Power of Eminent Domain

1. Manapat vs CA

For the resolution of the Court are three consolidated petitions for review
on certiorari under Rule 45 of the Rules of Court. G.R. No. 110478 assails the May
27, 1993Decision[2] of the Court of Appeals (CA) in CA-G.R. CV Nos. 10200-10212.
G.R. No. 116176 questions the June 28, 1994 Decision[3] of the appellate court in
CA-G.R. CV No. 27159. G.R. Nos. 116491-503 assails the March 2, 1994 and
the July 25, 1994 Resolutions[4] of the CA also in CA-G.R. CV Nos. 10200-10212.

The three-decade saga of the parties herein has for its subject parcels of land
forming part of what was originally known as the Grace Park Subdivision in
Caloocan City and formerly owned by the Roman Catholic Archbishop of Manila
(RCAM) and/or the Philippine Realty Corporation (PRC).

The Facts

Sometime in the 1960s, RCAM allowed a number of individuals to occupy the

Grace Park property on condition that they would vacate the premises should
the former push through with the plan to construct a school in the area. The plan,
however, did not materialize, thus, the occupants offered to purchase the
portions they occupied. Later, as they could not afford RCAMs proposed price,
the occupants, organizing themselves as exclusive members of the Eulogio
Rodriguez, Jr. Tenants Association, Inc., petitioned the Government for the
acquisition of the said property, its subdivision into home lots, and the resale of
the subdivided lots to them at a low price.[5]

Acting on the associations petition, the Government, in 1963, through the Land
Tenure Administration (LTA), later succeeded by the Peoples Homesite and
Housing Corporation (PHHC), negotiated for the acquisition of the property from
RCAM/PRC. But because of the high asking price of RCAM and the budgetary
constraints of the Government, the latters effort to purchase and/or to
expropriate the property was discontinued. RCAM then decided to effect, on its
own, the subdivision of the property and the sale of the individual subdivided lots
to the public.[6] Petitioners Manapat and Lim and respondents Loberanes,
Quimque, Vega, Santos, Oracion and Mercado in these consolidated cases were
among those who purchased individual subdivided lots of Grace Park directly
from RCAM and/or PRC.[7]

A significant turn of events however happened in 1977 when the late President
Ferdinand E. Marcos issued Presidential Decree (PD) No.
[8]
1072, appropriating P1.2M out of the Presidents Special Operations Funds to
cover the additional amount needed for the expropriation of Grace Park. The
National Housing Authority (NHA), PHHCs successor, then filed several
expropriation proceedings over the already subdivided lots for the purpose of
developing Grace Park under the Zonal Improvement Program (ZIP) and
subdividing it into small lots for distribution and resale at a low cost to the
residents of the area.[9] The following cases were filed by the NHA with the
Regional Trial Court (RTC) of Caloocan City: C-6225, C-6226, C-6227, C-6228, C-
6229, C-6230, C-6231, C-6232, C-6233, C-6234, C-6235, C-6236, C-6237, C-6238,
C-6255 and C-6435.[10]

After due proceedings, the trial court rendered separate decisions dismissing the
expropriation cases, with the exceptions of Cases Nos. C-6233 and C-6236 in
which it ordered the condemnation of the involved lots.[11] On motion for
reconsideration by the NHA in Cases Nos. C-6227, C-6228, C-6230, C-6234, C-
6235, C-6238 and C-6255, the trial court later amended its decision, set aside its
dismissal of the said cases, ordered the condemnation of the involved lots and
fixed the amount of just compensation at P180.00 per square meter. In Cases
Nos. C-6225, C-6229, C-6231, C-6232, C-6237 and C-6435, the RTC however
denied NHAs motion for reconsideration.[12]

NHA eventually appealed to the CA the decisions in Cases Nos. C-6225, C-6229,
C-6231, C-6232, C-6237 and C-6435 on the issue of the necessity of the taking,
and the amended ruling in Cases Nos. C-6227, C-6228, C-6230, C-6234, C-6235,
C-6238 and C-6255 on the issue of just compensation.[13] The CA consolidated
the appeals and docketed them as CA-G.R. CV No. 10200-10212. NHA likewise
filed with the CA an appeal from the decision in C-6226, which was docketed
as CA-G.R. CV No. 27159.

On May 27, 1993, the appellate court rendered its Decision[14] in CA-G.R. CV No.
10200-10212 disposing of the appealed cases as follows:

WHEREFORE, premises considered, judgment is hereby rendered:

1) Reversing and setting aside the decisions of dismissal in Cases Nos. C-6225, C-6229,
C-6231, C-6232, C-6237 and C-6435; and in lieu thereof an order of condemnation is
entered declaring that plaintiff-appellant NHA has a lawful right to take the lots
involved for the public use described in the complaints;

2) Affirming the decisions in Case Nos. C-6227, C-6228, C-6234, C-6235, C-6238 and C-
6255 insofar as said decision granted the expropriation; declaring that plaintiff-
appellant NHA has a lawful right to take the lots involved for the public use stated in
the complaint; but annulling and setting aside the just compensation fixed by the trial
court at P180.00 per square meter in the said cases;

3) Ordering the remand of all the appealed cases, except for Case No. C-6230, to the
trial court for determination of the just compensation to which defendants are entitled
in accordance with Rule 67 of the Revised Rules of Court;

4) Finding the compromise agreement in Case No. C-6230, entitled, NHA v. Aurora Dy
dela Costa, et al. in accordance with law, and not contrary to morals or public policy,
and rendering judgment in accordance therewith;

5) Ordering Remedios Macato to be joined as defendant with Julia C. Diaz in Case No.
C-6227.

No pronouncement as to costs.

SO ORDERED.[15]

Rosemarie and Dolores Guanzon, two of the owners of the lots in C-6225, filed
before this Court a petition for review on certiorari of the aforesaid decision of
the appellate court [Their petition was docketed as G.R. Nos. 110462-74].
On September 5, 1994, we dismissed their petition for failure to sufficiently show
that the CA had committed any reversible error in the challenged decision.[16] An
Entry of Judgment was issued on February 2, 1995.[17]
Likewise, Julia Diez and Remedios Macato, the owners of the lots in C-6227,
assailed before us the afore-quoted CA decision through a petition under Rule
45. On July 28, 1993, however, in G.R. No. 110770, we denied their Motion for
Extension of Time to file a petition for review on certiorari for their failure to
submit an affidavit of service of the motion as required by

Circular No. 19-91.[18] After denying their motion for reconsideration,[19] we

issued an Entry of Judgment on August 27, 1993.[20]

Petitioner Manapat, the defendant-landowner in C-6229, also elevated the case

before us via a petition for review on certiorari docketed as G.R. No.
110478.[21] We initially dismissed this petition for having been filed out of
time,[22] but we reinstated it on motion for reconsideration.[23]

In the meantime, the other defendants-landowners in the expropriation

casesRCAM/PRC in C-6225, Maximo Loberanes and Eladio Quimque in C-6231,
Alejandro Oracion, Gonzalo Mercado, Cesario Vega and Juanito Santos in C-6435,
and Remedios Macato in C-6227moved for the reconsideration of the said May
27, 1993 Decision of the CA.[24] In the March 2, 1994 Resolution,[25] the appellate
court resolved the motions in this wise:

WHEREFORE, premises considered, the motion for reconsideration of movants Roman

Catholic Archbishop of Manila and Philippine Realty Corporation (in Special Civil Action
No. 6225) and movant-intervenor Remedios Macato (in Special Civil Action No. 6227)
are DENIED.

The motions for reconsideration of movants Gonzalo Mercado, Cesario Vega and
Juanito Santos (in Special Civil Action No. 6435) and movants Maximo Loberanes and
Eladio Quimque (in Special Civil Action No. 6231) are GRANTED. The motion for
reconsideration of movant Alejandro Oracion (in Special Civil Action No. 6435) is
partially granted to the extent of Three Hundred (300) square meters of Lot 22, Block
157. The decision of this Court promulgated May 27, 1993 is accordingly MODIFIED.
Lot No. 26, Block No. 157 owned by Cesario Vega and Juanito Santos, and Lot No. 4,
Block No. 157 owned by Maximo Loberanes and Eladio Quimque are declared exempt
from expropriation and the corresponding complaints for expropriation (sic)
DISMISSED insofar as said lots are concerned. Lot No. 22, Block No. 157 owned by
movant Alejandro Oracion is declared exempt from expropriation to the extent of
Three Hundred (300) square meters. Only the remaining Ninety (90) square meters
shall be the subject of expropriation, the portion to be determined by the lower court
in the manner most beneficial to the owner and consistent with the objective of PD
1072.

SO ORDERED.[26]

Aggrieved by the said March 2, 1994 CA Resolution specifically with regard to the
exemption from expropriation of the lots of Loberanes, Quimque, Mercado, Vega
and Santos, and the partial exemption of the lot of Oracion, NHA moved for the
reconsideration of the same. In the subsequent July 25, 1994 Resolution,[27] the
appellate court denied NHAs motion, together with the belated motion of
Vivencio S. de Guzman, the defendant-landowner in C-6255. The dispositive
portion of the July 25, 1994 Resolution reads:

WHEREFORE, the motions for reconsideration of defendant-appellant Vivencio S. de

Guzman of the decision promulgated May 27, 1993 and of plaintiff-appellant National
Housing Authority of the resolution promulgated March 2, 1994 are DENIED.

SO ORDERED.[28]

With the denial of its motion for reconsideration, NHA filed with this Court a
Consolidated Petition for Review[29] under Rule 45, as aforesaid, assailing the
March 2, 1994 and the July 25, 1994 Resolutions of the appellate court. NHAs
petition was docketed as G.R. Nos. 116491-503 against respondents Loberanes
and Quimque (in C-6231), Vega, Santos, Oracion and Mercado (in C-6435).

In a separate development, the CA, on June 28, 1994, rendered its

Decision[30] in CA-G.R. CV No. 27159, reversing the RTCs ruling in C-6226.
The fallo of the decision reads:

WHEREFORE, FOREGOING PREMISES CONSIDERED, the appealed decision

dated October 29, 1986 is hereby REVERSED for want of merit. Let the record of this
case be remanded to the court of origin for further proceedings.

IT IS SO ORDERED.[31]
Discontented with the appellate courts ruling, petitioner Domingo Lim, one of
the owners of the lots subject of C-6226, elevated the case to us via a petition
for review on certiorari docketed as G.R. No. 116176.[32]

The Issues

Thus, for resolution by this Court are the following consolidated cases: (1) G.R.
No. 110478 of Manapat; (2) G.R. Nos. 116491-503 of the NHA; and (3) G.R. No.
116176 of Lim.

In G.R. No. 110487, petitioner Manapat argues in the main that, as he is also a
member of the tenant association, the beneficiary of the expropriation, it would
be incongruous to take the land away from him only to give it back to him as an
intended beneficiary. Accordingly, the CA, in its May 27, 1993 Decision in CA-G.R.
CV No. 10200-10212, should not have allowed the expropriation of his lot. To
further support his stance, Manapat raises the following grounds:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE ISSUANCE MADE IN THE
EXERCISE OF LEGISLATIVE POWER, SPECIFYING THE LOTS TO BE EXPROPRIATED AND
THE PURPOSE FOR WHICH THEY ARE INTENDED, REMOVES FROM THE JUDICIARY THE
DETERMINATION OF THE NECESSITY OF THE TAKING, THERE BEING NO SHOWING OF
ABUSE OF DISCRETION.[33]

II

SUPERVENING EVENT RENDERS IMPROPER THE DISPOSITION BY THE COURT OF

APPEALS FOR AN ORDER OF CONDEMNATION DECLARING THAT NHA HAS A LAWFUL
RIGHT TO TAKE THE LOT OF FERMIN MANAPAT FOR SUPPOSED PUBLIC USE AND FOR
REMAND OF HIS CASE TO THE TRIAL COURT FOR DETERMINATION OF JUST
COMPENSATION.[34]

III

THE COURT OF APPEALS SHOULD HAVE CONSIDERED THAT FERMIN MANAPAT IS NOT
ONLY A BONA FIDE OCCUPANT IN THE GRACE PARK SUBDIVISION FOR PURPOSES OF
P.D. 1072 BUT LIKEWISE HAS A TRANSFER CERTIFICATE OF TITLE NO. 42370 OF THE
REGISTRY OF DEEDS FOR THE CITY OF CALOOCAN OVER THE SAME LOT SOUGHT TO BE
EXPROPRIATED WHICH SHOULD NOT BE SUBJECT TO COLLATERAL ATTACK AS
DISPOSED BY THE COURT OF APPEALS.[35]

IV

THE COURT OF APPEALS SHOULD HAVE CONSIDERED THAT THE EVENTUAL

BENEFICIARIES OF ITS BENEVOLENT EXPROPRIATION ARE SQUATTERS.[36]

NHA, in its petition in G.R. Nos. 116491-503, primarily contends that the CA erred
when it issued its March 2, 1994 Resolution and modified the May 27, 1993
Decision in CA-G.R. CV No. 10200-10212 to the extent that it applied retroactively
Article VI, Section 10 of Republic Act (R.A.) No. 7279, thus exempting from
expropriation the 300-sq m lots of respondents Loberanes, Quimque, Vega,
Santos, Oracion and Mercado. NHA summarized its arguments as follows:

The Honorable Court of Appeals erred in applying retroactively Article VI, Section 10 of
Republic Act No. 7279 to the subject expropriation cases instituted back in 1977 by
petitioner-appellant NHA.[37]

A. Republic Act 7279 passed in 1992 should operate prospectively and, therefore,
should not be given retroactive effect.[38]

Republic Act 7279 is a substantive and penal law with a penalty clause which cannot
apply retroactively especially to pending actions.[39]

B. Republic Act No. 7279 and PD 1072 are not in pari materia.[40]

The retroactive application of Article VI, Section 10 of RA 7279 will affect vested rights
of petitioner-appellant NHA arising from its exercise of the power of eminent
domain.[41]

II

The Honorable Court of Appeals erred in ignoring the impractical consequences

resulting from a selective expropriation of lots.[42]
In G.R. No. 116176, petitioner Lim, a non-member of the tenant association who
bought from RCAM/PRC four lots of the subdivided Grace Park
Subdivision,[43] argues as follows:

Respondent NHA may not, as it would herein, legally re-group several smaller lots into
which a much bigger lot had previously been subdivided, and consider and treat them
as one again for the purpose of subdividing it once more into still smaller lots for
distribution to its supposed or intended beneficiaries.[44]

There really was no genuine necessity for the expropriation of the lots in question to
satisfy the purpose thereof as alleged in the complaint therefor.[45]

Respondent Court did not sustain the clear finding of the trial court that no evidence
sufficient to prove its claim that the expropriation of said lots and subdividing them
again into much smaller lots for resale to their present occupants would provide the
latter with more healthful, decent and peaceful surroundings and thus improve the
quality of their lives was ever presented by respondent NHA.[46]

Stripped of non-essentials, the petitions raise only one fundamental issue, and
that is, whether the NHA may validly expropriate the parcels of land subject of
these cases.

The Courts Ruling

The power of eminent domain is an inherent and indispensable power of the

State. Also called the power of expropriation, it is described as the highest and
most exact idea of property remaining in the government that may be acquired
for some public purpose through a method in the nature of a compulsory sale to
the State.[47] By virtue of its sovereign character, the exercise of the power
prevails over the non-impairment clause,[48] and is clearly superior to the final
and executory judgment rendered by a court in an ejectment case.[49]
Being inherent, the power need not be specifically conferred on the government
by the Constitution. Section 9, Article III of the Constitution, which mandates that
private property shall not be taken for a public use without just compensation,
merely imposes a limit on the governments exercise of the power and provides
a measure of protection to the individuals right to property.[50]

Just like its two companion fundamental powers of the State,[51] the power of
eminent domain is exercised by the Legislature. However, it may be delegated by
Congress to the President, administrative bodies, local government units, and
even to private enterprises performing public services.[52]

Albeit the power partakes of a sovereign character, it is by no means absolute. Its

exercise is subject to limitations, one of which is, precisely, Section 9, Article III
of the Constitution.

Over the years and in a plethora of cases, this Court has recognized the following
requisites for the valid exercise of the power of eminent domain: (1) the property
taken must be private property; (2) there must be genuine necessity to take the
private property; (3) the taking must be for public use; (4) there must be payment
of just compensation; and (5) the taking must comply with due process of
law.[53] Accordingly, the question that this Court must resolve is whether these
requisites have been adequately addressed.

It is incontrovertible that the parcels of land subject of these consolidated

petitions are private property. Thus, the first requisite is satisfied.

With respect to the second, it is well to recall that in Lagcao v. Judge Labra,[54] we
declared that the foundation of the right to exercise eminent domain is genuine
necessity, and that necessity must be of a public character. As a rule, the
determination of whether there is genuine necessity for the exercise is a
justiciable question.[55] However, when the power is exercised by the Legislature,
the question of necessity is essentially a political question.[56] Thus, in City
of Manila v. Chinese Community,[57] we held:

The legislature, in providing for the exercise of the power of eminent domain, may
directly determine the necessity for appropriating private property for a particular
improvement for public use, and it may select the exact location of the
improvement. In such a case, it is well-settled that the utility of the proposed
improvement, the extent of the public necessity for its construction, the expediency of
constructing it, the suitableness of the location selected and the consequent necessity
of taking the land selected for its site, are all questions exclusively for the legislature to
determine, and the courts have no power to interfere, or to substitute their own views
for those of the representatives of the people.

In the instant cases, the authority to expropriate came from Presidential Decree
No. 1072, issued by then President Ferdinand E. Marcos in 1977. At that time,
and as explicitly recognized under the 1973 Constitution, President Marcos had
legislative powers. Perforce, the expropriation of the subject properties
identified with specificity in the P.D. --- was directed by legislation. The issue of
necessity then assumed the nature of a political question.

As to the third requisite of public use, we examine the purpose for which the
expropriation was undertaken by NHA. As set forth in its petition, NHA justifies
the taking of the subject property for the purpose of improving and upgrading
the area by constructing roads and installing facilities thereon under the
Governments zonal improvement program and subdividing them into much
smaller lots for distribution and sale at a low cost to qualified beneficiaries,
mostly underprivileged long-time occupants of Grace Park. Around 510 families
with approximately 5 members each will be benefited by the project.[58] The only
remaining obstacle in the completion of this project is the lots subject of these
consolidated petitions as the other lots in Grace Park have already been
expropriated.[59]

The Zonal Improvement Program (ZIP), being implemented for government by

NHA, draws breath from policy mandates found in the 1987 Constitution.[60] It is
an integral part of the governments socialized housing program which,
in Sumulong v. Guerrero,[61] we deemed compliant with the public use
requirement, it being a program clearly devoted to a public purpose. Justice Irene
R. Cortes, speaking eloquently for the Court, said:

Socialized housing is defined as, the construction of dwelling units for the middle and
lower class members of our society, including the construction of the supporting
infrastructure and other facilities (Pres. Decree No. 1224, par. 1). This definition was
later expanded to include among others:

a) The construction and/or improvement of dwelling units for the middle and
lower income groups of the society, including the construction of the
supporting infrastructure and other facilities;

b) Slum clearance, relocation and resettlement of squatters and slum dwellers

as well as the provision of related facilities and services;

c) Slum improvement which consists basically of allocating homelots to the

dwellers in the area or property involved, rearrangement and re-alignment of
existing houses and other dwelling structures and the construction and
provision of basic community facilities and services, where there are none, such
as roads, footpaths, drainage, sewerage, water and power system, schools,
barangay centers, community centers, clinics, open spaces, parks, playgrounds
and other recreational facilities;

d) The provision of economic opportunities, including the development of

commercial and industrial estates and such other facilities to enhance the total
community growth; and

e) Such other activities undertaken in pursuance of the objective to provide and

maintain housing for the greatest number of people under Presidential Decree
No. 757. (Pres. Decree No. 1259, sec. 1)

xxxx

Specifically, urban renewal or redevelopment and the construction of low-cost housing

is recognized as a public purpose, not only because of the expanded concept of public
use but also because of specific provisions in the Constitution. The 1973 Constitution
made it incumbent upon the State to establish, maintain and ensure adequate social
services including housing [Art. II, sec. 7]. The 1987 Constitution goes even further by
providing that:

The State shall promote a just and dynamic social order that will ensure the
prosperity and independence of the nation and free the people from poverty
through policies that provide adequate social services, promote full
employment, a rising standard of living and an improved quality of life for all.
[Art. II, sec. 9]

The state shall, by law, and for the common good, undertake, in cooperation
with the private sector, a continuing program of urban land reform and housing
which will make available at affordable cost decent housing and basic services
to underprivileged and homeless citizens in urban centers and resettlement
areas. It shall also promote adequate employment opportunities to such
citizens. In the implementation of such program the State shall respect the rights
of small property owners. (Art. XIII, sec. 9, Emphasis supplied)

Housing is a basic human need. Shortage in housing is a matter of state concern since
it directly and significantly affects public health, safety, the environment and in sum,
the general welfare. The public character of housing measures does not change
because units in housing projects cannot be occupied by all but only by those who
satisfy prescribed qualifications. A beginning has to be made, for it is not possible to
provide housing for all who need it, all at once.

