COMMISSIONER OF INTERNAL G.R. No.

159647
REVENUE,
Petitioner, Present:
CENTRAL LUZON DRUG Promulgated:
CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely
a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used
by a private establishment only after the tax has been computed; a tax deduction, before the tax is
computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the
revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative
regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the
August 29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-
GR SP No. 67439. The assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from

is AFFIRMED in toto. No costs.[4]

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

Respondent is a domestic corporation primarily engaged in retailing of medicines and other

pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style
Mercury Drug.

From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified
senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its
Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20%
sales discount granted by respondent to qualified senior citizens totaled P904,769.00.

On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein
that it incurred net losses from its operations.

On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount
of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior
citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.

On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for lack of
merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and
collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the
tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the government of the tax sought to be
recovered. x x x.
xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of
tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is not available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, [6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in
favor of respondent citing the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No.
60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal Revenue promulgated on
May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or
credited by petitioner was not erroneously paid or illegally collected. We take exception to the CTAs
sweeping but unfounded statement that both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the government. Tax refunds or credits do not exclusively
pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a
refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected
or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated
corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that
of excise tax paid on goods locally produced or manufactured but actually exported. The standards and
mechanics for the grant of a refund or credit under these situations are different from that under Sec.
229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to
illegally collected or erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a
tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of private property for public
use.
Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondent may claim the 20% sales
discount as a tax credit instead of as a deduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may
still claim the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount on
their purchase of medicine from any private establishment in the country.[11] The latter may then claim
the cost of the discount as a tax credit.[12] But can such credit be claimed, even though an establishment
operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an amount
that is subtracted directly from ones total tax liability.[14] It is an allowance against the tax itself [15] or a
deduction from what is owed[16] by a taxpayer to the government. Examples of tax credits are withheld
taxes, payments of estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined
as a subtraction from income for tax purposes,[18] or an amount that is allowed by law to reduce income
prior to [the] application of the tax rate to compute the amount of tax which is due.[19] An example of a tax
deduction is any of the allowable deductions enumerated in Section 34[20] of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including --
whenever applicable -- the income tax that is determined after applying the corresponding tax rates
to taxable income.[21] A tax deduction, on the other, reduces the income that is subject to tax[22] in order
to arrive at taxable income.[23] To think of the former as the latter is to avoid, if not entirely confuse, the
issue. A tax credit is used only after the tax has been computed; a tax deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
liability before the tax credit can be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation
to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law
is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use
is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there
will obviously be no tax liability against which any tax creditcan be applied.[24] For the establishment to
choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit
to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax
liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an
administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, the tax
creditmay still be deducted from a future, not a present, tax liability, without which it does not have any
use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On
the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment
is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though
no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision
for donors taxes -- again when paid to a foreign country -- in computing for the donors tax due. The tax
credits in both instances allude to the prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or
not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not
directly attributable to either activity. This input tax may either be the VAT on the purchase or importation
of goods or services that is merely due from -- not necessarily paid by -- such VAT-registered person in
the course of trade or business; or the transitional input tax determined in accordance with Section
111(A). The latter type may in fact be an amount equivalent to only eight percent of the value of a VAT-
registered persons beginning inventory of goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said items.[25]Clearly from this provision, the tax
credit refers to an input tax that is either due only or given a value by mere comparison with the VAT
actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the
purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel
and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price of public work
contracts entered into with the government, again, no prior tax payments are needed for the use of the tax
credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under
Section 112(A), apply for the issuance of a tax creditcertificate for the amount of creditable input taxes
merely due -- again not necessarily paid to -- the government and attributable to such sales, to the extent
that the input taxes have not been applied against output taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount
of creditable input taxes due that are not directly and entirely attributable to any one of these transactions
shall be proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax
credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior
payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed,
even though no prior tax payments are not required. Specifically, in this provision, the imposition of a final
withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from
a domestic corporation is subjected to the condition that a foreign tax credit will be given by the domiciliary
country in an amount equivalent to taxes that are merely deemed paid.[27] Although true, this provision
actually refers to the tax credit as a condition only for the imposition of a lower tax rate, not as
a deductionfrom the corresponding tax liability. Besides, it is not our government but the domiciliary
country that credits against the income tax payable to the latter by the foreign corporation, the tax to be
foregone or spared.[28]

