax
than their brethren in the provinces.

Plaintiffs brand the ordinance unjust and oppressive because they say that it creates discrimination
within a class in that while professionals with offices in Manila have to pay the tax, outsiders who have
no offices in the city but practice their profession therein are not subject to the tax. Plaintiffs make a
distinction that is not found in the ordinance. The ordinance imposes the tax upon every person
"exercising" or "pursuing" in the City of Manila naturally any one of the occupations named, but
does not say that such person must have his office in Manila. What constitutes exercise or pursuit of a
profession in the city is a matter of judicial determination. The argument against double taxation may
not be invoked where one tax is imposed by the state and the other is imposed by the city (1 Cooley on
Taxation, 4th ed., p. 492), it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity
by both the state and the political subdivisions thereof. (51 Am. Jur., 341.)

In view of the foregoing, the judgment appealed from is reversed in so far as it declares Ordinance No.
3398 of the City of Manila illegal and void and affirmed in so far as it holds the validity of the provision of
the Manila charter authorizing it. With costs against plaintiffs-appellants.

Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.

Separate Opinions
PARAS, C.J., dissenting:

I am constrained to dissent from the decision of the majority upon the ground that the Municipal Board
of Manila cannot outlaw what Congress of the Philippines has already authorized. The plaintiffs-
appellants two lawyers, a physician, an accountant, a dentist and a pharmacist had already paid the
occupation tax under section 201 of the National Internal Revenue Code and are thereby duly licensed to
practice their respective professions throughout the Philippines; and yet they had been required to pay
another occupation tax under Ordinance No. 3398 for practising in the City of Manila. This is a glaring
example of contradiction the license granted by the National Government is in effect withdrawn by
the City in case of non-payment of the tax under the ordinance. I fit be argued that the national
occupation tax is collected to allow the professional residing in Manila to pursue his calling in other
places in the Philippines, it should then be exacted only from professionals practising simultaneously in
and outside of Manila. At any rate, we are confronted with the following situation: Whereas the
professionals elsewhere pay only one occupation tax, in the City of Manila they have to pay two,
although all are on equal footing insofar as opportunities for earning money out of their pursuits are
concerned. The statement that practice in Manila is more lucrative than in the provinces, may be true
perhaps with reference only to a limited few, but certainly not to the general mass of practitioners in any
field. Again, provincial residents who have occasional or isolated practice in Manila may have to pay the
city tax. This obvious discrimination or lack of uniformity cannot be brushed aside or justified by any trite
pronouncement that double taxation is legitimate or that legislation may validly affect certain classes.

My position is that a professional who has paid the occupation tax under the National Internal Revenue
Code should be allowed to practice in Manila even without paying the similar tax imposed by Ordinance
No. 3398. The City cannot give what said professional already has. I would not say that this Ordinance,
enacted by the Municipal Board pursuant to paragraph 1 of section 18 of the Revised Charter of Manila,
as amended by Republic Act No. 409, empowering the Board to impose a municipal occupation tax not
to exceed P50 per annum, is invalid; but that only one tax, either under the Internal Revenue Code or
under Ordinance No. 3398, should be imposed upon a practitioner in Manila.

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