Population growth, the migration to urban areas and the mushrooming of crowded
makeshift dwellings is a worldwide development particularly in developing countries.
So basic and urgent are housing problems that the United Nations General Assembly
proclaimed 1987 as the International Year of Shelter for the Homeless to focus the
attention of the international community on those problems. The General Assembly is
[s]eriously concerned that, despite the efforts of Governments at the national and local
levels and of international organizations, the living conditions of the majority of the
people in slums and squatter areas and rural settlements, especially in developing
countries, continue to deteriorate in both relative and absolute terms. [G.A. Res.
37/221, Yearbook of the United Nations 1982, Vol. 36, p. 1043-4]

In the light of the foregoing, this Court is satisfied that "socialized housing" falls within
the confines of "public use". It is, particularly important to draw attention to paragraph
(d) of Pres. Dec. No. 1224 which should be construed in relation with the preceding
three paragraphs. Provisions on economic opportunities inextricably linked with low-
cost housing, or slum clearance, relocation and resettlement, or slum improvement
emphasize the public purpose of the project.[62]

It need only be added, at this juncture, that the public use requisite for the valid
exercise of the power of eminent domain is a flexible and evolving concept
influenced by changing conditions. At present, it may not be amiss to state that
whatever is beneficially employed for the general welfare satisfies the
requirement of public use.[63]

Still, petitioner Manapat insists that, being himself a beneficiary of the

expropriation (because he has been a long-time resident of Grace Park), it would
be incongruous for government to take his land away from him only to give it
back to him. This contention sadly fails to comprehend the public purpose for the
taking under the socialized housing program. The parcels of land subject of the
expropriation are, precisely, being taken so that they can be subdivided into
much smaller lots --- at an average of 66.5 square meters per lot[64] --- for
distribution to deserving dwellers in the area. Upon the completion of the
project, Manapat, and those similarly situated as he, cannot assert any right to
be awarded the very same lots they currently occupy, nor be entitled to the same
area of the land they now have.

Then, we have petitioner Lim and respondents Vega, Santos, Oracion, and
Mercado, who argue that the lots they own should not be expropriated are
already titled in their names and are very small in area, being already the
subdivided portions of the original Grace Park Subdivision.

We are not persuaded.

J. M. Tuason & Co., Inc. v. Land Tenure Administration[65] is instructive. In that

case, this Court adopted the dissenting opinion of Justice J. B. L. Reyes in Republic
v. Baylosis,[66] that the propriety of exercising the power of eminent domain
cannot be determined on a purely quantitative or area basis, given that the
Constitution speaks of lands, not of landed estates. Speaking through Justice
(later Chief Justice) Enrique M. Fernando, the Court said:

This is not to say of course that property rights are disregarded. This is merely to
emphasize that the philosophy of our Constitution embodying as it does what Justice
Laurel referred to as its nationalistic and socialist traits discoverable upon even a
sudden dip into a variety of [its] provisions although not extending as far as the
destruction or annihilation of the rights to property, negates the postulate which at
one time reigned supreme in American constitutional law as to their well-nigh
inviolable character. This is not so under our Constitution, which rejects the doctrine
of laissez faire with its abhorrence for the least interference with the autonomy
supposed to be enjoyed by the property owner. Laissez faire, as Justice Malcolm
pointed out as far back as 1919, did not take too firm a foothold in our jurisprudence.
Our Constitution is much more explicit. There is no room for it for laissez faire. So
Justice Laurel affirmed not only in the above opinion but in another concurring opinion
quoted with approval in at least two of our subsequent decisions. We had occasion to
reiterate such a view in the ACCFA case, decided barely two months ago.

This particular grant of authority to Congress authorizing the expropriation of land is a

clear manifestation of such a policy that finds expression in our fundamental law. So is
the social justice principle enshrined in the Constitution of which it is an expression, as
so clearly pointed out in the respective dissenting opinions of Justice J.B.L. Reyes and
Chief Justice Paras in the Baylosis case. Why it should be thus is so plausibly set forth
in the ACCFA decision, the opinion being penned by Justice Makalintal. We quote: The
growing complexities of modern society, however, have rendered this traditional
classification of the functions of government quite unrealistic, not to say obsolete. 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. Here as almost everywhere else the
tendency is undoubtedly towards a greater socialization of economic forces. Here of
course this development was envisioned, indeed adopted as a national policy, by the
Constitution itself in its declaration of principle concerning the promotion of social
justice.

In a more recent decision,[67] we had occasion to declare that the fact that the
property is less than -hectare and that only a few would actually benefit from the
expropriation does not diminish its public use character, inasmuch as public use
now includes the broader notion of indirect public benefit or advantage,
including in particular, urban land reform and housing.

The Courts departure from the land size or area test finds further affirmation in
its rulings in Mataas na Lupa Tenants Association, Inc. v. Dimayuga[68] and the
aforecited Sumulong v. Guerrero.[69]

Given this discussion, it is clear that public use, as a requisite for the exercise of
eminent domain in the instant cases, has been adequately fulfilled.

To satisfy the fourth requisite, we affirm the appellate courts disposition that the
subject cases be remanded to the trial court for the determination of the amount
of just compensation. Under case law, the said determination is a judicial
prerogative.[70] As to the observance of the fifth requisite, the due process clause,
in the expropriation proceedings, all the parties have been given their day in
court. That they are now before this Court is attestation enough that they were
not denied due process of law.
From the foregoing disquisitions, it is unmistakable that all the requirements for
the valid exercise of the power of eminent domain have been complied
with. Thus, our answer to the singular and fundamental issue in these
consolidated cases is: YES, the NHA may validly expropriate the subject parcels
of land.

One final matter: the propriety of the application by the CA of R.A. No. 7279,
otherwise known as the Urban Development and Housing Act of 1992.

The Court is not unaware of the condition now imposed by R.A. No. 7279[71] that,
for purposes of urban development and housing under the Act, where
expropriation is resorted to, parcels of land owned by small property owners shall
be exempted.[72] Small property owners are owners of residential lands with an
area not exceeding 300 sq m in highly urbanized cities and 800 sq m in other
urban areas and who do not own any other real property.[73] Invoking this
limitation under the said law, the appellate court in the questioned rulings
exempted from expropriation the lots owned by Loberanes, Quimque, Mercado,
Vega and Santos, and partially exempted the lot of Oracion.

The CAs ruling on this point is incorrect. R.A. No. 7279 was enacted in 1992,
almost two decades after the expropriation cases against the property owners
herein were instituted with the RTC in 1977. Nova constitutio futuris formam
imponere debet, non praeteritis. A new statute should affect the future, not the
past. The law looks forward, not backward.[74] Article 4 of the Civil Code even
explicitly declares, (l)aws shall have no retroactive effect, unless the contrary is
provided.[75] In these consolidated cases, the Court finds that the language of R.A.
No. 7279 does not suggest that the Legislature has intended its provisions to have
any retroactive application. On the contrary, Section 49 of the said law indicates
that it shall take effect upon its publication in at least two (2) national
newspapers of general circulation.[76] The laws prospective application being
clearly stated, the Court cannot agree with the disposition of the appellate court
that the subject lots not exceeding 300 sq m are exempt from expropriation.

WHEREFORE, PREMISES CONSIDERED, the May 27, 1993 Decision of the Court of
Appeals in CA-G.R. CV No. 10200-10212 and the June 28, 1994 Decision in CA-
 G.R. CV No. 27159 are AFFIRMED; and the March 2, 1994 and the July 25, 1994
Resolutions in CA-G.R. CV Nos. 10200-10212 are REVERSED and SET ASIDE.

SO ORDERED.

2. Masikip vs City of Pasig

SANDOVAL GUTIERREZ, J.:

Where the taking by the State of private property is done for the benefit of a small
community which seeks to have its own sports and recreational facility,
notwithstanding that there is such a recreational facility only a short distance away,
such taking cannot be considered to be for public use. Its expropriation is not valid.
In this case, the Court defines what constitutes a genuine necessity for public use.

This petition for review on certiorari assails the Decision[1] of the Court of Appeals
dated October 31, 1997 in CA-G.R. SP No. 41860 affirming the Order[2] of the
Regional Trial Court, Branch 165, Pasig City, dated May 7, 1996 in S.C.A. No. 873.
Likewise assailed is the Resolution[3] of the same court dated November 20, 1998
denying petitioners Motion for Reconsideration.

The facts of the case are:

Petitioner Lourdes Dela Paz Masikip is the registered owner of a parcel of land with
an area of 4,521 square meters located at Pag-Asa, Caniogan, Pasig City, Metro
Manila.

In a letter dated January 6, 1994, the then Municipality of Pasig, now City of Pasig,
respondent, notified petitioner of its intention to expropriate a 1,500 square meter
portion of her property to be used for the sports development and recreational
activities of the residents of Barangay Caniogan. This was pursuant to Ordinance No.
42, Series of 1993 enacted by the then Sangguniang Bayan of Pasig.

Again, on March 23, 1994, respondent wrote another letter to petitioner, but this
time the purpose was allegedly in line with the program of the Municipal
Government to provide land opportunities to deserving poor sectors of our
community.

On May 2, 1994, petitioner sent a reply to respondent stating that the intended
expropriation of her property is unconstitutional, invalid, and oppressive, as the area
of her lot is neither sufficient nor suitable to provide land opportunities to deserving
poor sectors of our community.

In its letter of December 20, 1994, respondent reiterated that the purpose of the
expropriation of petitioners property is to provide sports and recreational facilities
to its poor residents.

Subsequently, on February 21, 1995, respondent filed with the trial court a
complaint for expropriation, docketed as SCA No. 873. Respondent prayed that the
trial court, after due notice and hearing, issue an order for the condemnation of the
property; that commissioners be appointed for the purpose of determining the just
compensation; and that judgment be rendered based on the report of the
commissioners.

On April 25, 1995, petitioner filed a Motion to Dismiss the complaint on the following
grounds:

I
PLAINTIFF HAS NO CAUSE OF ACTION FOR THE EXERCISE OF THE
POWER OF EMINENT DOMAIN, CONSIDERING THAT:
 (A) THERE IS NO GENUINE NECESSITY FOR THE
TAKING OF THE PROPERTY SOUGHT TO BE
EXPROPRIATED.

(B) PLAINTIFF HAS ARBITRARILY AND CAPRICIOUSLY

CHOSEN THE PROPERTY SOUGHT TO BE
EXPROPRIATED.

(C) EVEN ASSUMING ARGUENDO THAT

DEFENDANTS PROPERTY MAY BE EXPROPRIATED BY
PLAINTIFF, THE FAIR MARKET VALUE OF THE
PROPERTY TO BE EXPROPRIATED FAR EXCEEDS
SEVENTY-EIGHT THOUSAND PESOS (P78,000.00)

II

PLAINTIFFS COMPLAINT IS DEFECTIVE IN FORM AND

SUBSTANCE, CONSIDERING THAT:

(A) PLAINTIFF FAILS TO ALLEGE WITH CERTAINTY

THE PURPOSE OF THE EXPROPRIATION.

(B) PLAINTIFF HAS FAILED TO COMPLY WITH THE

PREREQUISITES LAID DOWN IN SECTION 34, RULE VI
OF THE RULES AND REGULATIONS IMPLEMENTING
 THE LOCAL GOVERNMENT CODE; THUS, THE
INSTANT EXPROPRIATION PROCEEDING IS
PREMATURE.

III

THE GRANTING OF THE EXPROPRIATION WOULD VIOLATE

SECTION 261 (V) OF THE OMNIBUS ELECTION CODE.

IV

PLAINTIFF CANNOT TAKE POSSESSION OF THE SUBJECT

PROPERTY BY MERELY DEPOSITING AN AMOUNT EQUAL TO
FIFTEEN PERCENT (15%) OF THE VALUE OF THE PROPERTY BASED
ON THE CURRENT TAX DECLARATION OF THE SUBJECT
PROPERTY.[4]

On May 7, 1996, the trial court issued an Order denying the Motion to Dismiss,[5] on
the ground that there is a genuine necessity to expropriate the property for the sports
and recreational activities of the residents of Pasig. As to the issue of just
compensation, the trial court held that the same is to be determined in accordance
with the Revised Rules of Court.

Petitioner filed a motion for reconsideration but it was denied by the trial court in
its Order of July 31, 1996. Forthwith, it appointed the City Assessor and City
Treasurer of Pasig City as commissioners to ascertain the just compensation. This
prompted petitioner to file with the Court of Appeals a special civil action
for certiorari, docketed as CA-G.R. SP No. 41860. On October 31, 1997, the Appellate
Court dismissed the petition for lack of merit. Petitioners Motion for
Reconsideration was denied in a Resolution dated November 20, 1998.

Hence, this petition anchored on the following grounds:

THE QUESTIONED DECISION DATED 31 OCTOBER 1997

(ATTACHMENT A) AND RESOLUTION DATED 20 NOVEMBER 1998
(ATTACHMENT B) ARE CONTRARY TO LAW, THE RULES OF COURT
AND JURISPRUDENCE CONSIDERING THAT:

A. THERE IS NO EVIDENCE TO PROVE THAT THERE IS

GENUINE NECESSITY FOR THE TAKING OF
THE PETITIONERS PROPERTY.

B. THERE IS NO EVIDENCE TO PROVE THAT THE

PUBLIC USE REQUIREMENT FOR THE
EXERCISE OF THE POWER OF EMINENT
DOMAIN HAS BEEN COMPLIED WITH.

C. THERE IS NO EVIDENCE TO PROVE THAT

RESPONDENT CITY OF PASIG HAS COMPLIED
WITH ALL CONDITIONS PRECEDENT FOR THE
EXERCISE OF THE POWER OF EMINENT
DOMAIN.

THE COURT A QUOS ORDER DATED 07 MAY 1996 AND 31 JULY

1996, WHICH WERE AFFIRMED BY THE COURT OF APPEALS,
EFFECTIVELY AMOUNT TO THE TAKING OF PETITIONERS
PROPERTY WITHOUT DUE PROCESS OF LAW:

II

THE COURT OF APPEALS GRAVELY ERRED IN

APPLYING OF RULE ON ACTIONABLE DOCUMENTS
TO THE DOCUMENTS ATTACHED TO RESPONDENT
CITY OF PASIGS COMPLAINT DATED 07 APRIL 1995
TO JUSTIFY THE COURT A QUOS DENIAL OF
PETITIONERS RESPONSIVE PLEADING TO THE
COMPLAINT FOR EXPROPRIATION (THE MOTION TO
DISMISS DATED 21 APRIL 1995).

III

THE COURT OF APPEALS GRAVELY ERRED IN

APPLYING THE RULE ON HYPOTHETICAL
ADMISSION OF FACTS ALLEGED IN A COMPLAINT
CONSIDERING THAT THE MOTION TO
DISMISS FILED BY PETITIONER IN THE
EXPROPRIATION CASE BELOW WAS THE
RESPONSIVE PLEADING REQUIRED TO BE FILED
UNDER THE THEN RULE 67 OF THE RULES OF COURT
AND NOT AN ORIDNARY MOTION TO DISMISS
UNDER RULE 16 OF THE RULES OF COURT.
The foregoing arguments may be synthesized into two main issues one substantive
and one procedural. We will first address the procedural issue.

Petitioner filed her Motion to Dismiss the complaint for expropriation on April 25,
1995. It was denied by the trial court on May 7, 1996. At that time, the rule on
expropriation was governed by Section 3, Rule 67 of the Revised Rules of Court
which provides:

SEC. 3. Defenses and objections. Within the time specified in the summons, each
defendant, in lieu of an answer, shall present in a single motion to dismiss or for other
appropriate relief, all his objections and defenses to the right of the plaintiff to take his
property for the use or purpose specified in the complaint. All such objections and
defenses not so presented are waived. A copy of the motion shall be served on the plaintiffs
attorney of record and filed with the court with proof of service.

The motion to dismiss contemplated in the above Rule clearly constitutes the
responsive pleading which takes the place of an answer to the complaint for
expropriation. Such motion is the pleading that puts in issue the right of the plaintiff
to expropriate the defendants property for the use specified in the complaint. All
that the law requires is that a copy of the said motion be served on plaintiffs attorney
of record. It is the court that at its convenience will set the case for trial after the
filing of the said pleading.[6]

The Court of Appeals therefore erred in holding that the motion to dismiss filed by
petitioner hypothetically admitted the truth of the facts alleged in the complaint,
specifically that there is a genuine necessity to expropriate petitioners property for
public use. Pursuant to the above Rule, the motion is a responsive pleading joining
the issues. What the trial court should have done was to set the case for the
reception of evidence to determine whether there is indeed a genuine necessity for
the taking of the property, instead of summarily making a finding that the taking is
for public use and appointing commissioners to fix just compensation. This is
especially so considering that the purpose of the expropriation was squarely
challenged and put in issue by petitioner in her motion to dismiss.
Significantly, the above Rule allowing a defendant in an expropriation case to file a
motion to dismiss in lieu of an answer was amended by the 1997 Rules of Civil
Procedure, which took effect on July 1, 1997. Section 3, Rule 67 now expressly
mandates that any objection or defense to the taking of the property of a defendant
must be set forth in an answer.

The fact that the Court of Appeals rendered its Decision in CA-G.R. SP No. 41860 on
October 31, after the 1997 Rules of Civil Procedure took effect, is of no moment. It
is only fair that the Rule at the time petitioner filed her motion to dismiss should
govern. The new provision cannot be applied retroactively to her prejudice.

We now proceed to address the substantive issue.

In the early case of US v. Toribio,[7] this Court defined the power of eminent domain
as the right of a government to take and appropriate private property to public use,
whenever the public exigency requires it, which can be done only on condition of
providing a reasonable compensation therefor. It has also been described as the
power of the State or its instrumentalities to take private property for public use and
is inseparable from sovereignty and inherent in government.[8]

The power of eminent domain is lodged in the legislative branch of the government.
It delegates the exercise thereof to local government units, other public entities and
public utility corporations,[9] subject only to Constitutional limitations. Local
governments have no inherent power of eminent domain and may exercise it only
when expressly authorized by statute.[10] Section 19 of the Local Government Code
of 1991 (Republic Act No. 7160) prescribes the delegation by Congress of the power
of eminent domain to local government units and lays down the parameters for its
exercise, thus:

SEC. 19. Eminent Domain. A local government unit may, through its chief executive and
acting pursuant to an ordinance, exercise the power of eminent domain for public use,
purpose or welfare for the benefit of the poor and the landless, upon payment of just
 compensation, pursuant to the provisions of the Constitution and pertinent laws: Provided,
however, That, the power of eminent domain may not be exercised unless a valid and
definite offer has been previously made to the owner and such offer was not
accepted: Provided, further, That, the local government unit may immediately take
possession of the property upon the filing of expropriation proceedings and upon making
a deposit with the proper court of at least fifteen percent (15%) of the fair market value of
the property based on the current tax declaration of the property to be
expropriated: Provided, finally, That, the amount to be paid for expropriated property shall
be determined by the proper court, based on the fair market value at the time of the taking
of the property.