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against
the income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily
paid -- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5)
provides that for such taxes incurred but not paid, a tax credit may be allowed, subject to the condition
precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by
petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of any
tax found due, upon petitioners redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that
grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that
is taxed in the state of source is also taxable in the state of residence, but the tax paid in the former is
merely allowed as a credit against the tax levied in the latter.[29] Apparently, payment is made to the state
of source, not the state of residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by
Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of exports.[30] In order to avail of such credits under
the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require
prior tax payments by private establishments concerned.[31] However, we do not agree with its
finding[32] that the carry-over of tax credits under the said special law to succeeding taxable periods, and
even their application against internal revenue taxes, did not necessitate the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that presents a net income. Both are entitled
to the tax credit provided for under RA 7432, since the law itself accords that unconditional benefit.
However, for the losing establishment to immediately apply such credit, where no tax is due, will be an
improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they
grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
procedures for its availment.[34] To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the
20 percent discount that shall be deducted by the said establishments from their gross income for income
tax purposes and from their gross sales for value-added tax or other percentage tax purposes.[35] In
ordinary business language, the tax credit represents the amount of such discount. However, the manner
by which the discount shall be credited against taxes has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value
of anything.[36] To be more precise, it is in business parlance a deduction or lowering of an amount of
money;[37] or a reduction from the full amount or value of something, especially a price. [38] In business
there are many kinds of discount, the most common of which is that affecting the income statement[39] or
financial report upon which the income tax is based.
Business Discounts
Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for their
prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made within a shorter
period of time than the maximum time specified.[41] Also referred to as a sales discount on the part of the
seller and a purchase discount on the part of the buyer, it may be expressed in such
terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price allowed for purchases made in large quantities,
justified by savings in packaging, shipping, and handling.[43] It is also called a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the manual or
computerized books of accounts, since the purchase or sale is already valued at the net price actually
charged the buyer.[46] The purpose for the discount is to encourage trading or increase sales, and the
prices at which the purchased goods may be resold are also suggested.[47] Even a chain discount -- a
series of discounts from one list price -- is recorded at net.[48]

Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a
purchaser based on the [latters] role in the [formers] distribution system. [49] This role usually involves
warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in the income
statement[50] as a line item deducted -- along with returns, allowances, rebates and other similar expenses
-- from gross sales to arrive at net sales.[51] This type of presentation is resorted to, because the accounts
receivable and sales figures that arise from sales discounts, -- as well as from quantity, volume or bulk
discounts -- are recorded in the manual and computerized books of accounts and reflected in the financial
statements at the gross amounts of the invoices.[52] This manner of recording credit sales -- known as
the gross method -- is most widely used, because it is simple, more convenient to apply than the net
method, and produces no material errors over time.[53]

However, under the net method used in recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of
accounts[54] and reflected in the financial statements. A separate line item cannot be shown, [55] because
the transactions themselves involving both accounts receivable and sales have already been entered
into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts
whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is deducted from gross
sales to come up with the gross income, profit or margin[57] derived from business.[58] In another provision
therein, sales discounts that are granted and indicated in the invoices at the time of sale -- and that do
not depend upon the happening of any future event -- may be excluded from the gross sales within the
same quarter they were given.[59] While determinative only of the VAT, the latter provision also appears
as a suitable reference point for income tax purposes already embraced in the former. After all, these
two provisions affirm that sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright
deduction of the discount from the invoice price of the medicine sold to the senior citizen.[60] It is, therefore,
expected that for each retail sale made under this law, the discount period lasts no more than a day,
because such discount is given -- and the net amount thereof collected -- immediately upon perfection of
the sale.[61] Although prompt payment is made for an arms-length transaction by the senior citizen, the
real and compelling reason for the private establishment giving the discount is that the law itself makes
it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the
above discounts in particular. Prompt payment is not the reason for (although a necessary consequence
of) such grant. To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax
credit benefit enjoyed by the private establishment granting the discount. Yet, under the revenue
regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to
a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales
discount. However, to a private establishment, the effect is different from a simple reduction in price that
results from such discount. In other words, the tax credit benefit is not the same as a sales discount. To
repeat from our earlier discourse, this benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of its tax
credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is
computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a
simple discount privilege should not be automatically treated like a sales discount. Ubi lex non distinguit,
nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount
deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage
tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter has to be deducted from gross sales in order to compute
the gross income in the income statement and cannot be deducted again, even for purposes of
computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount
-- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to
avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales
discount-- which is not even identical to the discount privilege that is granted by law -- does not define it
at all and serves no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a
rule out of harmony with
[62]
the statute is a mere nullity; it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a
statute by the executive officers whose duty it is to enforce it x x x. [63] In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax laws is crucial.[64] Our
tax authorities fill in the details that Congress may not have the opportunity or competence to
provide.[65] The regulations these authorities issue are relied upon by taxpayers, who are certain that
these will be followed by the courts.[66] Courts, however, will not uphold these authorities interpretations
when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a
meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of
Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing
these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft
additional requirements not contemplated by the legislature.[67]

In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is law.[69] Conversely, a
regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the
effect of law.[70]

Availment of Tax
Credit Voluntary

Third, the word may in the text of the statute[71] implies that the
[72]
availability of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right
conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it
chooses; neither does it impose a duty on the part of the government to sit back and allow an important
facet of tax collection to be at the sole control and discretion of the taxpayer.[73] For the tax authorities to
compel respondent to deduct the 20 percent discount from either its gross income or its gross sales[74] is,
therefore, not only to make an imposition without basis in law, but also to blatantly contravene the law
itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative.
Respondent is given two options -- either to claim or not to claim the cost of the discounts as a tax credit.
In fact, it may even ignore the credit and simply consider the gesture as an act of beneficence, an
expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can
easily be applied. If there is none, the credit cannot be used and will just have to be carried over and
revalidated[75] accordingly. If, however, the business continues to operate at a loss and no other taxes
are due, thus compelling it to close shop, the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the
discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail
itself of the credit whenever it pleases. Neither does it allow our tax administrators to expand or contract
the legislative mandate. The plain meaning rule or verba legis in statutory construction is thus applicable
x x x. Where the words of a statute are clear, plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation.[76]