Judicial review of the exercise of eminent domain is limited to the following areas of
concern: (a) the adequacy of the compensation, (b) the necessity of the taking, and
(c) the public use character of the purpose of the taking.[11]

In this case, petitioner contends that respondent City of Pasig failed to establish a
genuine necessity which justifies the condemnation of her property. While she does
not dispute the intended public purpose, nonetheless, she insists that there must be
a genuine necessity for the proposed use and purposes. According to petitioner,
there is already an established sports development and recreational activity center
at Rainforest Park in Pasig City, fully operational and being utilized by its residents,
including those from Barangay Caniogan. Respondent does not dispute this.
Evidently, there is no genuine necessity to justify the expropriation.

The right to take private property for public purposes necessarily originates from the
necessity and the taking must be limited to such necessity. In City of Manila v.
Chinese Community of Manila,[12] we held that the very foundation of the right to
exercise eminent domain is a genuine necessity and that necessity must be of a public
character. Moreover, the ascertainment of the necessity must precede or
accompany and not follow, the taking of the land. In City of Manila v. Arellano Law
College,[13] we ruled that necessity within the rule that the particular property to be
expropriated must be necessary, does not mean an absolute but only a reasonable
or practical necessity, such as would combine the greatest benefit to the public with
the least inconvenience and expense to the condemning party and the property
owner consistent with such benefit.
 Applying this standard, we hold that respondent City of Pasig has failed to
establish that there is a genuine necessity to expropriate petitioners property. Our
scrutiny of the records shows that the Certification[14] issued by the Caniogan
Barangay Council dated November 20, 1994, the basis for the passage of Ordinance
No. 42 s. 1993 authorizing the expropriation, indicates that the intended beneficiary
is the Melendres Compound Homeowners Association, a private, non-profit
organization, not the residents of Caniogan. It can be gleaned that the members of
the said Association are desirous of having their own private playground and
recreational facility. Petitioners lot is the nearest vacant space available. The
purpose is, therefore, not clearly and categorically public. The necessity has not
been shown, especially considering that there exists an alternative facility for sports
development and community recreation in the area, which is the Rainforest Park,
available to all residents of Pasig City, including those of Caniogan.

The right to own and possess property is one of the most cherished rights of
men. It is so fundamental that it has been written into organic law of every nation
where the rule of law prevails. Unless the requisite of genuine necessity for the
expropriation of ones property is clearly established, it shall be the duty of the courts
to protect the rights of individuals to their private property. Important as the power
of eminent domain may be, the inviolable sanctity which the Constitution attaches
to the property of the individual requires not only that the purpose for the taking of
private property be specified. The genuine necessity for the taking, which must be
of a public character, must also be shown to exist.

WHEREFORE, the petition for review is GRANTED. The challenged Decision

and Resolution of the Court of Appeals in CA-G.R. SP No. 41860 are REVERSED. The
complaint for expropriation filed before the trial court by respondent City of Pasig,
docketed as SCA No. 873, is ordered DISMISSED.

SO ORDERED.
3.NPC vs Gutierrez
BIDIN, J.:

This is a petition for review on certiorari filed by the National Power Corporation (NPC) seeking the reversal or
modification of the March 9, 1986 Decision of the Court of Appeals in CA G.R. No. 54291-R entitled "National
Power Corporation v. Sps. Misericordia Gutierrez and Ricardo Malit", affirming the December 4, 1972 Decision
of the then Court of First Instance of Pampanga, Fifth Judicial District, Branch II, in Civil Case No. 2709,
entitled National Power Corporation v. Matias Cruz, et al.

The undisputed facts of the case, as found by the Court of Appeals, are as follows:

Plaintiff National Power Corporation, a government owned and controlled entity, in accordance with
Commonwealth Act No. 120, is invested with the power of eminent domain for the purpose of
pursuing its objectives, which among others is the construction, operation, and maintenance of
electric transmission lines for distribution throughout the Philippines. For the construction of its 230
KV Mexico-Limay transmission lines, plaintiff's lines have to pass the lands belonging to defendants
Matias Cruz, Heirs of Natalia Paule and spouses Misericordia Gutierrez and Ricardo Malit covered by
tax declarations Nos. 907, 4281 and 7582, respectively.

Plaintiff initiated negotiations for the acquisition of right of way easements over the aforementioned
lots for the construction of its transmission lines but unsuccessful in this regard, said corporation was
constrained to file eminent domain proceedings against the herein defendants on January 20, 1965.

Upon filing of the corresponding complaint, plaintiff corporation deposited the amount of P973.00
with the Provincial Treasurer of Pampanga, tendered to cover the provisional value of the land of the
defendant spouses Ricardo Malit and Misericordia Gutierrez. And by virtue of which, the plaintiff
corporation was placed in possession of the property of the defendant spouses so it could
immediately proceed with the construction of its Mexico-Limay 230 KV transmission line. In this
connection, by the trial court's order of September 30, 1965, the defendant spouses were authorized
to withdraw the fixed provisional value of their land in the sum of P973.00.

The only controversy existing between the parties litigants is the reasonableness and adequacy of the
disturbance or compensation fee of the expropriated properties.

Meanwhile, for the purpose of determining the fair and just compensation due the defendants, the
court appointed three commissioners, comprised of one representative of the plaintiff, one for the
defendants and the other from the court, who then were empowered to receive evidence, conduct
ocular inspection of the premises, and thereafter, prepare their appraisals as to the fair and just
compensation to be paid to the owners of the lots. Hearings were consequently held before said
commissioners and during their hearings, the case of defendant Heirs of Natalia Paule was amicably
settled by virtue of a Right of Way Grant (Exh. C) executed by Guadalupe Sangalang for herself and in
behalf of her co-heirs in favor of the plaintiff corporation. The case against Matias Cruz was earlier
decided by the court, thereby leaving only the case against the defendant spouses Ricardo Malit and
Misericordia Gutierrez still to be resolved. Accordingly, the commissioners submitted their individual
reports. The commissioner for the plaintiff corporation recommended the following:

. . . that plaintiff be granted right of way easement over the 760 square meters of the
defendants Malit and Gutierrez land for plaintiff transmission line upon payment of an
easement fee of P1.00 therefor. . . . (Annex M)

The commissioner for the defendant spouses recommended the following:

. . . that Mr. and Mrs. Ricardo Malit be paid as disturbance compensation the amount of
P10.00 sq. meter or the total amount of P7,600.00' (Annex K)

The Court's commissioner recommended the following:

. . . the payment of Five (P 5.OO) Pesos per square meter of the area covered by the Right-of-
way to be granted, . . .(Annex L)

The plaintiff corporation urged the Court that the assessment as recommended by their
commissioner be the one adopted. Defendant spouses, however, dissented and objected to
the price recommended by both the representative of the court and of the plaintiff
corporation.

With these reports submitted by the three commissioners and on the evidence adduced by
the defendants as well as the plaintiff for the purpose of proving the fair market value of the
property sought to be expropriated, the lower court rendered a decision the dispositive
portion of which reads as follows:

WHEREFORE, responsive to the foregoing considerations, judgment is hereby

rendered ordering plaintiff National Power Corporation to pay defendant spouses
Ricardo Malit and Misericordia Gutierrez the sum of P10.00 per square meter as the
fair and reasonable compensation for the right-of-way easement of the affected
area, which is 760 squares, or a total sum of P7,600.00 and P800.00 as attorney's
fees' (Record on Appeal, p. 83)

Dissatisfied with the decision, the plaintiff corporation filed a motion for reconsideration
which was favorably acted upon by the lower court, and in an order dated June 10, 1973, it
amended its previous decision in the following tenor:

On the basis of an ocular inspection made personally by the undersigned, this court
finally classified the land of the spouses Ricardo Malit and Misericordia to be partly
commercial and partly agricultural, for which reason the amount of P10.00 per sq.
meter awarded in the decision of December 4,1972 is hereby reduced to P5.00 per
square meter as the fair and reasonable market value of the 760 square meters
belonging to the said spouses.

There being no claim and evidence for attorney's fees, the amount of P800.00
awarded as attorney's fees, in the decision of December 4, 1972 is hereby
reconsidered and set aside. (Annex S)
 Still not satisfied, an appeal was filed by petitioner (NPC) with the Court of Appeals but
respondent Court of Appeals in its March 9, 1982, sustained the trial court, as follows:

WHEREFORE, finding no reversible error committed by the court a quo, the appealed
judgment is hereby affirmed with costs against the plaintiff-appellant.

Hence, the instant petition.

The First Division of this Court gave due course to the petition and required both parties to submit their
respective memoranda (Resolution of January 12, 1983). It also noted in an internal resolution of August 17,
1983 that petitioner flied its memorandum while the respondents failed to file their memorandum within the
period which expired on February 24,1983; hence, the case was considered submitted for decision.

The sole issue raised by petitioner is

WHETHER PETITIONER SHOULD BE MADE TO PAY SIMPLE EASEMENT FEE OR FULL COMPENSATION
FOR THE LAND TRAVERSED BY ITS TRANSMISSION LINES.

It is the contention of petitioner that the Court of Appeals committed gross error by adjudging the petitioner
liable for the payment of the full market value of the land traversed by its transmission lines, and that it
overlooks the undeniable fact that a simple right-of-way easement (for the passage of transmission lines)
transmits no rights, except that of the easement. Full ownership is retained by the private respondents and
they are not totally deprived of the use of the land. They can continue planting the same agricultural crops,
except those that would result in contact with the wires. On this premise, petitioner submits that if full market
value is required, then full transfer of ownership is only the logical equivalent.

The petition is devoid of merit. The resolution of this case hinges on the determination of whether the
acquisition of a mere right-of-way is an exercise of the power of eminent domain contemplated by law. 1wphi1

The trial court's observation shared by the appellate court show that ". . . While it is true that plaintiff are (sic)
only after a right-of-way easement, it nevertheless perpetually deprives defendants of their proprietary rights
as manifested by the imposition by the plaintiff upon defendants that below said transmission lines no plant
higher than three (3) meters is allowed. Furthermore, because of the high-tension current conveyed through
said transmission lines, danger to life and limbs that may be caused beneath said wires cannot altogether be
discounted, and to cap it all plaintiff only pays the fee to defendants once, while the latter shall continually pay
the taxes due on said affected portion of their property."

The foregoing facts considered, the acquisition of the right-of-way easement falls within the purview of the
power of eminent domain. Such conclusion finds support in similar cases of easement of right-of-way where
the Supreme Court sustained the award of just compensation for private property condemned for public use
(See National Power Corporation vs. Court of Appeals, 129 SCRA 665, 1984; Garcia vs. Court of Appeals, 102
SCRA 597,1981). The Supreme Court, in Republic of the Philippines vs. PLDT, * thus held that:

Normally, of course, the power of eminent domain results in the taking or appropriation of title to,
and possession of, the expropriated property; but no cogent reason appears why said power may not
be availed of to impose only a burden upon the owner of condemned property, without loss of title
and possession. It is unquestionable that real property may, through expropriation, be subjected to an
easement of right-of-way.
In the case at bar, the easement of right-of-way is definitely a taking under the power of eminent domain.
Considering the nature and effect of the installation of the 230 KV Mexico-Limay transmission lines, the
limitation imposed by NPC against the use of the land for an indefinite period deprives private respondents of
its ordinary use.

For these reasons, the owner of the property expropriated is entitled to a just compensation, which should be
neither more nor less, whenever it is possible to make the assessment, than the money equivalent of said
property. Just compensation has always been understood to be the just and complete equivalent of the loss
which the owner of the thing expropriated has to suffer by reason of the expropriation (Province of Tayabas vs.
Perez, 66 Phil. 467 [1938]; Assoc. of Small Land Owners of the Phils., Inc. vs. Secretary of Agrarian Reform, G.R.
No. 78742; Acuna vs. Arroyo, G.R. No. 79310; Pabrico vs. Juico, G.R. No. 79744; Manaay v. Juico, G.R. No.
79777,14 July 1989, 175 SCRA 343 [1989]). The price or value of the land and its character at the time it was
taken by the Government are the criteria for determining just compensation (National Power Corp. v. Court of
Appeals, 129 SCRA 665, [1984]). The above price refers to the market value of the land which may be the full
market value thereof. According to private respondents, the market value of their lot is P50.00 per square
meter because the said lot is adjacent to the National and super highways of Gapan, Nueva Ecija and Olongapo
City.

Private respondents recognize the inherent power of eminent domain being exercised by NPC when it finally
consented to the expropriation of the said portion of their land, subject however to payment of just
compensation. No matter how laudable NPC's purpose is, for which expropriation was sought, it is just and
equitable that they be compensated the fair and full equivalent for the loss sustained, which is the measure of
the indemnity, not whatever gain would accrue to the expropriating entity (EPZA v. Dulay, 149 SCRA 305
[1987]; Mun. of Daet v. Court of Appeals, 93 SCRA 503 (1979]).

It appearing that the trial court did not act capriciously and arbitrarily in setting the price of P5.00 per square
meter of the affected property, the said award is proper and not unreasonable.

On the issue of ownership being claimed by petitioner in the event that the price of P5.00 per square meter be
sustained, it is well settled that an issue which has not been raised in the Court a quo cannot be raised for the
first time on appeal as it would be offensive to the basic rules of fair play, justice and due process . . . (Filipino
Merchants v. Court of Appeals, G.R. No. 85141, November 8, 1989, 179 SCRA 638; Commissioner of Internal
Revenue v. Procter and Gamble Philippines Manufacturing Corporation, 160 SCRA 560 [1988]; Commissioner
of Internal Revenue v. Wander Philippines, Inc., 160 SCRA 573 1988]). Petitioner only sought an easement of
right-of-way, and as earlier discussed, the power of eminent domain may be exercised although title was not
transferred to the expropriator.

WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
4. Republic vs La Orden
Office of the Solicitor General for plaintiff-appellant.
Ledesma, Puno, Guytingco, Antonio and Associates for defendant-appellee.

DIZON, J.:

To ease and solve the daily traffic congestion on Legarda Street, the Government drew plans to extend
Azcarraga street from its junction with Mendiola street, up to the Sta. Mesa Rotonda, Sampaloc, Manila. To
carry out this plan it offered to buy a portion of approximately 6,000 square meters of a bigger parcel
belonging to La Orden de PP. Benedictinos de Filipinas, a domestic religious corporation that owns the San
Beda College, a private educational institution situated on Mendiola street. Not having been able to reach an
agreement on the matter with the owner, the Government instituted the present expropriation proceedings.

On May 27, 1957 the trial court, upon application of the Government hereinafter referred to as appellant
issued an order fixing the provisional value of the property in question at P270,000.00 and authorizing
appellant to take immediate possession thereof upon depositing said amount. The deposit having been made
with the City Treasurer of Manila, the trial court issued the corresponding order directing the Sheriff of Manila
to place appellant in possession of the property aforesaid.

On June 8, 1957, as directed by the Rules of Court, the herein appellee, in lieu of an answer, filed a motion to
dismiss the complaint based on the following grounds:

I. That the property sought to be expropriated is already dedicated to public use and therefore is not
subject to expropriation.

II. That there is no necessity for the proposed expropriation.

III. That the proposed Azcarraga Extension could pass through a different site which would entail less
expense to the Government and which would not necessitate the expropriation of a property
dedicated to education.

IV. That the present action filed by the plaintiff against the defendant is discriminatory.

V. That the herein plaintiff does not count with sufficient funds to push through its project of
constructing the proposed Azcarraga Extension and to allow the plaintiff to expropriate defendant's
property at this time would be only to needlessly deprive the latter of the use of its property.".

The government filed a written opposition to the motion to dismiss (Record on Appeal, pp. 30-37) while
appellee filed a reply thereto (Id., pp. 38-48). On July 29, 1957, without receiving evidence upon the questions
of fact arising from the complaint, the motion to dismiss and the opposition thereto filed, the trial court issued
the appealed order dismissing the case.

The appealed order shows that the trial court limited itself to deciding the point of whether or not the
expropriation of the property in question is necessary (Rec. on Ap., p. 50) and, having arrived at the conclusion
that such expropriation was not of extreme necessity, dismissed the proceedings.

It is to be observed that paragraph IV of the complaint expressly alleges that appellant needs, among other
properties, the portion of appellee's property in question for the purpose of constructing the Azcarraga street
extension, and that paragraph VII of the same complaint expressly alleges that, in accordance with Section
64(b) of the Revised Administrative Code, the President of the Philippines had authorized the acquisition, thru
condemnation proceedings, of the aforesaid parcel of land belonging to appellee, as evidenced by the third
indorsement dated May 15, 1957 of the Executive Secretary, Office of the President of the Philippines, a copy
of which was attached to the complaint as Annex "C" and made an integral part thereof. In denial of these
allegations appellee's motion to dismiss alleged that "there is no necessity for the proposed expropriation".
Thus, the question of fact decisive of the whole case arose.

It is the rule in this jurisdiction that private property may be expropriated for public use and upon payment of
just compensation; that condemnation of private property is justified only if it is for the public good and there
is a genuine necessity therefor of a public character. Consequently, the courts have the power to inquire into
the legality of the exercise of the right of eminent domain and to determine whether or not there is a genuine
necessity therefor (City of Manila vs. Chinese Community, 40 Phil. 349; Manila Railroad Company vs. Hacienda
Benito, Inc., 37 O.G. 1957).

Upon the other hand, it does not need extended argument to show that whether or not the proposed opening
of the Azcarraga extension is a necessity in order to relieve the daily congestion of traffic on Legarda St., is a
question of fact dependent not only upon the facts of which the trial court very liberally took judicial notice
but also up on other factors that do not appear of record and must, therefore, be established by means of
evidence. We are, therefore, of the opinion that the parties should have been given an opportunity to present
their respective evidence upon these factors and others that might be of direct or indirect help in determining
the vital question of fact involved, namely, the need to open the extension of Azcarraga street to ease and
solve the traffic congestion on Legarda street.

WHEREFORE, the appealed order of dismissal is set aside and the present case is remanded to the trial court
for further proceedings in accordance with this decision. Without costs.
5. Republic vs PLDT
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio A. Torres and Solicitor Camilo
D. Quiason for plaintiff-appellant.
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant-appellant.

REYES, J.B.L., J.:

Direct appeals, upon a joint record on appeal, by both the plaintiff and the defendant from the dismissal,
after hearing, by the Court of First Instance of Manila, in its Civil Case No. 35805, of their respective complaint
and counterclaims, but making permanent a preliminary mandatory injunction theretofore issued against the
defendant on the interconnection of telephone facilities owned and operated by said parties.

The plaintiff, Republic of the Philippines, is a political entity exercising governmental powers through its
branches and instrumentalities, one of which is the Bureau of Telecommunications. That office was created on
1 July 1947, under Executive Order No. 94, with the following powers and duties, in addition to certain powers
and duties formerly vested in the Director of Posts: 1awphil.t

SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties:

(a) To operate and maintain existing wire-telegraph and radio-telegraph offices, stations, and facilities,
and those to be established to restore the pre-war telecommunication service under the Bureau of
Posts, as well as such additional offices or stations as may hereafter be established to provide
telecommunication service in places requiring such service;

(b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone or radio telephone
communication service throughout the Philippines by utilizing such existing facilities in cities, towns,
and provinces as may be found feasible and under such terms and conditions or arrangements with
the present owners or operators thereof as may be agreed upon to the satisfaction of all concerned;

(c) To prescribe, subject to approval by the Department Head, equitable rates of charges for messages
handled by the system and/or for time calls and other services that may be rendered by said system;

(d) To establish and maintain coastal stations to serve ships at sea or aircrafts and, when public
interest so requires, to engage in the international telecommunication service in agreement with
other countries desiring to establish such service with the Republic of the Philippines; and

(e) To abide by all existing rules and regulations prescribed by the International Telecommunication
Convention relative to the accounting, disposition and exchange of messages handled in the
international service, and those that may hereafter be promulgated by said convention and adhered
to by the Government of the Republic of the Philippines. 1

The defendant, Philippine Long Distance Telephone Company (PLDT for short), is a public service corporation
holding a legislative franchise, Act 3426, as amended by Commonwealth Act 407, to install, operate and
maintain a telephone system throughout the Philippines and to carry on the business of electrical transmission
of messages within the Philippines and between the Philippines and the telephone systems of other
countries. 2 The RCA Communications, Inc., (which is not a party to the present case but has contractual
relations with the parties) is an American corporation authorized to transact business in the Philippines and is
the grantee, by assignment, of a legislative franchise to operate a domestic station for the reception and
transmission of long distance wireless messages (Act 2178) and to operate broadcasting and radio-telephone
and radio-telegraphic communications services (Act 3180). 3

Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an agreement
whereby telephone messages, coming from the United States and received by RCA's domestic station, could
automatically be transferred to the lines of PLDT; and vice-versa, for calls collected by the PLDT for
transmission from the Philippines to the United States. The contracting parties agreed to divide the tolls, as
follows: 25% to PLDT and 75% to RCA. The sharing was amended in 1941 to 30% for PLDT and 70% for RCA,
and again amended in 1947 to a 50-50 basis. The arrangement was later extended to radio-telephone
messages to and from European and Asiatic countries. Their contract contained a stipulation that either party
could terminate it on a 24-month notice to the other.4 On 2 February 1956, PLDT gave notice to RCA to
terminate their contract on 2 February 1958. 5

Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government Telephone
System by utilizing its own appropriation and equipment and by renting trunk lines of the PLDT to enable
government offices to call private parties. 6 Its application for the use of these trunk lines was in the usual form
of applications for telephone service, containing a statement, above the signature of the applicant, that the
latter will abide by the rules and regulations of the PLDT which are on file with the Public Service
Commission. 7 One of the many rules prohibits the public use of the service furnished the telephone subscriber
for his private use. 8 The Bureau has extended its services to the general public since 1948, 9 using the same
trunk lines owned by, and rented from, the PLDT, and prescribing its (the Bureau's) own schedule of
rates. 10 Through these trunk lines, a Government Telephone System (GTS) subscriber could make a call to a
PLDT subscriber in the same way that the latter could make a call to the former.

On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an agreement with
RCA Communications, Inc., for a joint overseas telephone service whereby the Bureau would convey radio-
telephone overseas calls received by RCA's station to and from local residents. 11 Actually, they inaugurated this
joint operation on 2 February 1958, under a "provisional" agreement. 12

On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained to the Bureau of
Telecommunications that said bureau was violating the conditions under which their Private Branch Exchange
(PBX) is inter-connected with the PLDT's facilities, referring to the rented trunk lines, for the Bureau had used
the trunk lines not only for the use of government offices but even to serve private persons or the general
public, in competition with the business of the PLDT; and gave notice that if said violations were not stopped
by midnight of 12 April 1958, the PLDT would sever the telephone connections. 13 When the PLDT received no
reply, it disconnected the trunk lines being rented by the Bureau at midnight on 12 April 1958. 14 The result was
the isolation of the Philippines, on telephone services, from the rest of the world, except the United States. 15

At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending applications for telephone
connection. 16 The PLDT was also maintaining 60,000 telephones and had also 20,000 pending
applications. 17Through the years, neither of them has been able to fill up the demand for telephone service.

The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both enter into an
interconnecting agreement, with the government paying (on a call basis) for all calls passing through the
interconnecting facilities from the Government Telephone System to the PLDT. 18 The PLDT replied that it was
willing to enter into an agreement on overseas telephone service to Europe and Asian countries provided that
the Bureau would submit to the jurisdiction and regulations of the Public Service Commission and in
consideration of 37 1/2% of the gross revenues. 19 In its memorandum in lieu of oral argument in this Court
dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 % (1/3) as its share in the
overseas telephone service. The proposals were not accepted by either party.
 On 12 April 1958, plaintiff Republic commenced suit against the defendant, Philippine Long Distance
Telephone Company, in the Court of First Instance of Manila (Civil Case No. 35805), praying in its complaint for
judgment commanding the PLDT to execute a contract with plaintiff, through the Bureau, for the use of the
facilities of defendant's telephone system throughout the Philippines under such terms and conditions as the
court might consider reasonable, and for a writ of preliminary injunction against the defendant company to
restrain the severance of the existing telephone connections and/or restore those severed.

Acting on the application of the plaintiff, and on the ground that the severance of telephone connections by
the defendant company would isolate the Philippines from other countries, the court a quo, on 14 April 1958,
issued an order for the defendant:

(1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has disconnected
between the facilities of the Government Telephone System, including its overseas telephone
services, and the facilities of defendant; (2) to refrain from carrying into effect its threat to sever the
existing telephone communication between the Bureau of Telecommunications and defendant, and
not to make connection over its telephone system of telephone calls coming to the Philippines from
foreign countries through the said Bureau's telephone facilities and the radio facilities of RCA
Communications, Inc.; and (3) to accept and connect through its telephone system all such telephone
calls coming to the Philippines from foreign countries until further order of this Court.

On 28 April 1958, the defendant company filed its answer, with counterclaims.

It denied any obligation on its part to execute a contrary of services with the Bureau of Telecommunications;
contested the jurisdiction of the Court of First Instance to compel it to enter into interconnecting agreements,
and averred that it was justified to disconnect the trunk lines heretofore leased to the Bureau of
Telecommunications under the existing agreement because its facilities were being used in fraud of its rights.
PLDT further claimed that the Bureau was engaging in commercial telephone operations in excess of authority,
in competition with, and to the prejudice of, the PLDT, using defendants own telephone poles, without proper
accounting of revenues.

After trial, the lower court rendered judgment that it could not compel the PLDT to enter into an agreement
with the Bureau because the parties were not in agreement; that under Executive Order 94, establishing the
Bureau of Telecommunications, said Bureau was not limited to servicing government offices alone, nor was
there any in the contract of lease of the trunk lines, since the PLDT knew, or ought to have known, at the time
that their use by the Bureau was to be public throughout the Islands, hence the Bureau was neither guilty of
fraud, abuse, or misuse of the poles of the PLDT; and, in view of serious public prejudice that would result
from the disconnection of the trunk lines, declared the preliminary injunction permanent, although it
dismissed both the complaint and the counterclaims.

Both parties appealed.

Taking up first the appeal of the Republic, the latter complains of the action of the trial court in dismissing the
part of its complaint seeking to compel the defendant to enter into an interconnecting contract with it,
because the parties could not agree on the terms and conditions of the interconnection, and of its refusal to
fix the terms and conditions therefor.

We agree with the court below that parties can not be coerced to enter into a contract where no agreement
is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms
and conditions is of the essence of our contractual system, and by express provision of the statute, a contract
may be annulled if tainted by violence, intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code
of the Philippines). But the court a quo has apparently overlooked that while the Republic may not compel the
PLDT to celebrate a contract with it, the Republic may, in the exercise of the sovereign power of eminent
domain, require the telephone company to permit interconnection of the government telephone system and
that of the PLDT, as the needs of the government service may require, subject to the payment of just
compensation to be determined by the court. Nominally, of course, the power of eminent domain results in
the taking or appropriation of title to, and possession of, the expropriated property; but no cogent reason
appears why the said power may not be availed of to impose only a burden upon the owner of condemned
property, without loss of title and possession. It is unquestionable that real property may, through
expropriation, be subjected to an easement of right of way. The use of the PLDT's lines and services to allow
inter-service connection between both telephone systems is not much different. In either case private
property is subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the Constitution,
the State may, in the interest of national welfare, transfer utilities to public ownership upon payment of just
compensation, there is no reason why the State may not require a public utility to render services in the
general interest, provided just compensation is paid therefor. Ultimately, the beneficiary of the
interconnecting service would be the users of both telephone systems, so that the condemnation would be for
public use.

The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may operate and
maintain wire telephone or radio telephone communications throughout the Philippines by utilizing existing
facilities in cities, towns, and provinces under such terms and conditions or arrangement with present owners
or operators as may be agreed upon to the satisfaction of all concerned; but there is nothing in this section
that would exclude resort to condemnation proceedings where unreasonable or unjust terms and conditions
are exacted, to the extent of crippling or seriously hampering the operations of said Bureau.

A perusal of the complaint shows that the Republic's cause of action is predicated upon the radio telephonic
isolation of the Bureau's facilities from the outside world if the severance of interconnection were to be
carried out by the PLDT, thereby preventing the Bureau of Telecommunications from properly discharging its
functions, to the prejudice of the general public. Save for the prayer to compel the PLDT to enter into a
contract (and the prayer is no essential part of the pleading), the averments make out a case for compulsory
rendering of inter-connecting services by the telephone company upon such terms and conditions as the court
may determine to be just. And since the lower court found that both parties "are practically at one that
defendant (PLDT) is entitled to reasonable compensation from plaintiff for the reasonable use of the former's
telephone facilities" (Decision, Record on Appeal, page 224), the lower court should have proceeded to treat
the case as one of condemnation of such services independently of contract and proceeded to determine the
just and reasonable compensation for the same, instead of dismissing the petition.

This view we have taken of the true nature of the Republic's petition necessarily results in overruling the plea
of defendant-appellant PLDT that the court of first instance had no jurisdiction to entertain the petition and
that the proper forum for the action was the Public Service Commission. That body, under the law, has no
authority to pass upon actions for the taking of private property under the sovereign right of eminent domain.
Furthermore, while the defendant telephone company is a public utility corporation whose franchise,
equipment and other properties are under the jurisdiction, supervision and control of the Public Service
Commission (Sec. 13, Public Service Act), yet the plaintiff's telecommunications network is a public service
owned by the Republic and operated by an instrumentality of the National Government, hence exempt, under
Section 14 of the Public Service Act, from such jurisdiction, supervision and control. The Bureau of
Telecommunications was created in pursuance of a state policy reorganizing the government offices
 to meet the exigencies attendant upon the establishment of the free and independent Government
of the Republic of the Philippines, and for the purpose of promoting simplicity, economy and
efficiency in its operation (Section 1, Republic Act No. 51)

and the determination of state policy is not vested in the Commission (Utilities Com. vs. Bartonville Bus Line,
290 Ill. 574; 124 N.E. 373).

Defendant PLDT, as appellant, contends that the court below was in error in not holding that the Bureau of
Telecommunications was not empowered to engage in commercial telephone business, and in ruling that said
defendant was not justified in disconnecting the telephone trunk lines it had previously leased to the Bureau.
We find that the court a quo ruled correctly in rejecting both assertions.

Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications, expressly
empowered the latter in its Section 79, subsection (b), to "negotiate for, operate and maintain wire telephone
or radio telephone communication service throughout the Philippines", and, in subsection (c), "to prescribe,
subject to approval by the Department Head, equitable rates of charges for messages handled by the system
and/or for time calls and other services that may be rendered by the system". Nothing in these provisions
limits the Bureau to non-commercial activities or prevents it from serving the general public. It may be that in
its original prospectuses the Bureau officials had stated that the service would be limited to government
offices: but such limitations could not block future expansion of the system, as authorized by the terms of the
Executive Order, nor could the officials of the Bureau bind the Government not to engage in services that are
authorized by law. It is a well-known rule that erroneous application and enforcement of the law by public
officers do not block subsequent correct application of the statute (PLDT vs. Collector of Internal Revenue, 90
Phil. 676), and that the Government is never estopped by mistake or error on the part of its agents (Pineda vs.
Court of First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711,
724).

The theses that the Bureau's commercial services constituted unfair competition, and that the Bureau was
guilty of fraud and abuse under its contract, are, likewise, untenable.

First, the competition is merely hypothetical, the demand for telephone service being very much more than
the supposed competitors can supply. As previously noted, the PLDT had 20,000 pending applications at the
time, and the Bureau had another 5,000. The telephone company's inability to meet the demands for service
are notorious even now. Second, the charter of the defendant expressly provides:

SEC. 14. The rights herein granted shall not be exclusive, and the rights and power to grant to any
corporation, association or person other than the grantee franchise for the telephone or electrical
transmission of message or signals shall not be impaired or affected by the granting of this franchise:
(Act 3436)

And third, as the trial court correctly stated, "when the Bureau of Telecommunications subscribed to the
trunk lines, defendant knew or should have known that their use by the subscriber was more or less public and
all embracing in nature, that is, throughout the Philippines, if not abroad" (Decision, Record on Appeal, page
216).

The acceptance by the defendant of the payment of rentals, despite its knowledge that the plaintiff had
extended the use of the trunk lines to commercial purposes, continuously since 1948, implies assent by the
defendant to such extended use. Since this relationship has been maintained for a long time and the public has
patronized both telephone systems, and their interconnection is to the public convenience, it is too late for the
defendant to claim misuse of its facilities, and it is not now at liberty to unilaterally sever the physical
connection of the trunk lines.

..., but there is high authority for the position that, when such physical connection has been
voluntarily made, under a fair and workable arrangement and guaranteed by contract and the
continuous line has come to be patronized and established as a great public convenience, such
connection shall not in breach of the agreement be severed by one of the parties. In that case, the
public is held to have such an interest in the arrangement that its rights must receive due
consideration. This position finds approval in State ex rel. vs. Cadwaller, 172 Ind. 619, 636, 87 N.E.
650, and is stated in the elaborate and learned opinion of Chief Justice Myers as follows: "Such
physical connection cannot be required as of right, but if such connection is voluntarily made by
contract, as is here alleged to be the case, so that the public acquires an interest in its continuance,
the act of the parties in making such connection is equivalent to a declaration of a purpose to waive
the primary right of independence, and it imposes upon the property such a public status that it may
not be disregarded" citing Mahan v. Mich. Tel. Co., 132 Mich. 242, 93 N.W. 629, and the reasons
upon which it is in part made to rest are referred to in the same opinion, as follows: "Where private
property is by the consent of the owner invested with a public interest or privilege for the benefit of
the public, the owner can no longer deal with it as private property only, but must hold it subject to
the right of the public in the exercise of that public interest or privilege conferred for their benefit."
Allnut v. Inglis (1810) 12 East, 527. The doctrine of this early case is the acknowledged law. (Clinton-
Dunn Tel. Co. v. Carolina Tel. & Tel. Co., 74 S.E. 636, 638).

It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant did not expect
that the Bureau's telephone system would expand with such rapidity as it has done; but this expansion is no
ground for the discontinuance of the service agreed upon.

The last issue urged by the PLDT as appellant is its right to compensation for the use of its poles for bearing
telephone wires of the Bureau of Telecommunications. Admitting that section 19 of the PLDT charter reserves
to the Government

the privilege without compensation of using the poles of the grantee to attach one ten-pin cross-
arm, and to install, maintain and operate wires of its telegraph system thereon; Provided, however,
That the Bureau of Posts shall have the right to place additional cross-arms and wires on the poles of
the grantee by paying a compensation, the rate of which is to be agreed upon by the Director of Posts
and the grantee;

the defendant counterclaimed for P8,772.00 for the use of its poles by the plaintiff, contending that what was
allowed free use, under the aforequoted provision, was one ten-pin cross-arm attachment and only for
plaintiff's telegraph system, not for its telephone system; that said section could not refer to the plaintiff's
telephone system, because it did not have such telephone system when defendant acquired its franchise. The
implication of the argument is that plaintiff has to pay for the use of defendant's poles if such use is for
plaintiff's telephone system and has to pay also if it attaches more than one (1) ten-pin cross-arm for
telegraphic purposes.

As there is no proof that the telephone wires strain the poles of the PLDT more than the telegraph wires, nor
that they cause more damage than the wires of the telegraph system, or that the Government has attached to
the poles more than one ten-pin cross-arm as permitted by the PLDT charter, we see no point in this
assignment of error. So long as the burden to be borne by the PLDT poles is not increased, we see no reason
why the reservation in favor of the telegraph wires of the government should not be extended to its telephone
lines, any time that the government decided to engage also in this kind of communication.
 In the ultimate analysis, the true objection of the PLDT to continue the link between its network and that of
the Government is that the latter competes "parasitically" (sic) with its own telephone services. Considering,
however, that the PLDT franchise is non-exclusive; that it is well-known that defendant PLDT is unable to
adequately cope with the current demands for telephone service, as shown by the number of pending
applications therefor; and that the PLDT's right to just compensation for the services rendered to the
Government telephone system and its users is herein recognized and preserved, the objections of defendant-
appellant are without merit. To uphold the PLDT's contention is to subordinate the needs of the general public
to the right of the PLDT to derive profit from the future expansion of its services under its non-exclusive
franchise.

WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed, except in so far as it
dismisses the petition of the Republic of the Philippines to compel the Philippine Long Distance Telephone
Company to continue servicing the Government telephone system upon such terms, and for a compensation,
that the trial court may determine to be just, including the period elapsed from the filing of the original
complaint or petition. And for this purpose, the records are ordered returned to the court of origin for further
hearings and other proceedings not inconsistent with this opinion. No costs.

6. Republic vs Borbon
BERSAMIN, J.:

The expropriator who has taken possession of the property subject of expropriation is obliged to pay
reasonable compensation to the landowner for the period of such possession although the proceedings had
been discontinued on the ground that the public purpose for the expropriation had meanwhile ceased.
Antecedents

The National Power Corporation (NAPOCOR) is a government-owned and -controlled corporation vested with
authority under Republic Act No. 6395, as amended, to undertake the development of hydro-electric
generation of power, production of electricity from any and all sources, construction, operation and
maintenance of power plants, auxiliary plants, dams, reservoirs, pipes, main transmission lines, power stations
and substations, and other works for the purpose of developing hydraulic power from any river, lake, creek,
spring and waterfalls in the Philippines and to supply such power to the inhabitants thereof.1

In February 1993, NAPOCOR entered a property located in Barangay San Isidro, Batangas City in order to
construct and maintain transmission lines for the 230 KV Mahabang Parang-Pinamucan Power Transmission
Project.2 Respondents heirs of Saturnino Q. Borbon owned the property, with a total area of 14,257 square
meters, which was registered under Transfer Certificate of Title No. T-9696 of the Registry of Deeds of
Batangas.3

On May 26, 1995, NAPOCOR filed a complaint for expropriation in the Regional Trial Court in Batangas City
(RTC),4seeking the acquisition of an easement of right of way over a portion of the property involving an area
of only 6,326 square meters, more or less,5 alleging that it had negotiated with the respondents for the
acquisition of the easement but they had failed to reach any agreement; and that, nonetheless, it was willing
to deposit the amount of 9,790.00 representing the assessed value of the portion sought to be
expropriated.6 It prayed for the issuance of a writ of possession upon deposit to enable it to enter and take
possession and control of the affected portion of the property; to demolish all improvements existing thereon;
and to commence construction of the transmission line project. It likewise prayed for the appointment of
three commissioners to determine the just compensation to be paid.7

In their answer with motion to dismiss,8 the respondents staunchly maintained that NAPOCOR had not
negotiated with them before entering the property and that the entry was done without their consent in the
process, destroying some fruit trees without payment, and installing five transmission line posts and five
woodpoles for its project;9 that the area being expropriated only covered the portion directly affected by the
transmission lines; that the remaining portion of the property was also affected because the transmission line
passed through the center of the land, thereby dividing the land into three lots; that the presence of the high
tension transmission line had rendered the entire property inutile for any future use and capabilities;10 that,
nonetheless, they tendered no objection to NAPOCORs entry provided it would pay just compensation not
only for the portion sought to be expropriated but for the entire property whose potential was greatly
diminished, if not totally lost, due to the project;11 and that their property was classified as industrial land.
Thus, they sought the dismissal of the complaint, the payment of just compensation of 1,000.00/square
meter, and attorneys fees;12 and to be allowed to nominate their representative to the panel of commissioners
to be appointed by the trial court.13

In the pre-trial conference conducted on December 20, 1995, the parties stipulated on: (1) the location of the
property; (2) the number of the heirs of the late Saturnino Q. Borbon; (3) the names of the persons upon
whom title to the property was issued; and (4) the ownership and possession of the property.14 In its order of
that date, the RTC directed the parties to submit the names of their nominees to sit in the panel of
commissioners within 10 days from the date of the pre-trial.15

The RTC constituted the panel of three commissioners. Two commissioners submitted a joint report on April 8,
1999,16 in which they found that the property was classified as industrial land located within the Industrial 2
Zone;17that although the property used to be classified as agricultural (i.e., horticultural and pasture land), it
was reclassified to industrial land for appraisal or taxation purposes on June 30, 1994; and that the
reclassification was made on the basis of a certification issued by the Zoning Administrator pursuant to Section
3.10 (d) of the Amended Zoning Ordinance (1989) of the City of Batangas.18 The two commissioners appraised
the value at 550.00/square meter.19However, the third commissioner filed a separate report dated March 16,
1999,20 whereby he recommended the payment of "an easement fee of at least ten percent (10%) of the
assessed value indicated in the tax declaration21plus cost of damages in the course of the construction,
improvements affected and tower occupancy fee."22

The parties then submitted their respective objections to the reports. On their part, the respondents
maintained that NAPOCOR should compensate them for the entire property at the rate of 550.00/square
meter because the property was already classified as industrial land at the time NAPOCOR entered it.23 In
contrast, NAPOCOR objected to the joint report, insisting that the property was classified as agricultural land at
the time of its taking in March 1993; and clarifying that it was only seeking an easement of right of way over a
portion of the property, not the entire area thereof, so that it should pay only 10% of the assessed value of the
portion thus occupied.24

In the judgment dated November 27, 2000,25 the RTC adopted the recommendation contained in the joint
report, and ruled thusly:

The price to be paid for an expropriated land is its value at the time of taking, which is the date when the
plaintiff actually entered the property or the date of the filing of the complaint for expropriation. In this case,
there is no evidence as to when the plaintiff actually entered the property in question, so the reference point
should be the date of filing of the complaint, which is May 5, 1995.