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be
it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather
from the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for
public use.[77]

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.[78] The discount
privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to
which these citizens belong. The discounts given would have entered the coffers and formed part of
the gross sales of the private establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct
amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of
property taken by the State, such issuance -- when not done within a reasonable time from the grant of
the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while awaiting actual receipt, through the
certificate, of the equivalent amount it needs to cope with the reduction in its revenues.[79]

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent
domain.[80] Tax measures are but enforced contributions exacted on pain of penal sanctions[81] and clearly
imposed for a public purpose.[82] In recent years, the power to tax has indeed become a most effective
tool to realize social justice, public welfare, and the equitable distribution of wealth.[83]

While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample
on the rights of property owners who under our Constitution and laws are also entitled to protection. The
social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and
give them to another who is not entitled thereto.[84] For this reason, a just compensation for income that
is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support
to realize social justice, and no administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even[85] -- without the discounts yet -- will
surely start to incur losses because of such discounts. The same effect is expected if its mark-up is less
than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from the
observation we have already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its gross sales. Operating
at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if
not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves
of tax credits denied those that are losing, because no taxes are due from the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as
a whole and to establish a program beneficial to them.[86]These objectives are consonant with the
constitutional policy of making health x x x services available to all the people at affordable cost[87] and of
giving priority for the needs of the x x x elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict
these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In
fact, no cash outlay is required from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social Justice,
which finalized RA 7432, disclose the true intent of our legislators to treat the sales discounts as a tax
credit, rather than as a deduction from gross income. We quote from those deliberations as follows:

Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x x [T]he
rule is that on a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two statutes, the
earlier special and the later general -- the terms of the general broad enough to include the matter
provided for in the special -- the fact that one is special and the other is general creates a presumption
that the special is to be considered as remaining an exception to the general, [91] one as a general law of
the land, the other as the law of a particular case.[92] It is a canon of statutory construction that a
later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not
affect the special provisions of such earlier statute.[93]

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax
Code -- a later law. When the former states that a tax creditmay be claimed, then the requirement of prior
tax payments under certain provisions of the latter, as discussed above, cannot be made to apply. Neither
can the instances of or references to a tax deduction under the Tax Code[94] be made to restrict RA 7432.
No provision of any revenue regulation can supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,
Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,
Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity.
The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which
provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net
income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends
and share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated
against by the imposition of higher rates of tax upon his income arising from the exercise of his
profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. 4He
characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in
character 5 For petitioner, therefore, there is a transgression of both the equal protection and due process
clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was
filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations which to their mind are
"mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those
stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big.
135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted
or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack
of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly
set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise
and initiative and which the government was called upon to enter optionally, and only 'because it was
better equipped to administer for the public welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be absorbed within activities that the government
must undertake in its sovereign capacity if it is to meet the increasing social challenges of the
times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds.
To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain
availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude
'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits .
Adversely affecting as it does properly rights, both the due process and equal protection clauses inay
properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter,
after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to]
the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize
that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully
conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of
Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is
in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative
or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the
challenged statutory provision as petitioner here alleges fails to abide by its command, then this
Court must so declare and adjudge it null. The injury thus is centered on the question of whether the
imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void or its face, he has not made out a case. This is
merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail. 18
5. It is undoubted that 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 the
confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to
say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls
for the application of the Holmes dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so
harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of
eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the
attainment of the common weal was prompted by the 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. Favoritism and undue
preference cannot be allowed. For the principle is that equal protection and security shall be given to
every person under circumtances which if not Identical are analogous. If law be looked upon in terms of
burden or charges, those that fall within a class should be treated in the same fashion, whatever
restrictions cast on some in the group equally binding on the rest." 20 That same formulation applies as
well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of
approximating the Ideal of the laws benefits being available to all and the affairs of men being governed
by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however,
wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal
protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal
protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B
and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific
ends by the use of specific remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the
view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz
V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent
in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe
no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule
of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force
and effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity
does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem
of classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "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, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity
then to the standard of equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing the applicable tax rate.
Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must
rest upon substantial distinctions that make real differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the
income to the application of generalized rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately
impose on all alike the same tax rates on the basis of gross income. There is ample justification then for
the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling
doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the
distinction between compensation and taxable net income of professionals and businessman certainly
not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On
the other hand, 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 taxation, which is the promotion
of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision
of the Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in
the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January
18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received
on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to
receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was
not taking any action on the protest and it was only then that he accepted the warrant of distraint and
levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as
a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless
a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of
distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax
authorities. During the intervening period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period
had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it
was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the
Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to
be personal holding company income 12 but later conformed to the decision of the respondent court
rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts
of the persons among whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the
same family in control of Algue. It is argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough substantiation of such payments. In short,
the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered
that this was a family corporation where strict business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from
the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions

(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other compensation
for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable allowance for salaries or
other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service.
This test and deductibility in the case of compensation payments is whether they are reasonable and are,
in fact, payments purely for service. This test and its practical application may be further stated and
illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock.
This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the
excessive payment correspond or bear a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30
O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were
they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of
the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond
in the form of tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If
it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate,
as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time
with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed
deduction by the private respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution[1] of the Court of Appeals dated September 22,
1993, affirming the Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due course. The Decision
of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby
AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in the amount
of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim
for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The petition for review is dismissed for lack of
merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly
organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of
1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by
applying PBComs tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax
Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for
the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income
tax liability. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net
loss of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld
and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax
credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees
from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was
docketed as CTA Case No. 4309 entitled: Philippine Bank of Communications vs. Commissioner of
Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for refund and tax credit for 1985
and 1986, filed before the Court of Tax Appeals, are as follows:
1985 1986
Net Income (Loss) (P25,317,228.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50*============== P234,077.69==============
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo difference was
noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of
petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law. The petitioners claim for refund in 1986
amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by
PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but the same was
denied due course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of
Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTAs resolution
dated July 20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of BIR in RMC No. 7-
85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its
1985-86 excess quarterly income tax payments -- can be prejudiced by the subsequent BIR rejection,
applied retroactively, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax
credit of excess quarterly income tax payments is not two years but ten (10).[7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBComs
claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof,
that there were taxes due in 1987 and that PBCom availed of tax-crediting that year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax
refund or tax credits on the ground of prescription, despite petitioners reliance on RMC No. 7-85,
changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on
the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states
that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and
that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten
(10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX
RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which
provide:
xxxxxxxxx
It has been observed, however, that because of the excess tax payments, corporations file claims for
recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date
of payment, in accordance with Sections 292 and 295 of the National Internal Revenue Code. It is obvious
that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or
tax credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax under the provisions
of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the overpaid
income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax
returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit
is granted, and, this procedure was adopted to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals
in order to preserve the right to claim refund or tax credit within the two-year period. As already
stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax
returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid
under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering
that it is an obligation created by law (Article 1144 of the Civil Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its declared circular
if it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting Corporation vs. Court of Tax
Appeals[10] petitioner claims that rulings or circulars promulgated by the Commissioner of Internal
Revenue have no retroactive effect if it would be prejudicial to taxpayers. In ABS-CBN case, the Court
held that the government is precluded from adopting a position inconsistent with one previously taken
where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rule
as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April
15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which
adhered to this principle, to wit: ACCRA Investments Corp. vs. Court of Appeals, et
al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al..[12] Respondent Commissioner
also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985
was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the
court.Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA
on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to
petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to
the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it
disregards the two-year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds
for the State to finance the needs of the citizenry and to advance the common weal. [13] Due process of
law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be
so because it is upon taxation that the government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied
should be summary and interfered with as little as possible.[14]
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by
law because the BIR being an administrative body enforced to collect taxes, its functions should not be
unduly delayed or hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)
provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or
illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment;
Provided however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from the time of filing the Adjustment Return and final
payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this Court explained
the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the refund
is ascertained, which can only be determined after a final adjustment return is accomplished. In the
present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. x x x As
we have earlier said in the TMX Sales case, Sections 68,[16] 69,[17] and 70[18] on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period
of two years to ten years on claims of excess quarterly income tax payments, such circular created a
clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to time
by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts.Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be
erroneous.[20] Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by administrative officials
to implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is
contrary to the provisions and spirit of Act. No. 4003 as amended, because whereas the prohibition
prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO
No. 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of
Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the
reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions
of the latter. x x x In this connection, the attention of the technical men in the offices of Department Heads
who draft rules and regulation is called to the importance and necessity of closely following the terms and
provisions of the law which they intended to implement, this to avoid any possible misunderstanding or
confusion as in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its
officials or agents.[24] As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued
by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in
harmony with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his
interpretation could not be given weight for to do so would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is
estopped by the principle of non-retroactivity of BIR rulings. Again We do not agree. The Memorandum
Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of
payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund
or tax credit and the corresponding petition for review within the two-year prescription period, and that
the lengthening of the period of limitation on refund from two to ten years would be adverse to public
policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was
not the Commissioner of Internal Revenue who denied petitioners claim of refund or tax credit. Rather, it
was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC
No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out
of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence,
cannot be given weight for to do so would in effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes as part of the
legal system of the country. But administrative decisions do not enjoy that level of recognition.A
memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial
action. For there are no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the Government in estoppel to
correct or overrule the same.[27] Moreover, the non-retroactivity of rulings by the Commissioner of Internal
Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent
courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held
by this Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTAs
decision denying its claim for refund of P 234,077.69 (tax overpaid in 1986), based on mere speculation,
without proof, that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the total