On this date, the property in question was already classified as industrial. So, the Joint Report (Exhibit "1") is
credible on this point. The two Commissioners who submitted the Joint Report are government officials who
were not shown to be biased. So, that their report should be given more weight than the minority report
submitted by a private lawyer representing the plaintiff. In view of these, the Court adopts the Joint Report
and rejects the minority report. The former fixed the just compensation at 550.00 per square meter for the
whole lot of 14,257 square meters.26

Accordingly, the RTC ordered NAPOCOR to pay the respondents: (1) just compensation for the whole area of
14,257 square meters at the rate of 550.00/square meter; (2) legal rate of interest from May 5, 1995 until full
payment; and (3) the costs of suit.27

NAPOCOR appealed (CA-G.R. No. 72069).

On April 29, 2004,28 the CA promulgated its decision, viz:

WHEREFORE, premises considered, the Decision dated November 27, 2000 of Branch I of the Regional Trial
Court of Batangas City, is hereby AFFIRMED with the MODIFICATION that plaintiff-appellant shall pay only for
the occupied 6,326 square meters of the subject real property at the rate of 550.00 per square meter and to
pay legal interest therefrom until fully paid.

SO ORDERED.29

Hence, this appeal by NAPOCOR.

Issue
On December 3, 2012, during the pendency of the appeal, NAPOCOR filed a Motion to Defer Proceedings
stating that negotiations between the parties were going on with a view to the amicable settlement of the
case.30

On January 3, 2014, NAPOCOR filed a Manifestation and Motion to Discontinue Expropriation

Proceedings,31informing that the parties failed to reach an amicable agreement; that the property sought to be
expropriated was no longer necessary for public purpose because of the intervening retirement of the
transmission lines installed on the respondents property;32 that because the public purpose for which such
property would be used thereby ceased to exist, the proceedings for expropriation should no longer continue,
and the State was now duty-bound to return the property to its owners; and that the dismissal or
discontinuance of the expropriation proceedings was in accordance with Section 4, Rule 67 of the Rules of
Court. Hence, NAPOCOR prayed that the proceedings be discontinued "under such terms as the court deems
just and equitable,"33 and that the compensation to be awarded the respondents be reduced by the equivalent
of the benefit they received from the land during the time of its occupation, for which purpose the case could
be remanded to the trial court for the determination of reasonable compensation to be paid to them.34

In light of its Manifestation and Motion to Discontinue Expropriation Proceedings, NAPOCOR contends that the
expropriation has become without basis for lack of public purpose as a result of the retirement of the
transmission lines; that if expropriation still proceeds, the Government will be unduly burdened by payment of
just compensation for property it no longer requires; and that there is legal basis in dismissing the
proceedings, citing Metropolitan Water District v. De los Angeles35 where the Court granted petitioners prayer
for the quashal of expropriation proceedings and the eventual dismissal of the proceedings on the ground that
the land sought to be expropriated was no longer "indispensably necessary" in the maintenance and operation
of petitioner's waterworks system.

The issue to be considered and resolved is whether or not the expropriation proceedings should be
discontinued or dismissed pending appeal.

Ruling of the Court

The dismissal of the proceedings for expropriation at the instance of NAPOCOR is proper, but, conformably
with Section 4,36 Rule 67 of the Rules of Court, the dismissal or discontinuance of the proceedings must be
upon such terms as the court deems just and equitable.

Before anything more, we remind the parties about the nature of the power of eminent domain. The right of
eminent domain is "the ultimate right of the sovereign power to appropriate, not only the public but the
private property of all citizens within the territorial sovereignty, to public purpose."37 But the exercise of such
right is not unlimited, for two mandatory requirements should underlie the Governments exercise of the
power of eminent domain, namely: (1) that it is for a particular public purpose; and (2) that just compensation
be paid to the property owner.38 These requirements partake the nature of implied conditions that should be
complied with to enable the condemnor to keep the property expropriated.39

Public use, in common acceptation, means "use by the public." However, the concept has expanded to include
utility, advantage or productivity for the benefit of the public.40 In Asia's Emerging Dragon Corporation v.
Department of Transportation and Communications,41 Justice Corona, in his dissenting opinion said that:

To be valid, the taking must be for public use. The meaning of the term "public use" has evolved over time in
response to changing public needs and exigencies. Public use which was traditionally understood as strictly
limited to actual "use by the public" has already been abandoned. "Public use" has now been held to be
synonymous with "public interest," "public benefit," and "public convenience."

It is essential that the element of public use of the property be maintained throughout the proceedings for
expropriation. The effects of abandoning the public purpose were explained in Mactan-Cebu International
Airport Authority v. Lozada, Sr.,42 to wit:

More particularly, with respect to the element of public use, the expropriator should commit to use the
property pursuant to the purpose stated in the petition for expropriation filed, failing which, it should file
another petition for the new purpose. If not, it is then incumbent upon the expropriator to return the said
property to its private owner, if the latter desires to reacquire the same. Otherwise, the judgment of
expropriation suffers an intrinsic flaw, as it would lack one indispensable element for the proper exercise of
the power of eminent domain, namely, the particular public purpose for which the property will be devoted.
Accordingly, the private property owner would be denied due process of law, and the judgment would violate
the property owner's right to justice, fairness and equity.43

A review reveals that Metropolitan Water District v. De los Angeles44 is an appropriate precedent herein. There,
the Metropolitan Water District passed a board resolution requesting the Attorney-General to file a petition in
the Court of First Instance of the Province of Rizal praying that it be permitted to discontinue the
condemnation proceedings it had initiated for the expropriation of a parcel of land in Montalban, Rizal to be
used in the construction of the Angat Waterworks System. It claimed that the land was no longer indispensably
necessary in the maintenance and operation of its waterworks system, and that the expropriation complaint
should then be dismissed. The Court, expounding on the power of the State to exercise the right of eminent
domain, then pronounced:

There is no question raised concerning the right of the plaintiff here to acquire the land under the power of
eminent domain. That power was expressly granted it by its charter. The power of eminent domain is a right
1wphi1

reserved to the people or Government to take property for public use. It is the right of the state, through its
regular organization, to reassert either temporarily or permanently its dominion over any portion of the soil of
the state on account of public necessity and for the public good. The right of eminent domain is the right
which the Government or the people retains over the estates of individuals to resume them for public use. It is
the right of the people, or the sovereign, to dispose, in case of public necessity and for the public safety, of all
the wealth contained in the state.45

Indeed, public use is the fundamental basis for the action for expropriation; hence, NAPOCORs motion to
discontinue the proceedings is warranted and should be granted. The Court has observed in Metropolitan
Water District v. De los Angeles:

It is not denied that the purpose of the plaintiff was to acquire the land in question for public use. The
fundamental basis then of all actions brought for the expropriation of lands, under the power of eminent
domain, is public use. That being true, the very moment that it appears at any stage of the proceedings that
the expropriation is not for a public use, the action must necessarily fail and should be dismissed, for the
reason that the action cannot be maintained at all except when the expropriation is for some public use. That
must be true even during the pendency of the appeal or at any other stage of the proceedings. If, for example,
during the trial in the lower court, it should be made to appear to the satisfaction of the court that the
expropriation is not for some public use, it would be the duty and the obligation of the trial court to dismiss
the action. And even during the pendency of the appeal, if it should be made to appear to the satisfaction of
the appellate court that the expropriation is not for public use, then it would become the duty and the
obligation of the appellate court to dismiss it.
In the present case the petitioner admits that the expropriation of the land in question is no longer necessary
for public use. Had that admission been made in the trial court the case should have been dismissed there. It
now appearing positively, by resolution of the plaintiff, that the expropriation is not necessary for public use,
the action should be dismissed even without a motion on the part of the plaintiff. The moment it appears in
whatever stage of the proceedings that the expropriation is not for a public use the complaint should be
dismissed and all the parties thereto should be relieved from further annoyance or litigation.46 (underscoring
and emphasis supplied)

It is notable that the dismissal of the expropriation proceedings in Metropolitan Water District v. De los
Angeles was made subject to several conditions in order to address the dispossession of the defendants of
their land, and the inconvenience, annoyance and damages suffered by the defendants on account of the
proceedings. Accordingly, the Court remanded the case to the trial court for the issuance of a writ of
possession ordering Metropolitan Water District to immediately return possession of the land to the
defendants, and for the determination of damages in favor of the defendants, the claims for which must be
presented within 30 days from the return of the record to the court of origin and notice thereof.47

Here, NAPOCOR seeks to discontinue the expropriation proceedings on the ground that the transmission lines
constructed on the respondents property had already been retired. Considering that the Court has
consistently upheld the primordial importance of public use in expropriation proceedings, NAPOCORs reliance
on Metropolitan Water District v. De los Angeles was apt and correct. Verily, the retirement of the
transmission lines necessarily stripped the expropriation proceedings of the element of public use. To continue
with the expropriation proceedings despite the definite cessation of the public purpose of the project would
result in the rendition of an invalid judgment in favor of the expropriator due to the absence of the essential
element of public use.

Unlike in Metropolitan Water District v. De los Angeles where the request to discontinue the expropriation
proceedings was made upon the authority appearing in the board resolution issued on July 14, 1930,48 counsel
for NAPOCOR has not presented herein any document to show that NAPOCOR had decided, as a corporate
body, to discontinue the expropriation proceedings. Nonetheless, the Court points to the Memorandum dated
December 13, 201249 and the Certificate of Inspection/Accomplishment dated February 5, 200550 attached to
NAPOCORs motion attesting to the retirement of the transmission lines. Also, Metropolitan Water District v.
De los Angeles emphasized that it became the duty and the obligation of the court, regardless of the stage of
the proceedings, to dismiss the action "if it should be made to appear to the satisfaction of the court that the
expropriation is not for some public use."51 Despite the lack of the board resolution, therefore, the Court now
considers the documents attached to NAPOCORs Manifestation and Motion to Discontinue Expropriation
Proceedings to be sufficient to establish that the expropriation sought is no longer for some public purpose.

Accordingly, the Court grants the motion to discontinue the proceedings subject to the conditions to be
shortly mentioned hereunder, and requires the return of the property to the respondents. Having said that,
we must point out that NAPOCOR entered the property without the owners consent and without paying just
compensation to the respondents. Neither did it deposit any amount as required by law prior to its entry. The
Constitution is explicit in obliging the Government and its entities to pay just compensation before depriving
any person of his or her property for public use.52 Considering that in the process of installing transmission
lines, NAPOCOR destroyed some fruit trees and plants without payment, and the installation of the
transmission lines went through the middle of the land as to divide the property into three lots, thereby
effectively rendering the entire property inutile for any future use, it would be unfair for NAPOCOR not to be
made liable to the respondents for the disturbance of their property rights from the time of entry until the
time of restoration of the possession of the property. There should be no question about the taking. In several
rulings, notably National Power Corporation v. Zabala,53 Republic v. Libunao,54 National Power Corporation v.
Tuazon,55 and National Power Corporation v. Saludares,56 this Court has already declared that "since the high-
tension electric current passing through the transmission lines will perpetually deprive the property owners of
the normal use of their land, it is only just and proper to require Napocor to recompense them for the full
market value of their property."

There is a sufficient showing that NAPOCOR entered into and took possession of the respondents property as
early as in March 1993 without the benefit of first filing a petition for eminent domain. For all intents and
purposes, therefore, March 1993 is the reckoning point of NAPOCORs taking of the property, instead of May
5, 1995, the time NAPOCOR filed the petition for expropriation. The reckoning conforms to the
pronouncement in Ansaldo v. Tantuico, Jr.,57 to wit:

Normally, of course, where the institution of an expropriation action precedes the taking of the property
subject thereof, the just compensation is fixed as of the time of the filing of the complaint. This is so provided
by the Rules of Court, the assumption of possession by the expropriator ordinarily being conditioned on its
deposits with the National or Provincial Treasurer of the value of the property as provisionally ascertained by
the court having jurisdiction of the proceedings.

There are instances, however, where the expropriating agency takes over the property prior to the
expropriation suit, as in this case although, to repeat, the case at bar is quite extraordinary in that possession
was taken by the expropriator more than 40 years prior to suit. In these instances, this Court has ruled that the
just compensation shall be determined as of the time of taking, not as of the time of filing of the action of
eminent domain.

In the context of the State's inherent power of eminent domain, there is a "taking" when the owner is actually
deprived or dispossessed of his property; when there is a practical destruction or a material impairment of the
value of his property or when he is deprived of the ordinary use thereof. There is a "taking" in this sense when
the expropriator enters private property not only for a momentary period but for a more permanent duration,
for the purpose of devoting the property to a public use in such a manner as to oust the owner and deprive
him of all beneficial enjoyment thereof. For ownership, after all, "is nothing without the inherent rights of
possession, control and enjoyment. Where the owner is deprived of the ordinary and beneficial use of his
property or of its value by its being diverted to public use, there is taking within the Constitutional sense." x x
x.58

In view of the discontinuance of the proceedings and the eventual return of the property to the respondents,
there is no need to pay "just compensation" to them because their property would not be taken by NAPOCOR.
Instead of full market value of the property, therefore, NAPOCOR should compensate the respondents for the
disturbance of their property rights from the time of entry in March 1993 until the time of restoration of the
possession by paying to them actual or other compensatory damages. This conforms with the following
pronouncement in Mactan-Cebu International Airport Authority v. Lozada, Sr.:59

In light of these premises, we now expressly hold that the taking of private property, consequent to the
Governments exercise of its power of eminent domain, is always subject to the condition that the property be
devoted to the specific public purpose for which it was taken. Corollarily, if this particular purpose or intent is
not initiated or not at all pursued, and is peremptorily abandoned, then the former owners, if they so desire,
may seek the reversion of the property, subject to the return of the amount of just compensation received. In
such a case, the exercise of the power of eminent domain has become improper for lack of the required
factual justification.60

This should mean that the compensation must be based on what they actually lost as a result and by reason of
their dispossession of the property and of its use, including the value of the fruit trees, plants and crops
destroyed by NAPOCORs construction of the transmission lines. Considering that the dismissal of the
expropriation proceedings is a development occurring during the appeal, the Court now treats the dismissal of
the expropriation proceedings as producing the effect of converting the case into an action for damages. For
that purpose, the Court remands the case to the court of origin for further proceedings, with instruction to the
court of origin to enable the parties to fully litigate the action for damages by giving them the opportunity to
re-define the factual and legal issues by the submission of the proper pleadings on the extent of the taking, the
value of the compensation to be paid to the respondents by NAPOCOR, and other relevant matters as they
deem fit. Trial shall be limited to matters the evidence upon which had not been heretofore heard or adduced.
The assessment and payment of the correct amount of filing fees due from the respondents shall be made in
the judgment, and such amount shall constitute a first lien on the recovery. Subject to these conditions, the
court of origin shall treat the case as if originally filed as an action for damages.

WHEREFORE, the Court DISMISSES the expropriation proceedings due to the intervening cessation of the need
for public use; REMANDS the records to the Regional Trial Court, Branch 1, in Batangas City as the court of
origin for further proceedings to be conducted in accordance with the foregoing instructions; and ORDERS said
trial court to try and decide the issues with dispatch.

SO ORDERED

7. People vs Fajardo
Appeal from the decision of the Court of First Instance of Camarines Sur convicting defendants-appellants Juan
F. Fajardo and Pedro Babilonia of a violation of Ordinance No. 7, Series of 1950, of the Municipality of Baao,
Camarines Sur, for having constructed without a permit from the municipal mayor a building that destroys the
view of the public plaza.
It appears that on August 15, 1950, during the incumbency of defendant-appellant Juan F. Fajardo as mayor of
the municipality of Baao, Camarines Sur, the municipal council passed the ordinance in question providing as
follows:

SECTION 1. Any person or persons who will construct or repair a building should, before constructing
or repairing, obtain a written permit from the Municipal Mayor.

SEC. 2. A fee of not less than P2.00 should be charged for each building permit and P1.00 for each
repair permit issued.

SEC. 3. PENALTY Any violation of the provisions of the above, this ordinance, shall make the
violation liable to pay a fine of not less than P25 nor more than P50 or imprisonment of not less than
12 days nor more than 24 days or both, at the discretion of the court. If said building destroys the
view of the Public Plaza or occupies any public property, it shall be removed at the expense of the
owner of the building or house.

SEC. 4. EFFECTIVITY This ordinance shall take effect on its approval. (Orig. Recs., P. 3)

Four years later, after the term of appellant Fajardo as mayor had expired, he and his son in-law, appellant
Babilonia, filed a written request with the incumbent municipal mayor for a permit to construct a building
adjacent to their gasoline station on a parcel of land registered in Fajardo's name, located along the national
highway and separated from the public plaza by a creek (Exh. D). On January 16, 1954, the request was denied,
for the reason among others that the proposed building would destroy the view or beauty of the public plaza
(Exh. E). On January 18, 1954, defendants reiterated their request for a building permit (Exh. 3), but again the
request was turned down by the mayor. Whereupon, appellants proceeded with the construction of the
building without a permit, because they needed a place of residence very badly, their former house having
been destroyed by a typhoon and hitherto they had been living on leased property.

On February 26, 1954, appellants were charged before and convicted by the justice of the peace court of Baao,
Camarines Sur, for violation of the ordinance in question. Defendants appealed to the Court of First Instance,
which affirmed the conviction, and sentenced appellants to pay a fine of P35 each and the costs, as well as to
demolish the building in question because it destroys the view of the public plaza of Baao, in that "it hinders
the view of travelers from the National Highway to the said public plaza." From this decision, the accused
appealed to the Court of Appeals, but the latter forwarded the records to us because the appeal attacks the
constitutionality of the ordinance in question.

We find that the appealed conviction can not stand.

A first objection to the validity of the ordinance in question is that under it the mayor has absolute discretion
to issue or deny a permit. The ordinance fails to state any policy, or to set up any standard to guide or limit the
mayor's action. No purpose to be attained by requiring the permit is expressed; no conditions for its grant or
refusal are enumerated. It is not merely a case of deficient standards; standards are entirely lacking. The
ordinance thus confers upon the mayor arbitrary and unrestricted power to grant or deny the issuance of
building permits, and it is a settled rule that such an undefined and unlimited delegation of power to allow or
prevent an activity, per se lawful, is invalid (People vs. Vera, 65 Phil., 56; Primicias vs. Fugoso, 80 Phil., 71;
Schloss Poster Adv. Co. vs. Rock Hill, 2 SE (2d) 392)

The ordinance in question in no way controls or guides the discretion vested thereby in the
respondents. It prescribes no uniform rule upon which the special permission of the city is to be
 granted. Thus the city is clothed with the uncontrolled power to capriciously grant the privilege to
some and deny it others; to refuse the application of one landowner or lessee and to grant that of
another, when for all material purposes, the two applying for precisely the same privileges under the
same circumstances. The danger of such an ordinance is that it makes possible arbitrary
discriminations and abuses in its execution, depending upon no conditions or qualifications whatever,
other than the unregulated arbitrary will of the city authorities as the touchstone by which its validity
is to be tested. Fundamental rights under our government do not depend for their existence upon
such a slender and uncertain thread. Ordinances which thus invest a city council with a discretion
which is purely arbitrary, and which may be exercised in the interest of a favored few, are
unreasonable and invalid. The ordinance should have established a rule by which its impartial
enforcement could be secured. All of the authorities cited above sustain this conclusion.

As was said in City of Richmond vs. Dudley, 129 Ind. 112,28 N. E. 312, 314 13 L. R. A. 587, 28 Am. St.
Rep. 180: "It seems from the foregoing authorities to be well established that municipal ordinances
placing restrictions upon lawful conduct or the lawful use of property must, in order to be valid,
specify the rules and conditions to be observed in such conduct or business; and must admit of the
exercise of the privilege of all citizens alike who will comply with such rules and conditions; and must
not admit of the exercise, or of an opportunity for the exercise, of any arbitrary discrimination by the
municipal authorities between citizens who will so comply. (Schloss Poster Adv. Co., Inc. vs. City of
Rock Hill, et al., 2 SE (2d), pp. 394-395).

It is contended, on the other hand, that the mayor can refuse a permit solely in case that the proposed
building "destroys the view of the public plaza or occupies any public property" (as stated in its section 3); and
in fact, the refusal of the Mayor of Baao to issue a building permit to the appellant was predicated on the
ground that the proposed building would "destroy the view of the public plaza" by preventing its being seen
from the public highway. Even thus interpreted, the ordinance is unreasonable and oppressive, in that it
operates to permanently deprive appellants of the right to use their own property; hence, it oversteps the
bounds of police power, and amounts to a taking of appellants property without just compensation. We do not
overlook that the modern tendency is to regard the beautification of neighborhoods as conducive to the
comfort and happiness of residents. But while property may be regulated in the interest of the general
welfare, and in its pursuit, the State may prohibit structures offensive to the sight (Churchill and Tait vs.
Rafferty, 32 Phil. 580), the State may not, under the guise of police power, permanently divest owners of the
beneficial use of their property and practically confiscate them solely to preserve or assure the aesthetic
appearance of the community. As the case now stands, every structure that may be erected on appellants'
land, regardless of its own beauty, stands condemned under the ordinance in question, because it would
interfere with the view of the public plaza from the highway. The appellants would, in effect, be constrained to
let their land remain idle and unused for the obvious purpose for which it is best suited, being urban in
character. To legally achieve that result, the municipality must give appellants just compensation and an
opportunity to be heard.

An ordinance which permanently so restricts the use of property that it can not be used for any
reasonable purpose goes, it is plain, beyond regulation and must be recognized as a taking of the
property. The only substantial difference, in such case, between restriction and actual taking, is that
the restriction leaves the owner subject to the burden of payment of taxation, while outright
confiscation would relieve him of that burden. (Arverne Bay Constr. Co. vs. Thatcher (N.Y.) 117 ALR.
1110, 1116).

A regulation which substantially deprives an owner of all beneficial use of his property is confiscation
and is a deprivation within the meaning of the 14th Amendment. (Sundlum vs. Zoning Bd., 145 Atl.
451; also Eaton vs. Sweeny, 177 NE 412; Taylor vs. Jacksonville, 133 So. 114).
 Zoning which admittedly limits property to a use which can not reasonably be made of it cannot be
said to set aside such property to a use but constitutes the taking of such property without just
compensation. Use of property is an element of ownership therein. Regardless of the opinion of
zealots that property may properly, by zoning, be utterly destroyed without compensation, such
principle finds no support in the genius of our government nor in the principles of justice as we known
them. Such a doctrine shocks the sense of justice. If it be of public benefit that property remain open
and unused, then certainly the public, and not the private individuals, should bear the cost of
reasonable compensation for such property under the rules of law governing the condemnation of
private property for public use. (Tews vs. Woolhiser (1933) 352 I11. 212, 185 N.E. 827) (Emphasis
supplied.)

The validity of the ordinance in question was justified by the court below under section 2243, par. (c), of the
Revised Administrative Code, as amended. This section provides:

SEC. 2243. Certain legislative powers of discretionary character. The municipal council shall have
authority to exercise the following discretionary powers:

xxx xxx xxx

(c) To establish fire limits in populous centers, prescribe the kinds of buildings that may be
constructed or repaired within them, and issue permits for the creation or repair thereof, charging a
fee which shall be determined by the municipal council and which shall not be less than two pesos for
each building permit and one peso for each repair permit issued. The fees collected under the
provisions of this subsection shall accrue to the municipal school fund.

Under the provisions of the section above quoted, however, the power of the municipal council to require the
issuance of building permits rests upon its first establishing fire limits in populous parts of the town and
prescribing the kinds of buildings that may be constructed or repaired within them. As there is absolutely no
showing in this case that the municipal council had either established fire limits within the municipality or set
standards for the kind or kinds of buildings to be constructed or repaired within them before it passed the
ordinance in question, it is clear that said ordinance was not conceived and promulgated under the express
authority of sec. 2243 (c) aforequoted.

We rule that the regulation in question, Municipal Ordinance No. 7, Series of 1950, of the Municipality of Baao,
Camarines Sur, was beyond the authority of said municipality to enact, and is therefore null and void. Hence,
the conviction of herein appellants is reversed, and said accused are acquitted, with costs de oficio. So
ordered.

POWER OF TAXATION

1.NPC vs City of Cabanatuan

This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001
and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax
to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as
amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the
production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric
power on a nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to
construct, operate and maintain power plants, auxiliary plants, power stations and substations for the purpose
of developing hydraulic power and supplying such power to the inhabitants.6

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income
of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the
petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for
the preceding year.9

Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,10 refused to pay
the tax assessment. It argued that the respondent has no authority to impose tax on government entities.
Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of
taxes, charges, duties or fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and
Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-
profit and shall devote all its return from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import
of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum products used by the Corporation in the generation, transmission, utilization, and
sale of electric power."12

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner
pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of
Rep. Act No. 7160,14 which reads as follows:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government owned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption
privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1)
Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law;
(2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local
governments have no power to tax instrumentalities of the national government. Pertinent portion of the
Order reads:

"The question of whether a particular law has been repealed or not by a subsequent law is a matter of
legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing
provisions which expressly and specifically cite(s) the particular law or laws, and portions thereof, that
are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular
and specific law, identified by its number or title is repealed is an express repeal; all others are implied
repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to identify the act or
acts that are intended to be repealed. It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored. The presumption is against inconsistency and repugnancy for
the legislative is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law does not
repeal a special law unless it clearly appears that the legislative has intended by the latter general act
to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from which the
questioned Ordinance No. 165-92 was based, the tax exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco
vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that:

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

PAGCOR is a government owned or controlled corporation with an original charter, PD 1869.
All of its shares of stocks are owned by the National Government. xxx Being an
instrumentality of the government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by mere
local government.'

Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter
and its shares of stocks owned by the National Government, is beyond the taxing power of the Local
Government. Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy,
Congress declared that: 'xxx (2) the total electrification of the Philippines through the development of
power from all services to meet the needs of industrial development and dispersal and needs of rural
electrification are primary objectives of the nations which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to
impede the avowed goal of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to
that which is provided for in its charter or other statute. Any grant of taxing power is to be construed
strictly, with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could
not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in relation to
sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.18 It ordered the
petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the
franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the
gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the
sum of P 10,000.00 as litigation expense.19

On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was
denied by the appellate court, viz:

"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that
the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to
private persons or corporations in which category it (NPC) does not belong, and that the LGC (RA
7160) which is a general law may not impliedly repeal the NPC Charter which is a special lawfinds
the answer in Section 193 of the LGC to the effect that 'tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including government-owned or
controlled corporations except local water districts xxx are hereby withdrawn.' The repeal is direct and
unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."20

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT
CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF
THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS
OR CORPORATIONS ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL FORMS
OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE
ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE
REPEALED A SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF POLICE
POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21

It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and
impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137
of the LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law,
the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent
(1%) of the capital investment. In the succeeding calendar year, regardless of when the business
 started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any
fraction thereof, as provided herein." (emphasis supplied)

x x x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the
taxes, fees, and charges which the province or municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly urbanized and independent component cities
shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement
taxes."

Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power
of the respondent city government to private entities that are engaged in trade or occupation for profit.22

Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is
conferred upon private persons or corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of the public welfare, security and safety." From the
phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons" and
"corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer
specifically to franchises granted to private natural persons and to private corporations.23 Ergo, its charter
should not be considered a "franchise" for the purpose of imposing the franchise tax in question.

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly
engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity
for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any case,
petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits are
required by law to be channeled for expansion and improvement of its facilities and services.24

Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be
taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation26where this Court held that local governments have no power to tax instrumentalities of the
National Government, viz:

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

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental,
which places it in the category of an agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control by a mere local
government.

'The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)'
 This doctrine emanates from the 'supremacy' of the National Government over local governments.

'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the instrumentalities
of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
political subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even seriously burden it from accomplishment of
them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as ' a tool
regulation' (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it."27

Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-
owned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be
amended or modified impliedly by the local government code which is a general law. Consequently, petitioner
claims that its exemption from all taxes, fees or charges under its charter subsists despite the passage of the
LGC, viz:

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature. Moreover,
it has to be conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a
general law. It is a basic rule in statutory construction that the enactment of a later legislation which is
a general law cannot be construed to have repealed a special law. Where there is a conflict between a
general law and a special statute, the special statute should prevail since it evinces the legislative
intent more clearly than the general statute."28

Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail
over the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to
petitioner's exemption from taxation; "police power being the most pervasive, the least limitable and most
demanding of all powers, including the power of taxation."29

The petition is without merit.

Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of
the state whose social contract with its citizens obliges it to promote public interest and common good. The
theory behind the exercise of the power to tax emanates from necessity;32 without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people.

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation
has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives.33 Taxation assumes even greater
significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz:

"Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."

This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the country's
highly centralized government structure has bred a culture of dependence among local government leaders
upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative
resilience in matters of local development on the part of local government leaders."35 The only way to shatter
this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them
sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of
the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic
policy of local autonomy, set the guidelines and limitations to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the
different local government units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and functions and duties of
local officials, and all other matters relating to the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government Code of 1991
(LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code
of 1983.40 Despite these initiatives, however, the shackles of dependence on the national government
remained. Local government units were faced with the same problems that hamper their capabilities to
participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack
of fiscal control over external sources of income, (c) limited authority to prioritize and approve development
projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over
personnel of national line agencies.41

Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with
the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by
previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance
with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum
and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.43

One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities
and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs
cannot impose taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the
LGUs to impose taxes, fees or charges on the aforementioned entities, viz:
 "Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

x x x

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

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming
Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize,
the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government
units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the
case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing governmental functions may
be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and
agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held
that MCIAA, although an instrumentality of the national government, was subject to real property tax, viz:

"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as
laid down in section 133, the taxing power of local governments cannot extend to the levy of inter
alia, 'taxes, fees and charges of any kind on the national government, its agencies and
instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities and
municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia,
'real property owned by the Republic of the Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted for consideration or otherwise, to a taxable person as
provided in the item (a) of the first paragraph of section 12.'"47

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city
government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does not belong
to citizens of the country generally as a matter of common right.48 In its specific sense, a franchise may refer to
a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as
a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law
creating the corporation.49 The right under a primary or general franchise is vested in the individuals who
compose the corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or
privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay
pipes of tracks, erect poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to
dispose of its property, except such special or secondary franchises as are charged with a public use.52

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special
franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As
commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising
corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a
corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by
the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and
exercise its franchise.56 It is within this context that the phrase "tax on businesses enjoying a franchise" in
section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is
covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a
"franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges
under this franchise within the territory of the respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes
petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition,
capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.57 As
its secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers
which are not available to ordinary corporations, viz:

"x x x

(e) To conduct investigations and surveys for the development of water power in any part of the
Philippines;

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for
the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian
owners and from persons owning or interested in waters which are or may be necessary for said
purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the
flow of water in streams or water channels intersecting or connecting therewith or contiguous to its
works or any part thereof: Provided, That just compensation shall be paid to any person or persons
whose property is, directly or indirectly, adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains,
transmission lines, power stations and substations, and other works for the purpose of developing
hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and supplying such
power to the inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas,
oil, or steam engines, and/or other prime movers, generators and machinery in plants and/or auxiliary
plants for the production of electric power; to establish, develop, operate, maintain and administer
power and lighting systems for the transmission and utilization of its power generation; to sell electric
power in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate
subdivisions x x x;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose
of property incident to, or necessary, convenient or proper to carry out the purposes for which the
Corporation was created: Provided, That in case a right of way is necessary for its transmission lines,
easement of right of way shall only be sought: Provided, however, That in case the property itself shall
be acquired by purchase, the cost thereof shall be the fair market value at the time of the taking of
such property;

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street,
avenue, highway or railway of private and public ownership, as the location of said works may require
xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law
for instituting condemnation proceedings by the national, provincial and municipal governments;
 x x x

(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants
and/or projects constructed or proposed to be constructed by the Corporation. Upon determination
by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry,
the Reforestation Administration and the Bureau of Lands shall, upon written advice by the
Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced within the
watersheds, subject to existing private rights, the needs of waterworks systems, and the requirements
of domestic water supply;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to
prevent environmental pollution and promote the conservation, development and maximum
utilization of natural resources xxx "58

With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity.
This monopoly was strengthened with the issuance of Pres. Decree No. 40,59 nationalizing the electric power
industry. Although Exec. Order No. 21560 thereafter allowed private sector participation in the generation of
electricity, the transmission of electricity remains the monopoly of the petitioner.

Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial
jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its
operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling
both requisites, petitioner is, and ought to be, subject of the franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks
are wholly owned by the National Government, and its charter characterized it as a "non-profit" organization.

These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a
privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the
individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from
the National Government. It can sue and be sued under its own name,61 and can exercise all the powers of a
corporation under the Corporation Code.62

To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply
that petitioner is not engaged in business. Section 2 of Pres. Decree No. 202963 classifies government-owned
or controlled corporations (GOCCs) into those performing governmental functions and those performing
proprietary functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock corporation, whether

performing governmental or proprietary functions, which is directly chartered by special law or if
organized under the general corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority
of its outstanding voting capital stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while proprietary functions are those that are
undertaken only by way of advancing the general interest of society, and are merely optional on the
government.64 Included in the class of GOCCs performing proprietary functions are "business-like" entities such
as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security
System (SSS), the Government Service Insurance System (GSIS), and the National Water Sewerage Authority
(NAWASA),65 among others.

Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and sells electricity in
bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are purely
private and commercial undertakings, albeit imbued with public interest. The public interest involved in its
activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the
same league with similar public utilities like telephone and telegraph companies, railroad companies, water
supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of
which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the
general interest of society.67

A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68

"(n) When essential to the proper administration of its corporate affairs or necessary for the proper
transaction of its business or to carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the President upon recommendation of the
Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry out
the business and purposes for which it was organized, or which, from time to time, may be declared by
the Board to be necessary, useful, incidental or auxiliary to accomplish the said purpose
xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its capital
investment, as well as excess revenues from its operation, for expansion"70 while other franchise holders have
the option to distribute their profits to its stockholders by declaring dividends. We do not see why this fact can
be a source of difference in tax treatment. In both instances, the taxable entity is the corporation, which
exercises the franchise, and not the individual stockholders.

We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist
despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist
clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole
refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and
realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government
agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the
sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of
petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions
from local taxes.72 It reads:

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

It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.73 Not
being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit
hospital or educational institution, petitioner clearly does not belong to the exception. It is therefore
incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it exemption from
local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose
franchise tax "notwithstanding any exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an issue before this Court.
The same issue was involved in the subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling
in favor of the local government in both instances, we ruled that the franchise tax in question is imposable
despite any exemption enjoyed by MERALCO under special laws, viz:

"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to
support their position that MERALCO's tax exemption has been withdrawn. The explicit language of
section 137 which authorizes the province to impose franchise tax 'notwithstanding any exemption
granted by any law or other special law' is all-encompassing and clear. The franchise tax is imposable
despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless
otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled corporations except
(1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit
hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious
import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision of
the Code to the contrary, and we find no other provision in point, any existing tax exemption or
incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar based on the incoming receipts realized within its territorial
jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is
clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such
exemption subject only to the exceptions enumerated. Since it would be not only tedious and
impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges.
No more unequivocal language could have been used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to
grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes
an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent
city government clearly did not intend to exempt the petitioner from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support
myriad activities of the local government units for the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace, progress, and prosperity of the people. As this Court
observed in the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to
government-owned or controlled corporations and all other units of government were that such privilege
resulted in serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises."78 With the added burden of devolution, it is even more imperative for government entities to
share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from
them.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of
Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.

2.Chamber of Real Estate Builders Inc., vs Romulo

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of Section
27 (E) of Republic Act (RA) 8424[2] and the revenue regulations (RRs) issued by the
Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting
Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe
the rules and procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these revenue regulations
are contrary to law for two reasons: first, they ignore the different treatment by RA
8424 of ordinary assets and capital assets and second, respondent Secretary of
Finance has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon
real estate enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is

unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-
2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of

operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater
than the normal corporate income tax imposed under Section 27(A).[4] If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any
excess of the MCIT over the normal tax shall be carried forward and credited against
the normal income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the
tax computed under Subsection (A) of this Section for the
taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the

[MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. The Secretary
of Finance is hereby authorized to suspend the imposition of
the [MCIT] on any corporation which suffers losses on account
of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.

The Secretary of Finance is hereby authorized to

promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT]

provided under Subsection (E) hereof, the term gross income
shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

For trading or merchandising concern, cost of goods sold

shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are
in transit.

For a manufacturing concern, cost of goods

manufactured and sold shall include all costs of production of
finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory
or warehouse.

In the case of taxpayers engaged in the sale of service,

gross income means gross receipts less sales returns,
allowances, discounts and cost of services. Cost of services
shall mean all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients
including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, cost of
services shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR
9-98 implementing Section 27(E).[5] The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the

gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period
employed) is hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately following
the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, normal

income tax means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January
1, 2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over
the normal income tax as computed under Sec. 27(A) of the
Code shall be carried forward on an annual basis and credited
 against the normal income tax for the three (3) immediately
succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of

respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.[6] Under Section 2.57.2(J) of RR No. 2-98, income
payments from the sale, exchange or transfer of real property, other than capital
assets, by persons residing in the Philippines and habitually engaged in the real
estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed

thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its

equivalent paid to the seller/owner for the sale, exchange or transfer of.
Real property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the
following schedule
Those which are exempt from a
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.
 Exempt

xxx xxx xxx

With a selling price of five hundred
thousand pesos (P500,000.00) or less.
Gross
1.5%
selling price
shall mean
With a selling price of more than five the
hundred thousand pesos
(P500,000.00) but not more than two
million pesos (P2,000,000.00).

3.0%

With selling price of more than two

million pesos (P2,000,000.00)

5.0%

consideration stated in the sales document or the fair market value

determined in accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the property
received in exchange, as determined in the Income Tax Regulations shall
be used.

Where the consideration or part thereof is payable on installment, no

withholding tax is required to be made on theperiodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to
be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT]
based on the gross selling price/total amount of consideration
or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following
schedule:

Where the seller/transferor is exempt from [CWT]

in accordance with Sec. 2.57.5 of these regulations.

Exempt

Upon the following values of real property, where

the seller/transferor is habitually engaged in the real
estate business.