quarterly payments over the actual income tax computed in the adjustment or final corporate income tax
return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option box
provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit
for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax Appeals, after
examining the adjusted final corporate annual income tax return for taxable year 1986, found out that
petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987
annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can
no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. [30]
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as
specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must
respect.Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to
controvert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no
showing of gross error or abuse on their part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
G.R. No. L-18330 July 31, 1963
JOSE DE BORJA, petitioner-appellee,
vs.
VICENTE G. GELLA, ET AL., respondents-appellants.
David Guevara for petitioner-appellee.
Office of the Solicitor General for respondent-appellant Treasurer of the Philippines.
Assistant City Fiscal H. A. Avendano for respondent-appellant Treasurer of Pasay City.
BAUTISTA ANGELO, J.:
Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties
located in the City of Manila and Pasay City and has offered to pay them with two negotiable, certificates
of indebtedness Nos. 3064 and 3065 in the amounts of P793.40 and P717.69, respectively. Borja was,
however, a mere assignee of the aforesaid negotiable certificates, the applicants for backpay rights
covered by them being respectively Rafael Vizcaya and Pablo Batario Luna.
The offers to pay the estate taxes in question were rejected by the city treasurers of both Manila and
Pasay cities on the ground of their limited negotiability under Section 2, Republic Act No. 304, as
amended by Republic Act 800, and in the case of the city treasurer of Manila on the further ground that
he was ordered not to accept them by the city mayor, for which reason Borja was prompted to bring the
question to the Treasurer of the Philippines who opined, among others, that the negotiable certificates
cannot be accepted as payment of real estate taxes inasmuch as the law provides for their acceptance
from their backpay holder only or the original applicant himself, but not his assignee. In his letter of April
29, 1960 to the Treasurer of the Philippines, however, Borja entertained hope that the certificates would
be accepted for payment in view of the fact that they are already long past due and redeemable, but his
hope was frustrated. So on June 30, 1960, Borja filed an action against the treasurers of both the City of
Manila and Pasay City, as well as the Treasurer of the Philippines, to impel them to execute an act which
the law allegedly requires them to perform, to wit: to accept the above-mentioned certificates of
indebtedness considering that they were already due and redeemable so as not to deprive him illegally
of his privilege to pay his obligation to the government thru such means.
Respondents in due time filed their answer setting up the reasons for their refusal to accept the
certificates, and after the requisite trial was held, the court a quo rendered judgment the dispositive part
of which reads:
WHEREFORE, the treasurers of the City of Manila and Pasay City, their agents and other persons acting
in their behalf are hereby enjoined from including petitioner's properties in the payment of real estate,
taxes, and to sell them at public auction and respondent Treasurer of the Philippines, and the treasurers
of the City of Manila and Pasay City are hereby ordered to accept petitioner's Negotiable Certificates of
Indebtedness Nos. 3064 and 3065 in the sums of P793.40 and P717.39 in payment of real estate taxes
of his properties in the City of Manila and Pasay City, respectively, without costs.
Respondents took this appeal on purely questions of law.1wph1.t
Reduced to bare essentials, the 12 errors assigned by appellants may be boiled down to the following:
(a) has appellee the right to apply to the payment of his real estate taxes to the government of Manila
and Pasay cities the certificates of indebtedness he holds while appellants have the correlative legal duty
to accept the certificates in payment of said taxes?; (b) can compensation be invoked to extinguish
appellee's real estate tax liability between the latter's obligation and the credit represented by said
certificates of indebtedness?
Anent the first issue, the pertinent legal provision to be reckoned with is Section 2 of Republic Act No.
304, as amended by Republic Act No. 800, which in part reads:
SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year from the approval
of this Act, and under such rules and regulations as may be promulgated by the Secretary of Finance,
acknowledge and file requests for the recognition of the right to the salaries and wages as provided in
section one hereof, and notice of such acknowledgment shall be issued to the applicant which shall state
the total amount of such salaries or wages due to the applicant, and certify that it shall be redeemed by
the Government of the Philippines within ten years from the date of their issuance without
interest: Provided, that upon application . . . a certificate of indebtedness may be issued by the Treasurer
of the Philippines covering the whole or part of the total salaries or wages the right to which has been
duly acknowledged and recognized, provided that the face value of such certificate of indebtedness shall
not exceed the amount that the applicant may need for the payment of (1) obligations subsisting at the
time of the approval of this Act for which the applicant may directly be liable to the Government or to any
of its branches or instrumentalities, or the corporations owned or controlled by the Government, or to any
citizen of the Philippines, who may be willing to accept the same for such settlement; (2) his taxes; . .
. and Provided, also, That any person who is not an alien, bank or other financial institution at least
sixty per centum of whose capital is owned by Filipinos may, notwithstanding any provision of its charter,
articles of incorporation, by-laws, or rules and regulations to the contrary, accept or discount at not more
than three and one-half per centum per annum for ten years a negotiable certificate of indebtedness
which shall be issued by the Treasurer of the Philippines upon application by a holder of a back pay
acknowledgment. . . . .
To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable
certificates of indebtedness held by appellee in payment of his real estate taxes for the simple reason
that they were not obligations subsisting at the time of the approval of Republic Act No. 304 which took
effect on June 18, 1948. It should be noted that the real estate taxes in question have reference to those
due in 1958 and subsequent years. The law is explicit that in order that a certificate may be used in
payment of an obligation the same must be subsisting at the time of its approval even if we hold that a
tax partakes of this character, neither can it be contended that appellee can compel the government to
accept the alleged certificates of indebtedness in payment of his real estate taxes under proviso No. 2
abovequoted also for the reason that in order that such payment may be allowed the tax must be owed
by the applicant himself . This is the correct implication that may be drawn from the use by the law of the
words "his taxes". Verily, the right to use the backpay certificate in settlement of taxes is given only to the
applicant and not to any holder of any negotiable certificate to whom the law only gives the right to have
it discounted by a Filipino citizen or corporation under certain limitations. Here appellee is not himself the
applicant of the certificate, in question. He is merely an assignee thereof, or a subsequent holder whose
right is at most to have it discounted upon maturity or to negotiate it in the meantime. A fortiori, it may
be included that, not having the right to use said certificates to pay his taxes, appellee cannot compel
appellants to accept them as he requests in the present petition for mandamus. As a consequence, we
cannot but hold that mandamus does not lie against appellants because they have in no way neglected
to perform an act enjoined upon them by law as a duty, nor have they unlawfully excluded appellee from
the use or enjoyment of a right to which be is entitled.1
We are aware of the cases2 cited by the court a quo wherein the government banking institutions were
ordered to accept the backpay certificates of petitioners in payment of their indebtedness to them, but
they are not here in point because in the cases mentioned the petitioners were applicants and original
holders of the corresponding backpay certificates. Here appellee is not.
With regard to the second issue, i.e., whether compensation can be invoked insofar as the two obligations
are concerned, Articles 1278 and 1279 of the new Civil Code provide:
ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors
of each other.
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they two liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
It is clear from the above legal provisions that compensation cannot be effected with regard to the two
obligations in question. In the first place, the debtor insofar as the certificates of indebtedness are
concerned is the Republic of the Philippines, whereas the real estate taxes owed by appellee are due to
the City of Manila and Pasay City, each one of which having a distinct and separate personality from our
Republic. With regard to the certificates, the creditor is the appellee while the debtor is the Republic of
the Philippines. And with regard to the taxes, the creditors are the City of Manila and Pasay City while
the debtor is the appellee. It appears, therefore, that each one of the obligors concerning the two
obligations is not at the same time the principal creditor of the other. It cannot also be said for certain that
the certificates are already due. Although on their faces the certificates issued to appellee state that they
are redeemable on June 18, 1958, yet the law does not say that they are redeemable from its approval
on June 18, 1948 but "within ten years from the date of issuance" of the certificates. There is no certainty,
therefore, when the certificates are really redeemable within the meaning of the law. Since the requisites
for the accomplishment of legal compensation cannot be fulfilled, the latter cannot take place with regard
to the two obligations as found by the court a quo.
WHEREFORE, the decision appealed from is reversed. The petition for mandamus is dismissed. The
injunction issued against respondents-appellants is hereby lifted. No costs.