With a selling price of Five Hundred Thousand Pesos

(P500,000.00) or less.
1.5%
 With a selling price of more than Five Hundred
Thousand Pesos (P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00).
5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the

sales document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a

corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan

(that is, payments in the year of sale do not exceed 25% of
the selling price), the tax shall be deducted and withheld by
the buyer on every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a

deferred-payment sale not on the installment plan (that is,
payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross
 selling price or fair market value of the property, whichever
is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be

issued to the buyer unless the [CWT] due on the sale, transfer or exchange
of real property other than capital asset has been fully paid. (Underlined
amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides

that any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of

conveyances of land or land and building/improvement thereon arising
from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the
guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
 Section 4. Applicable taxes on sale, exchange or other
disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts),

resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines,

classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98],
as amended, based on the gross selling price or
current fair market value as determined in
accordance with Section 6(E) of the Code, whichever
is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable
income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

 (ii) The sale of land and/or building classified as ordinary asset
and other real property (other than land and/or building
treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR
2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the Code,
whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the
following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing
to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the
case.[9]
 Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances
cited that the assailed law and revenue regulations have actually and
adversely affected it. Lacking empirical data on which to base any
conclusion, any discussion on the constitutionality of the MCIT or CWT on
sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate

justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not
really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an assertion

of opposite legal claims which is susceptible of judicial resolution as distinguished
from a hypothetical or abstract difference or dispute.[11] On the other hand, a
question is considered ripe for adjudication when the act being challenged has a
direct adverse effect on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until petitioners

members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of

the challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial
duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than
the present to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers

and builders in the Philippines. Petitioners did not allege that [it] itself is
in the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in a

case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.[16] In Holy Spirit Homeowners Association, Inc. v.
Defensor,[17] we held that the association had legal standing because its members
stood to be injured by the enforcement of the assailed provisions:
 Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of petitioner
association are residents of the NGC. As such they are covered and stand
to be either benefited or injured by the enforcement of the IRR,
particularly as regards the selection process of beneficiaries and lot
allocation to qualified beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have
sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does
not satisfy the requirements of an actual case, ripeness or legal standing when
paramount public interest is involved.[19] The questioned MCIT and CWT affect not
only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance
to society make it proper for us to take cognizance of this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424

to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.[21] It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control
and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on
this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of

certain corporations of reporting constantly a loss in their operations to
avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will pay
their just share in supporting our public life and our economic
advancement.[22]

Domestic corporations owe their corporate existence and their privilege to do

business to the government. They also benefit from the efforts of the government
to improve the financial market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a reasonable
contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while

having large turn-overs, report minimal or negative net income resulting in minimal
or zero income taxes year in and year out, through under-declaration of income or
over-deduction of expenses otherwise called tax shelters.[23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is
why they have proposed the [MCIT]. Because from experience too, you
have corporations which have been losing year in and year out and paid
no tax. So, if the corporation has been losing for the past five years to ten
 years, then that corporation has no business to be in business. It is
dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a profit. Continued

and repeated losses after operations of a corporation or consistent reports of
minimal net income render its financial statements and its tax payments
suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards
were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT commences
only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.[25] This grace period allows a new business
to stabilize first and make its ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal income tax
for the three immediately succeeding years.[27]
 Third, since certain businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.[28]

Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum corporate
income taxation. Our lawmakers noted that most developing countries, particularly
Latin American and Asian countries, have the same form of safeguards as we do. As
pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have this
same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of

income tax of half a percent (0.5%) of gross assessable income. In Korea
a 25% of taxable income before deductions and exemptions. Of course
the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American

countries that employed this method. Okay, those are additional Latin
American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income as
defined under said provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into
account.[31] Thus, pegging the tax base of the MCIT to a corporations gross income
is tantamount to a confiscation of capital because gross income, unlike net income,
is not realized gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. The exercise of taxing power derives its source from
the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely

legislative.[35] Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation.[36] It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall
be imposed, why it should be imposed, how much tax shall be imposed, against
whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its
abuse is to be found only in the responsibility of the legislature (which imposes the
tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no]

person shall be deprived of life, liberty or property without due process of
law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue measure[39] when
it amounts to a confiscation of property.[40] But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.[41] There must be a factual foundation to such an unconstitutional
taint.[42] This merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.[43]

Petitioner is correct in saying that income is distinct from capital.[44] Income

means all the wealth which flows into the taxpayer other than a mere return on
capital.Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time.[45] Income is gain
derived and severed from capital.[46] For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from

taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because

capital is not income. In other words, it is income, not capital, which is subject to
income tax.However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the

capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48] and
other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The
MCIT merely approximates the amount of net income tax due from a corporation,
pegging the rate at a very much reduced 2% and uses as the base the corporations
gross income.
Besides, 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.[49]

Statutes taxing the gross "receipts," "earnings," or "income" of

particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates
the requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which
is generally characterized by a lower tax rate but a broader tax base.[51] Since our
income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these
laws.[52] Although our MCIT is not exactly the same as the AMT, the policy behind
them and the procedure of their implementation are comparable. On the question
of the AMTs constitutionality, the United States Court of Appeals for the Ninth
Circuit stated in Okin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general

taxpayer distrust of the system growing from large numbers of taxpayers
with large incomes who were yet paying no taxes.

xxx xxx xxx

 We thus join a number of other courts in upholding the constitutionality
of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax,
and therefore is constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.[55]

American courts have also emphasized that Congress has the power to condition,
limit or deny deductions from gross income in order to arrive at the net that it
chooses to tax.[56] This is because deductions are a matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of
net income, as the tax base of the MCIT, taken with the reduction of the tax rate
from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation
that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.[58] Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights.[59] The party alleging the
laws unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.[60]
RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due

process of law because the MCIT is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount
of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such

corporation has zero or negative taxable income, merely defines the coverage of
Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to
an MCIT of 2% of its gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net income. But the law
also states that the MCIT is to be paid only if it is greater than the normal net
income. Obviously, it may well be the case that the MCIT would be less than the net
income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

 The withholding tax system is a procedure through which taxes (including
income taxes) are collected.[61] Under Section 57 of RA 8424, the types of income
subject to withholding tax are divided into three categories: (a) withholding of final
tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free
covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary

assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and
Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with grave abuse of
discretion amounting to lack of jurisdiction and patently in contravention of
law[62] because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair
market value (FMV) of the real estate as basis for determining the income tax for
the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the
sale via the CWT, contrary to RA 8424 which calls for the payment of the net income
at the end of the taxable period.[63]

Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by the
legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER
THE COLLECTION OF CWT ON SALES OF REAL PROPERTY
CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the

authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority is subject to the limitation
that the rules and regulations must not override, but must remain consistent and in
harmony with, the law they seek to apply and implement.[64] It is well-settled that an
administrative agency cannot amend an act of Congress.[65]

We have long recognized that the method of withholding tax at source is a

procedure of collecting income tax which is sanctioned by our tax laws.[66] The
withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to
ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the
governments cash flow.[67] This results in administrative savings, prompt and
efficient collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and
remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax on

items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:
 SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may,

upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural
or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the

authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-
5% is between the 1%-32% range; the withholding tax is imposed on the income
payable and the tax is creditable against the income tax liability of the taxpayer for
the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX

OF INDIVIDUALS OR CORPORATIONS ENGAGED IN THE
REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a
real estate business income tax from net income to GSP or FMV of the property sold.
 Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order
to extinguish its possible tax obligation. [69] They are installments on the annual tax
which may be due at the end of the taxable year.[70]

Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entitys net income imposed under
Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to
Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the end of the taxable
year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base
for the sale of real property classified as ordinary assets remains to be the net
taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real

property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts),

resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;

xxx xxx xxx

 (ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J)
of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however,
domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return
and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If
the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.
 The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not know, nor is he privy to,
how much the taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be the
GSP or FMV as these are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY

ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA
8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized
from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld
at source.[72]

The differences between the two forms of withholding tax, i.e., creditable and
final, show that ordinary assets are not treated in the same manner as capital assets.
Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT
 a) The amount of income tax
withheld by the withholding agent is
constituted as a full and final payment
of the income tax due from the payee
on the said income.
a) Taxes withheld on certain income
payments are intended to equal or at
least approximate the tax due of the
payee on said income.

b)The liability for payment of the tax
rests primarily on the payor as a
withholding agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax
due on the income. The payee also has
the right to ask for a refund if the tax
withheld is more than the tax due.

c) The payee is not required to file an

income tax return for the particular
c) The income recipient is still required
income.[73]
to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the
NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand,
CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary
assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of
transaction are contrary to the provisions of RA 8424 on the manner and time of
filing of the return, payment and assessment of income tax involving ordinary
assets.[75]

The fact that the tax is withheld at source does not automatically mean that
it is treated exactly the same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by withholding
the tax due from the income payable is the essence of the withholding tax method
of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding

tax, whether final or creditable. According to petitioner, the whole of Section 57
governs the withholding of income tax on passive income. The enumeration in
Section 57(A) refers to passive income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and

regulations, the [Secretary] may promulgate, upon the recommendation
of the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of income shall be withheld by
payor-corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of this Code.
 (B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds
of income and enumerates these as passive income. The BIR defines passive income
by stating what it is not:

if the income is generated in the active pursuit and performance of

the corporations primary purposes, the same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in the form of
real properties that return rental income, shares of stock in a corporation that earn
dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a
CWT on income payable to natural or juridical persons, residing in the
Philippines. There is no requirement that this income be passive income. If that were
the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section
57(B) pertains to CWT. The former covers the kinds of passive income enumerated
therein and the latter encompasses any income other than those listed in
57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B)
in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or

deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a statute
does not require any particular procedure to be followed by an administrative
agency, the agency may adopt any reasonable method to carry out its
functions.[77] Similarly, considering that the law uses the general term income, the
Secretary and CIR may specify the kinds of income the rules will apply to based on
what is feasible. In addition, administrative rules and regulations ordinarily deserve
to be given weight and respect by the courts[78] in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective
fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate

classified as ordinary assets deprives its members of their property without due
process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from net
income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of
the property at the end of the taxable year. The seller will be able to claim a tax
refund if its net income is less than the taxes withheld. Nothing is taken that is not
due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies
to the power to tax.[79] The CWT does not impose new taxes nor does it increase
taxes.[80] It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to litigation
before they are granted a refund.[81] This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality
and validity of the CWT as a method of collecting the tax.

Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and other
expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and
borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive
up-front regulatory fees from at least 20 government agencies.[82]

Petitioners lamentations will not support its attack on the constitutionality of

the CWT. Petitioners complaints are essentially matters of policy best addressed to
the executive and legislative branches of the government. Besides, the CWT is
applied only on the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment basis.[83] Petitioners
desire to utilize for its operational and capital expenses money earmarked for the
payment of taxes may be a practical business option but it is not a fundamental right
which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection
clause because the CWT is being levied only on real estate enterprises. Specifically,
petitioner points out that manufacturing enterprises are not similarly imposed a
CWT on their sales, even if their manner of doing business is not much different from
that of a real estate enterprise. Like a manufacturing concern, a real estate business
is involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that goods produced by the
real estate business are house and lot units.[84]

Again, we disagree.

The equal protection clause under the Constitution means that no person or
class of persons shall be deprived of the same protection of laws which is enjoyed
by other persons or other classes in the same place and in like
circumstances.[85] Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not
violated by legislation based on a reasonable classification. Classification, to be valid,
must (1) rest on substantial distinctions; (2) be germane to the purpose of the law;
(3) not be limited to existing conditions only and (4) apply equally to all members of
the same class.[86]

The taxing power has the authority to make reasonable classifications for purposes
of taxation.[87] Inequalities which result from a singling out of one particular class for
taxation, or exemption, infringe no constitutional limitation.[88] The real estate
industry is, by itself, a class and can be validly treated differently from other business
enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing

enterprises, fails to realize that what distinguishes the real estate business from
other manufacturing enterprises, for purposes of the imposition of the CWT, is not
their production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger and its
frequency of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal
and substantial amounts. To require the customers of manufacturing enterprises, at
present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are
also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other
capital goods yet these are not similarly subjected to the CWT.[89] As already
discussed, the Secretary may adopt any reasonable method to carry out its
functions.[90] Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument
is not accurate. The sales of manufacturers who have clients within the top 5,000
corporations, as specified by the BIR, are also subject to CWT for their transactions
with said 5,000 corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY

IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the regisration of any document transferring real
property unless a certification is issued by the CIR that the withholding tax has been
paid. Petitioner proffers hardly any reason to strike down this rule except to rely on
its contention that the CWT is unconstitutional. We have ruled that it is
not. Furthermore, this provision uses almost exactly the same wording as Section
58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

 (E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
transfer has been reported, and the capital gains or [CWT], if any, has been
paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code.
(Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing
in the world to understand is the income tax.[92] When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einsteins
observation but also with the vast and well-established jurisprudence in support of
the plenary powers of Congress to impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court that the imposition of MCIT and CWT
is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.
3.MIAA vs CA
The Antecedents

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

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

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061. The
OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate tax granted
to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with respondent City of Paraaque to
pay the real estate tax imposed by the City. MIAA then paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Paraaque for
the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as follows:

TAX DECLARATION TAXABLE YEAR TAX DUE PENALTY TOTAL

E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

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

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

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and injunction,
with prayer for preliminary injunction or temporary restraining order. The petition sought to restrain the City
of Paraaque from imposing real estate tax on, levying against, and auctioning for public sale the Airport Lands
and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the 60-day
reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's motion for
reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5 December 2002 the
present petition for review.7

Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay Halls of
Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of Barangay La Huerta; and in
the main lobby of the Paraaque City Hall. The City of Paraaque published the notices in the 3 and 10 January
2003 issues of the Philippine Daily Inquirer, a newspaper of general circulation in the Philippines. The notices
announced the public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003,
10:00 a.m., at the Legislative Session Hall Building of Paraaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The motion sought
to restrain respondents the City of Paraaque, City Mayor of Paraaque, Sangguniang Panglungsod ng
Paraaque, City Treasurer of Paraaque, and the City Assessor of Paraaque ("respondents") from
auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately. The Court
ordered respondents to cease and desist from selling at public auction the Airport Lands and Buildings.
Respondents received the TRO on the same day that the Court issued it. However, respondents received the
TRO only at 1:25 p.m. or three hours after the conclusion of the public auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive issued
during the hearing, MIAA, respondent City of Paraaque, and the Solicitor General subsequently submitted
their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the name of
MIAA. However, MIAA points out that it cannot claim ownership over these properties since the real owner of
the Airport Lands and Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to devote
the Airport Lands and Buildings for the benefit of the general public. Since the Airport Lands and Buildings are
devoted to public use and public service, the ownership of these properties remains with the State. The
Airport Lands and Buildings are thus inalienable and are not subject to real estate tax by local governments.

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

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption
privileges of "government-owned and-controlled corporations" upon the effectivity of the Local Government
Code. Respondents also argue that a basic rule of statutory construction is that the express mention of one
person, thing, or act excludes all others. An international airport is not among the exceptions mentioned in
Section 193 of the Local Government Code. Thus, respondents assert that MIAA cannot claim that the Airport
Lands and Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we held that the
Local Government Code has withdrawn the exemption from real estate tax granted to international airports.
Respondents further argue that since MIAA has already paid some of the real estate tax assessments, it is now
estopped from claiming that the Airport Lands and Buildings are exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are exempt from
real estate tax under existing laws. If so exempt, then the real estate tax assessments issued by the City of
Paraaque, and all proceedings taken pursuant to such assessments, are void. In such event, the other issues
raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt from real
estate tax. Respondents claim that the deletion of the phrase "any government-owned or controlled so
exempt by its charter" in Section 234(e) of the Local Government Code withdrew the real estate tax exemption
of government-owned or controlled corporations. The deleted phrase appeared in Section 40(a) of the 1974
Real Property Tax Code enumerating the entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax.
However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the Introductory
Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as
follows:

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

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
 where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of
its capital stock: x x x. (Emphasis supplied)

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

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

SECTION 10. Capital. The capital of the Authority to be contributed by the National Government
shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion
(P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such other
properties, movable and immovable[,] which may be contributed by the National Government or
transferred by it from any of its agencies, the valuation of which shall be determined jointly with the
Department of Budget and Management and the Commission on Audit on the date of such
contribution or transfer after making due allowances for depreciation and other deductions taking
into account the loans and other liabilities of the Authority at the time of the takeover of the assets
and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy percentum
(70%) of the unremitted share of the National Government from 1983 to 1986 to be remitted to the
National Treasury as provided for in Section 11 of E. O. No. 903 as amended, shall be converted into
the equity of the National Government in the Authority. Thereafter, the Government contribution to
the capital of the Authority shall be provided in the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is divided into
shares and x x x authorized to distribute to the holders of such shares dividends x x x." MIAA has capital but it is
not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not a stock
corporation.

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

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

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or
controlled corporation. What then is the legal status of MIAA within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental
functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with
corporate powers. Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:

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

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through
a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not become a
corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it
remains a government instrumentality exercising not only governmental but also corporate powers. Thus,
MIAA exercises the governmental powers of eminent domain,12 police authority13 and the levying of fees and
charges.14 At the same time, MIAA exercises "all the powers of a corporation under the Corporation Law,
insofar as these powers are not inconsistent with the provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality
remains part of the National Government machinery although not integrated with the department framework.
The MIAA Charter expressly states that transforming MIAA into a "separate and autonomous body"16 will make
its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock or non-
stock corporations, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan International Airport Authority, the
Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized as stock or non-stock
corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate entities. However, they are
not government-owned or controlled corporations in the strict sense as understood under the Administrative
Code, which is the governing law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which
states:

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

xxxx

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

Section 133(o) recognizes the basic principle that local governments cannot tax the national government,
which historically merely delegated to local governments the power to tax. While the 1987 Constitution now
includes taxation as one of the powers of local governments, local governments may only exercise such power
"subject to such guidelines and limitations as the Congress may provide."18

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

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

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

There is, moreover, no point in national and local governments taxing each other, unless a sound and
compelling policy requires such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for rendering
essential public services to inhabitants of local governments. The only exception is when the legislature clearly
intended to tax government instrumentalities for the delivery of essential public services for sound and
compelling policy considerations. There must be express language in the law empowering local governments to
tax national government instrumentalities. Any doubt whether such power exists is resolved against local
governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the Code, local
governments cannot tax national government instrumentalities. As this Court held in Basco v. Philippine
Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the instrumentalities
of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or
political subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the accomplishment
of them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
 Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. 20

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

a. Airport Lands and Buildings are of Public Dominion

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

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

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

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

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

ARTICLE 421. All other property of the State, which is not of the character stated in the preceding
article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for public
service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like "roads,
canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The term "ports"
includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by the
State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for international
and domestic travel and transportation. The fact that the MIAA collects terminal fees and other charges from
the public does not remove the character of the Airport Lands and Buildings as properties for public use. The
operation by the government of a tollway does not change the character of the road as one for public use.
Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the road through the toll fees they pay upon
using the road. The tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is of public
dominion or not. Article 420 of the Civil Code defines property of public dominion as one "intended for public
use." Even if the government collects toll fees, the road is still "intended for public use" if anyone can use the
road under the same terms and conditions as the rest of the public. The charging of fees, the limitation on the
kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do
not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute
the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the
character of MIAA as an airport for public use. Such fees are often termed user's tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public including those who never
use the particular public facility. A user's tax is more equitable a principle of taxation mandated in the 1987
Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the Philippines for
both international and domestic air traffic,"22 are properties of public dominion because they are intended for
public use. As properties of public dominion, they indisputably belong to the State or the Republic of the
Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