Planters Products Inc vs Fertiphil Corp G.R. No. 166006 March 14, 2008 (Digested Case)

FACTS: Petitioner PPI and respondent Fertiphil are private corporations incorporated under Philippine
laws, both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.
Marcos issued Letter of Instruction (LOI) 1465, imposing a capital recovery component of Php10.00 per
bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially viable.

Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which was then remitted the depository
bank of PPI. Fertiphil paid P6,689,144 to FPA from 1985 to 1986. After the 1986 EDSA Revolution, FPA
voluntarily stopped the imposition of the P10 levy. Fertiphil demanded from PPI a refund of the amount it
remitted, however PPI refused.

Fertiphil filed a complaint for collection and damages, questioning the constitutionality of LOI 1465,
claiming that it was unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted
to a denial of due process. PPI argues that Fertiphil has no locus standing to question the constitutionality
of LOI No. 1465 because it does not have a "personal and substantial interest in the case or will sustain
direct injury as a result of its enforcement."

It asserts that Fertiphil did not suffer any damage from the imposition because" incidence of the levy fell
on the ultimate consumer or the farmers themselves, not on the seller fertilizer company.

ISSUE:

-Whether or not Fertiphil has locus standi to question the constitutionality of LOI No. 1465.

-What is the power of taxation?

RULING: Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere
procedural technicality which may be waived. The imposition of the levy was an exercise of the taxation
power of the state. While it is true that the power to tax can be used as an implement of police power,
the primary purpose of the levy was revenue generation.

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax. Police power and the power of taxation are inherent powers of
the State. These powers are distinct and have different tests for validity. Police power is the power of the
State to enact legislation that may interfere with personal liberty or property in order to promote the
general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The
main purpose of police power isthe regulation of a behavior or conduct, while taxation is revenue
generation.

The "lawful subjects" and" lawful means" tests are used to determine the validity of a law enacted under
the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional
limitations

(Whole case)
G.R. No. 166006 March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of
statutes, executive orders, presidential decrees and other issuances. The Constitution vests that power
not only in the Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision of the Court of Appeals
(CA) affirming with modification that of the RTC in Makati City, finding petitioner Planters Products, Inc.
(PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of
Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine
laws. They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural
chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No.
1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the
domestic sale of all grades of fertilizers in the Philippines. The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all
domestic sales of fertilizers in the Philippines. (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the
Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank
and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to
January 24, 1986.
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return
of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI
refused to accede to the demand.
Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in Makati. It
questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and
an unlawful imposition that amounted to a denial of due process of law Fertiphil alleged that the LOI
solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of
the fertilizer industry.
In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a
valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the
country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden
imposed by the levy fell on the ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and
against the defendant Planters Product, Inc., ordering the latter to pay the former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the
RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose,
viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly
in the exercise of the power of taxation. It is a settled principle that the power of taxation by the state is
plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of
the members of the legislature to their constituents. However, there are two kinds of limitations on the
power of taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token,
taxes may not be levied for purely private purposes, for building up of private fortunes, or for the redress
of private wrongs. They cannot be levied for the improvement of private property, or for the benefit, and
promotion of private enterprises, except where the aid is incident to the public benefit. It is well-settled
principle of constitutional law that no general tax can be levied except for the purpose of raising money
which is to be expended for public use. Funds cannot be exacted under the guise of taxation to promote
a purpose that is not of public interest. Without such limitation, the power to tax could be exercised or
employed as an authority to destroy the economy of the people. A tax, however, is not held void on the
ground of want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority
pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount
to the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co.
Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic corporation,
became poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc., another
private domestic corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite
evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters Product, Inc. is unlawful because it
violates the mandate that a tax can be levied only for a public purpose and not to benefit, aid and promote
a private enterprise such as Planters Product, Inc.
PPI moved for reconsideration but its motion was denied. PPI then filed a notice of appeal with the RTC
but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court allowed
the appeal of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC,
with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the award of attorneys fees is hereby DELETED.
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the
constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially determine
the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid
ruling on constitutional questions and to presume that the acts of political departments are valid, absent
a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following requisites are
obtaining in a controversy before it: First, there must be before the court an actual case calling for the
exercise of judicial review. Second, the question must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge. Fourth, the question of constitutionality
must have been raised at the earliest opportunity; and lastly, the issue of constitutionality must be the
very lis mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of
the complaint also reveals that the instant action is founded on the claim that the levy imposed was an
unlawful and unconstitutional special assessment. Consequently, the requisite that the constitutionality
of the law in question be the very lis mota of the case is present, making it proper for the trial court to rule
on the constitutionality of LOI 1465.
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the
state, it is still unconstitutional because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was
an invalid exercise of the States power of taxation inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public purposes. It reasoned out that the amount collected under
the levy was remitted to the depository bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise of police
power. In addition, it disputes the court a quos findings arguing that the collections under LOI 1465 was
for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been characterized as
the most essential, insistent and the least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property sought to be regulated has some
relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires
the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1) the interests of the public generally, as
distinguished from those of a particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals
(National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is
an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve
this is by no means a measure that will promote the public welfare. The governments commitment to
support the successful rehabilitation and continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest
of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the
Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest,
the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of
government power. To rule in favor of appellant would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private
individuals.
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of
Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership
of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April
18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its
fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the
purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust
by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately
P206 million (subject to validation by Planters and Planters Foundation) (such unpaid portion of the
outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which will be added to
the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother
company. In this connection, the Republic hereby acknowledges that the advances by Planters to
Planters Foundation which were applied to the payment of the Planters shares now held in trust by
Planters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic,
through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the special
trust account designated in the notice dated April 2, 1985, addressed by counsel for the Creditors to
Planters Foundation. Such proceeds shall be deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid
Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof.
For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the
full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign
currency-denominated obligations." (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister
Virata taken together with the Justice Secretarys Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of farmers. Unfortunately for appellant, in the
absence of sufficient evidence to establish its claims, this Court is constrained to rely on what is explicitly
provided in LOI 1465 that one of the primary aims in imposing the levy is to support the successful
rehabilitation and continued viability of PPI.
PPI moved for reconsideration but its motion was denied. It then filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE.
NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP
IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND
POLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO
THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND
VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF
THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN
THE INSTANT CASE. (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural
technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it
does not have a "personal and substantial interest in the case or will sustain direct injury as a result of its
enforcement." It asserts that Fertiphil did not suffer any damage from the CRC imposition because
"incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer
company."
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been
adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to
have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a
"real party in interest," which is defined as "the party who stands to be benefited or injured by the judgment
in the suit or the party entitled to the avails of the suit."
In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts
a public right on behalf of the general public because of conflicting public policy issues. On one end, there
is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion
and illegal official action. At the other end, there is the public policy precluding excessive judicial
interference in official acts, which may unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public suits. In
People v. Vera, it was held that a person who impugns the validity of a statute must have "a personal
and substantial interest in the case such that he has sustained, or will sustain direct injury as a result."
The "direct injury test" in public suits is similar to the "real party in interest" rule for private suits under
Section 2, Rule 3 of the 1997 Rules of Civil Procedure.
Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court
relaxed the requirement in cases of "transcendental importance" or with "far reaching implications." Being
a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus
standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required,
and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be
true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify
it from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate
burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact
of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in
its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic
sellers much more expensive. The harm to their business consists not only in fewer clients because of
the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI No.
1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to be competitive
in the market. The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus
standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted
by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public
importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an
ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming
financially viable. The LOI provided that "the capital contribution shall be collected until adequate capital
is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional
duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of
standing, being a mere procedural technicality, should be waived, if at all, to adequately thresh out an
important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint;
it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. Alternatively, the
resolution of the constitutional issue is not necessary for a determination of the complaint for collection.
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims
that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot
determine its claim without resolving the issue.
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree
or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement,
law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
(Underscoring supplied)
In Mirasol v. Court of Appeals, this Court recognized the power of the RTC to resolve constitutional
issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider
the constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power
of judicial review or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs, this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however, is
not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take
cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies.
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts.
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through
any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such
review may be had in criminal actions, as in People v. Ferrer involving the constitutionality of the now
defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds involving the
constitutionality of laws prohibiting aliens from acquiring public lands. The constitutional issue, however,
(a) must be properly raised and presented in the case, and (b) its resolution is necessary to a
determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the
complaint for collection filed with the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the
Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and
disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation
and were then exerting all efforts and maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been
presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount
to illegal exaction amounting to a denial of due process since the persons of entities which had to bear
the burden of paying the CRC derived no benefit therefrom; that on the contrary it was used by PPI in
trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other
distributors and importers. (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed
the complaint to compel PPI to refund the levies paid under the statute on the ground that the law
imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly paid
pursuant to an unconstitutional law should be refunded under the civil code principle against unjust
enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC
surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota
of the complaint with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of
the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It
claims that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in
the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the
LOI is enacted under the police power, it is still unconstitutional because it did not promote the general
welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and
have different tests for validity. Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the general welfare, while the power of
taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is
the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and
"lawful means" tests are used to determine the validity of a law enacted under the police power. The
power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power.
While it is true that the power of taxation can be used as an implement of police power, the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax.
In Philippine Airlines, Inc. v. Edu, it was held that the imposition of a vehicle registration fee is not an
exercise by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners
of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x
x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the
purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision
appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had
in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of
a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks
of other "fees" such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees
are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes
like the motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61.
(Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no
doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer
by as much as five percent. A plain reading of the LOI also supports the conclusion that the levy was for
revenue generation. The LOI expressly provided that the levy was imposed "until adequate capital is
raised to make PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a
public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons.
The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power
is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax
its citizens and use the funds generated for a private purpose. As an old United States case bluntly put
it: "To lay with one hand, the power of the government on the property of the citizen, and with the other
to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called taxation." The term "public
purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards.
Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain
to those purposes which are traditionally viewed as essentially government functions, such as building
roads and delivery of basic services, but also includes those purposes designed to promote social justice.
Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or
agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact
funds from the public when its true intent is to give undue benefit and advantage to a private enterprise,
that law will not satisfy the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree
with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose
is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all
domestic sales of fertilizers in the Philippines. (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In
this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The
framers of the LOI did not even hide the insidious purpose of the law. They were cavalier enough to name
PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law
would expressly name a private company as the ultimate beneficiary of the taxes to be levied from the
public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI
becoming financially "viable." This suggests that the levy was actually imposed to benefit PPI. The LOI
notably does not fix a maximum amount when PPI is deemed financially "viable." Worse, the liability of
Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited
by FPA to Far East Bank and Trust Company, the depositary bank of PPI. This proves that PPI benefited
from the LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage
to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding
dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial
problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI
before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts
to its foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent
portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and
agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or pesos,
to the Creditors, (2) that Planters is currently experiencing financial difficulties, and (3) that there are
presently pending with the Securities and Exchange Commission of the Philippines a petition filed at
Planters own behest for the suspension of payment of all its obligations, and a separate petition filed by
Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation
receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it considers
and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration
of your expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic
hereby manifests its full and unqualified support of the successful rehabilitation and continuing viability
of Planters, and to that end, hereby binds and obligates itself to the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its
fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the
purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust
by Planters Foundation, Inc. ("Planters Foundation"), which unpaid capital is estimated at approximately
P206 million (subject to validation by Planters and Planters Foundation) such unpaid portion of the
outstanding capital stock of Planters being hereafter referred to as the "Unpaid Capital"), and
subsequently for such capital increases as may be required for the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid
Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the "carrying cost" shall be at such rate as will
represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso
and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance
It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts
of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry
in the country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was
exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for
a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid
for failing to comply with the test of "lawful subjects" and "lawful means." Jurisprudence states the test as
follows: (1) the interest of the public generally, as distinguished from those of particular class, requires
its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals.
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest.
The law was enacted to give undue advantage to a private corporation. We quote with approval the CA
ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought
to achieve this is by no means a measure that will promote the public welfare. The governments
commitment to support the successful rehabilitation and continued viability of PPI, a private corporation,
is an unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-
interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even
the Filipino people in general. Well to stress, substantive due process exacts fairness and equal
protection disallows distinction where none is needed. When a statutes public purpose is spoiled by
private interest, the use of police power becomes a travesty which must be struck down for being an
arbitrary exercise of government power. To rule in favor of appellant would contravene the general
principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive
benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It
banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect before
being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is
subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless
it has been raised in the court a quo. PPI did not raise the applicability of the doctrine of operative fact
with the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the
dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It
produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal
contemplation, inoperative as if it has not been passed. Being void, Fertiphil is not required to pay the
levy. All levies paid should be refunded in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be
excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the
latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and
fair play. It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute
prior to a determination of unconstitutionality is an operative fact and may have consequences which
cannot always be ignored. The past cannot always be erased by a new judicial declaration.
The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those
who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of
unconstitutionality would put the accused in double jeopardy or would put in limbo the acts done by a
municipality in reliance upon a law creating it.
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under
LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were
remitted and deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to
order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code
explicitly provides that "every person who, through an act of performance by another comes into
possession of something at the expense of the latter without just or legal ground shall return the same to
him." We cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must
refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is
AFFIRMED.
SO ORDERED.