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

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

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could not in
1907 withdraw or exclude from public use a portion thereof in order to lease it for the sole benefit of
the defendant Hilaria Rojas. In leasing a portion of said plaza or public place to the defendant for
private use the plaintiff municipality exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce of man
may be the object of a contract, and plazas and streets are outside of this commerce, as was decided
by the supreme court of Spain in its decision of February 12, 1895, which says: "Communal things that
cannot be sold because they are by their very nature outside of commerce are those for public use,
such as the plazas, streets, common lands, rivers, fountains, etc." (Emphasis supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are outside the
commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be disposed of or
even leased by the municipality to private parties. While in case of war or during an emergency, town
plazas may be occupied temporarily by private individuals, as was done and as was tolerated by the
Municipality of Pozorrubio, when the emergency has ceased, said temporary occupation or use must
 also cease, and the town officials should see to it that the town plazas should ever be kept open to the
public and free from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man, cannot be the
subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition
through public or private sale. Any encumbrance, levy on execution or auction sale of any property of public
dominion is void for being contrary to public policy. Essential public services will stop if properties of public
dominion are subject to encumbrances, foreclosures and auction sale. This will happen if the City of Paraaque
can foreclose and compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real
estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw from public
usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or Commonwealth Act No. 141,
which "remains to this day the existing general law governing the classification and disposition of lands of the
public domain other than timber and mineral lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources, the
President may designate by proclamation any tract or tracts of land of the public domain as
reservations for the use of the Republic of the Philippines or of any of its branches, or of the
inhabitants thereof, in accordance with regulations prescribed for this purposes, or for quasi-public
uses or purposes when the public interest requires it, including reservations for highways, rights of
way for railroads, hydraulic power sites, irrigation systems, communal pastures or lequas
communales, public parks, public quarries, public fishponds, working men's village and other
improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-three shall
be non-alienable and shall not be subject to occupation, entry, sale, lease, or other disposition until
again declared alienable under the provisions of this Act or by proclamation of the President. (Emphasis
and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from public use,
these properties remain properties of public dominion and are inalienable. Since the Airport Lands and
Buildings are inalienable in their present status as properties of public dominion, they are not subject to levy
on execution or foreclosure sale. As long as the Airport Lands and Buildings are reserved for public use, their
ownership remains with the State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw such
public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987, which
states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. (1) The
President shall have the power to reserve for settlement or public use, and for specific public purposes,
any of the lands of the public domain, the use of which is not otherwise directed by law. The reserved
land shall thereafter remain subject to the specific public purpose indicated until otherwise provided by
law or proclamation;

x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the Republic and
outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48, Chapter 12,
Book I of the Administrative Code allows instrumentalities like MIAA to hold title to real properties owned by the
Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the Government is
authorized by law to be conveyed, the deed of conveyance shall be executed in behalf of the
government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of any political
subdivision or of any corporate agency or instrumentality, by the executive head of the agency or
instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even its
executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President of the
Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings from the
Bureau of Air Transportation of the Department of Transportation and Communications. The MIAA Charter
provides:

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

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

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

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic receiving cash,
promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands and
Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport accommodation and
service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be upgraded to
meet the current and future air traffic and other demands of aviation in Metro Manila;

WHEREAS, a management and organization study has indicated that the objectives of providing high
standards of accommodation and service within the context of a financially viable operation, will best be
achieved by a separate and autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772, the
President of the Philippines is given continuing authority to reorganize the National Government,
which authority includes the creation of new entities, agencies and instrumentalities of the
Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was not meant
to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose was merely
to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body. The Republic
remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is owned solely by the Republic.
No party claims any ownership rights over MIAA's assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines." This only means that
the Republic retained the beneficial ownership of the Airport Lands and Buildings because under Article 428 of
the Civil Code, only the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose of the
Airport Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings without the
Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the President is the only one
who can authorize the sale or disposition of the Airport Lands and Buildings. This only confirms that the Airport
Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property owned by the
Republic of the Philippines." Section 234(a) provides:
 SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:

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

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing "[t]axes, fees or charges of any kind on the National Government, its agencies
and instrumentalitiesx x x." The real properties owned by the Republic are titled either in the name of the
Republic itself or in the name of agencies or instrumentalities of the National Government. The Administrative
Code allows real property owned by the Republic to be titled in the name of agencies or instrumentalities of
the national government. Such real properties remain owned by the Republic and continue to be exempt from
real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the national
government. This happens when title of the real property is transferred to an agency or instrumentality even
as the Republic remains the owner of the real property. Such arrangement does not result in the loss of the tax
exemption. Section 234(a) of the Local Government Code states that real property owned by the Republic
loses its tax exemption only if the "beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the
Local Government Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use of
the Airport Lands and Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from
real estate tax. For example, the land area occupied by hangars that MIAA leases to private corporations is
subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a
consideration to a taxable person and therefore such land area is subject to real estate tax. In Lung Center of
the Philippines v. Quezon City, the Court ruled:

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

3. Refutation of Arguments of Minority

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

SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions
are hereby withdrawn upon effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues that since the Local
Government Code withdrew the tax exemption of all juridical persons, then MIAA is not exempt from real
estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the withdrawn exemptions
from realty tax cover not just GOCCs, but all persons. To repeat, the provisions lay down the explicit
proposition that the withdrawal of realty tax exemption applies to all persons. The reference to or the
inclusion of GOCCs is only clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under our laws, natural and
juridical persons. Obviously, MIAA is not a natural person. Thus, the determinative test is not just
whether MIAA is a GOCC, but whether MIAA is a juridical person at all. (Emphasis and underscoring in
the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its status
whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and 234 may be
examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly withdrew
the tax exemption of all juridical persons "[u]nless otherwise provided in this Code." Now, Section 133(o) of the
Local Government Code expressly provides otherwise, specifically prohibiting local governments from imposing
any kind of tax on national government instrumentalities. Section 133(o) states:

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

xxxx

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

By express mandate of the Local Government Code, local governments cannot impose any kind of tax on
national government instrumentalities like the MIAA. Local governments are devoid of power to tax the
national government, its agencies and instrumentalities. The taxing powers of local governments do not
extend to the national government, its agencies and instrumentalities, "[u]nless otherwise provided in this
Code" as stated in the saving clause of Section 133. The saving clause refers to Section 234(a) on the exception
to the exemption from real estate tax of real property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are subject to
tax by local governments. The minority insists that the juridical persons exempt from local taxation are limited
to the three classes of entities specifically enumerated as exempt in Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives duly
registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and educational
institutions. It would be belaboring the obvious why the MIAA does not fall within any of the exempt
entities under Section 193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local Government
Code. This theory will result in gross absurdities. It will make the national government, which itself is a juridical
person, subject to tax by local governments since the national government is not included in the enumeration
of exempt entities in Section 193. Under this theory, local governments can impose any kind of local tax, and
not only real estate tax, on the national government.

Under the minority's theory, many national government instrumentalities with juridical personalities will also
be subject to any kind of local tax, and not only real estate tax. Some of the national government
instrumentalities vested by law with juridical personalities are: Bangko Sentral ng Pilipinas,30 Philippine Rice
Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port Authority,37 Cebu
Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly prohibits local
governments from imposing any kind of tax on national government instrumentalities. Section 133(o) does not
distinguish between national government instrumentalities with or without juridical personalities. Where the
law does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA is exempt from
local taxation is not whether MIAA is a juridical person, but whether it is a national government
instrumentality under Section 133(o) of the Local Government Code. Section 133(o) is the specific provision of
law prohibiting local governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided in this
Code." This means that unless the Local Government Code grants an express authorization, local governments
have no power to tax the national government, its agencies and instrumentalities. Clearly, the rule is local
governments have no power to tax the national government, its agencies and instrumentalities. As an
exception to this rule, local governments may tax the national government, its agencies and instrumentalities
only if the Local Government Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code, which
makes the national government subject to real estate tax when it gives the beneficial use of its real properties
to a taxable entity. Section 234(a) of the Local Government Code provides:

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

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

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The exception to
this exemption is when the government gives the beneficial use of the real property to a taxable entity.

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

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

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted rule
of construction, in case of conflict the subsequent provisions should prevail. Therefore, MIAA, as a
juridical person, is subject to real property taxes, the general exemptions attaching to
instrumentalities under Section 133(o) of the Local Government Code being qualified by Sections 193
and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and Sections
193 and 234 on the other. No one has urged that there is such a conflict, much less has any one presenteda
persuasive argument that there is such a conflict. The minority's assumption of an irreconcilable conflict in the
statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly admits its
subordination to other provisions of the Code when Section 193 states "[u]nless otherwise provided in this
Code." By its own words, Section 193 admits the superiority of other provisions of the Local Government Code
that limit the exercise of the taxing power in Section 193. When a provision of law grants a power but
withholds such power on certain matters, there is no conflict between the grant of power and the withholding
of power. The grantee of the power simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government Units."
Section 133 limits the grant to local governments of the power to tax, and not merely the exercise of a
delegated power to tax. Section 133 states that the taxing powers of local governments "shall not extend to
the levy" of any kind of tax on the national government, its agencies and instrumentalities. There is no clearer
limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local governments, Section 133
logically prevails over Section 193 which grants local governments such taxing powers. By their very meaning
and purpose, the "common limitations" on the taxing power prevail over the grant or exercise of the taxing
power. If the taxing power of local governments in Section 193 prevails over the limitations on such taxing
power in Section 133, then local governments can impose any kind of tax on the national government, its
agencies and instrumentalities a gross absurdity.

Local governments have no power to tax the national government, its agencies and instrumentalities, except
as otherwise provided in the Local Government Code pursuant to the saving clause in Section 133 stating
"[u]nless otherwise provided in this Code." This exception which is an exception to the exemption of the
Republic from real estate tax imposed by local governments refers to Section 234(a) of the Code. The
exception to the exemption in Section 234(a) subjects real property owned by the Republic, whether titled in
the name of the national government, its agencies or instrumentalities, to real estate tax if the beneficial use
of such property is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-owned or
controlled corporation" is not controlling. The minority points out that Section 2 of the Introductory Provisions
of the Administrative Code admits that its definitions are not controlling when it provides:
 SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a
particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that a statute
may require a different meaning than that defined in the Administrative Code. However, this does not
automatically mean that the definition in the Administrative Code does not apply to the Local Government
Code. Section 2 of the Administrative Code clearly states that "unless the specific words x x x of a particular
statute shall require a different meaning," the definition in Section 2 of the Administrative Code shall apply.
Thus, unless there is specific language in the Local Government Code defining the phrase "government-owned
or controlled corporation" differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase "government-
owned or controlled corporation" differently from the definition in the Administrative Code. Indeed, there is
none. The Local Government Code is silent on the definition of the phrase "government-owned or controlled
corporation." The Administrative Code, however, expressly defines the phrase "government-owned or
controlled corporation." The inescapable conclusion is that the Administrative Code definition of the phrase
"government-owned or controlled corporation" applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified document
the major structural, functional and procedural principles and rules of governance." Thus, the Administrative
Code is the governing law defining the status and relationship of government departments, bureaus, offices,
agencies and instrumentalities. Unless a statute expressly provides for a different status and relationship for a
specific government unit or entity, the provisions of the Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should apply only
to corporations organized under the Corporation Code, the general incorporation law, and not to corporations
created by special charters. The minority sees no reason why government corporations with special charters
should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its instrumentalities
which are created not by legislative enactment, but formed and organized under the Corporation
Code through registration with the Securities and Exchange Commission. In short, these are GOCCs
without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for GOCCs
whose full ownership is limited by its charter to the State or Republic. Such GOCCs are not
empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and existing
legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or controlled corporation" does
not distinguish between one incorporated under the Corporation Code or under a special charter. Where the
law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations organized as
stock corporations. Prime examples are the Land Bank of the Philippines and the Development Bank of the
Philippines. The special charter40 of the Land Bank of the Philippines provides:

SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos, divided
into seven hundred and eighty million common shares with a par value of ten pesos each, which shall
be fully subscribed by the Government, and one hundred and twenty million preferred shares with a
par value of ten pesos each, which shall be issued in accordance with the provisions of Sections
seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five Billion
Pesos to be divided into Fifty Million common shares with par value of P100 per share. These shares
are available for subscription by the National Government. Upon the effectivity of this Charter, the
National Government shall subscribe to Twenty-Five Million common shares of stock worth Two
Billion Five Hundred Million which shall be deemed paid for by the Government with the net asset
values of the Bank remaining after the transfer of assets and liabilities as provided in Section 30
hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters are the
Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and the Philippine
National Bank44 before it was reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock corporations are subject to real
estate tax on real properties owned by them. To rule that they are not government-owned or controlled
corporations because they are not registered with the Securities and Exchange Commission would remove
them from the reach of Section 234 of the Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those that meet
the two conditions prescribed in Section 16, Article XII of the Constitution. The first condition is that the
government-owned or controlled corporation must be established for the common good. The second
condition is that the government-owned or controlled corporation must meet the test of economic viability.
Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of
economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create government-owned or
controlled corporations with special charters unless they are made to comply with the two conditions of
common good and economic viability. The test of economic viability applies only to government-owned or
controlled corporations that perform economic or commercial activities and need to compete in the market
place. Being essentially economic vehicles of the State for the common good meaning for economic
development purposes these government-owned or controlled corporations with special charters are
usually organized as stock corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing governmental or
public functions need not meet the test of economic viability. These instrumentalities perform essential public
services for the common good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even subsidize their entire
operations. These instrumentalities are not the "government-owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government instrumentalities vested
with corporate powers but performing essential governmental or public functions. Congress has plenary
authority to create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services. However, when the legislature
creates through special charters corporations that perform economic or commercial activities, such entities
known as "government-owned or controlled corporations" must meet the test of economic viability
because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines and
similar government-owned or controlled corporations, which derive their income to meet operating expenses
solely from commercial transactions in competition with the private sector. The intent of the Constitution is to
prevent the creation of government-owned or controlled corporations that cannot survive on their own in the
market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional
Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government creates a
corporation, there is a sense in which this corporation becomes exempt from the test of economic
performance. We know what happened in the past. If a government corporation loses, then it makes
its claim upon the taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a budget of P115 billion
for the entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been relocated to
agrarian reform, to social services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good," this
becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his textbook The
1987 Constitution of the Republic of the Philippines: A Commentary:
 The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes capability to make profit and
generate benefits not quantifiable in financial terms.46(Emphasis supplied)

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

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

The MIAA need not meet the test of economic viability because the legislature did not create MIAA to
compete in the market place. MIAA does not compete in the market place because there is no competing
international airport operated by the private sector. MIAA performs an essential public service as the primary
domestic and international airport of the Philippines. The operation of an international airport requires the
presence of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of passengers,
screening out those without visas or travel documents, or those with hold departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited importations;

3. The quarantine office of the Department of Health, to enforce health measures against the spread
of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of terrorists
and the escape of criminals, as well as to secure the airport premises from terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to authorize
aircraft to enter or leave Philippine airspace, as well as to land on, or take off from, the airport; and

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

All these agencies of government perform government functions essential to the operation of an international
airport.
MIAA performs an essential public service that every modern State must provide its citizens. MIAA derives its
revenues principally from the mandatory fees and charges MIAA imposes on passengers and airlines. The
terminal fees that MIAA charges every passenger are regulatory or administrative fees47 and not income from
commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code, which provides:

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

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-owned or
controlled corporation. Without a change in its capital structure, MIAA remains a government instrumentality
under Section 2(10) of the Introductory Provisions of the Administrative Code. More importantly, as long as
MIAA renders essential public services, it need not comply with the test of economic viability. Thus, MIAA is
outside the scope of the phrase "government-owned or controlled corporations" under Section 16, Article XII
of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or controlled
corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution prescribes explicit
conditions for the creation of "government-owned or controlled corporations." The Administrative Code
defines what constitutes a "government-owned or controlled corporation." To belittle this phrase as
"clarificatory or illustrative" is grave error.

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

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of
public dominion. Properties of public dominion are owned by the State or the Republic. Article 420 of the Civil
Code provides:

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

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed
by the State, banks, shores, roadsteads, and others of similar character;
 (2) Those which belong to the State, without being for public use, and are intended for some public
service or for the development of the national wealth. (Emphasis supplied)

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

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs the
legal relation and status of government units, agencies and offices within the entire government machinery,
MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section
133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because
it is not subject to "[t]axes, fees or charges of any kind" by local governments. The only exception is when
MIAA leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government
Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of
the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by
the City of Paraaque.

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

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

No costs.

SO ORDERED.
4.Planters Product Inc. vs Fertiphil Corp.

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[1] of the Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter
of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations

incorporated under Philippine laws.[3] They are both engaged in the importation and
distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative

powers, issued LOI No. 1465 which provided, among others, for the imposition of a
capital recovery component (CRC) on the domestic sale of all grades of fertilizers in
the Philippines.[4] The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not less
than P10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of fertilizers
in the Philippines.[5] (Underscoring supplied)
 Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the
domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted
the amount collected to the Far East Bank and Trust Company, the depositary bank
of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund
of the amounts it paid under LOI No. 1465, but PPI refused to accede to the
demand.[7]

Fertiphil filed a complaint for collection and damages[8] against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being
unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted
to a denial of due process of law.[9] Fertiphil alleged that the LOI solely favored PPI,
a privately owned corporation, which used the proceeds to maintain its monopoly
of the fertilizer industry.

In its Answer,[10] FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the State in
ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed by
the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing
as follows:
 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.[11]

Ruling that the imposition of the P10 CRC was an exercise of the States inherent
power of taxation, the RTC invalidated the levy for violating the basic principle that
taxes can only be levied for public purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in

the country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the state is
plenary. Comprehensive and supreme, the principal check upon its abuse
resting in the responsibility of the members of the legislature to their
constituents. However, there are two kinds of limitations on the power of
taxation: the inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public
purposes:
 The power to tax can be resorted to only for a
constitutionally valid public purpose. By the same token,
taxes may not be levied for purely private purposes, for
building up of private fortunes, or for the redress of private
wrongs. They cannot be levied for the improvement of
private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the
public benefit. It is well-settled principle of constitutional
law that no general tax can be levied except for the purpose
of raising money which is to be expended for public
use. Funds cannot be exacted under the guise of taxation to
promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or
employed as an authority to destroy the economy of the
people. A tax, however, is not held void on the ground of
want of public interest unless the want of such interest is
clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer
sold imposition under LOI 1465 which, in turn, remitted the amount to the
defendant Planters Products, Inc. thru the latters depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil
Corporation, which is a private domestic corporation, became poorer by
the amount of P6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the amount
of P6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-

quoted jurisprudence, it is quite evident that LOI 1465 insofar as it
imposes the amount of P10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters Product,
Inc. is unlawful because it violates the mandate that a tax can be levied
 only for a public purpose and not to benefit, aid and promote a private
enterprise such as Planters Product, Inc.[12]

PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice
of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a
separate but related proceeding, this Court[14] 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.[15]

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to exercise
its power to judicially determine the constitutionality of the subject
statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the

courts will not resolve the constitutionality of a law (Lim v. Pacquing, 240
SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the
contrary.
 However, the courts are not precluded from exercising such power when
the following requisites are obtaining in a controversy before it: First,
there must be before the court an actual case calling for the exercise of
judicial review. Second, the question must be ripe for adjudication. Third,
the person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised
at the earliest opportunity; and lastly, the issue of constitutionality must
be the very lis mota of the case (Integrated Bar of the Philippines v.
Zamora, 338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed was
an unlawful and unconstitutional special assessment. Consequently, the
requisite that the constitutionality of the law in question be the very lis
mota of the case is present, making it proper for the trial court to rule on
the constitutionality of LOI 1465.[16]

The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote public
welfare.The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the
levy imposed under the said law was an invalid exercise of the States
power of taxation inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public purposes. It reasoned out
that the amount collected under the levy was remitted to the depository
bank of PPI, which the latter used to advance its private interest.

On the other hand, appellant submits that the subject statutes passage
was a valid exercise of police power. In addition, it disputes the court a
quos findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police

power has been characterized as the most essential, insistent and the
least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property sought
to be regulated has some relevance to public welfare (Constitutional Law,
by Isagani A. Cruz, p. 38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set
by the Constitution, which requires the concurrence of a lawful subject
and a lawful method. Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1) the interests of
the public generally, as distinguished from those of a particular class,
requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment 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.[17]

The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for
the benefit of Planters Foundation, Inc., a foundation created to hold in trust the
stock ownership of PPI. The CA stated:

Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created
by law to hold in trust for millions of farmers, the stock ownership
of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime
Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of
Justice in an Opinion dated October 12, 1987, to wit:

2. Upon the effective date of this Letter of Undertaking, the

Republic shall cause FPA to include in its fertilizer pricing
formula a capital recovery component, the proceeds of
which will be used initially for the purpose of funding the
unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters
Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by Planters
and Planters Foundation) (such unpaid portion of the
outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such
capital increases as may be required for the continuing
viability of Planters.
 The capital recovery component shall be in the minimum
amount of P10 per bag, which will be added to the price of
all domestic sales of fertilizer in the Philippines by any
importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the
advances by Planters to Planters Foundation which were
applied to the payment of the Planters shares now held in
trust by Planters Foundation, have been assigned to, among
others, the Creditors. Accordingly, the Republic, through
FPA, hereby agrees to deposit the proceeds of the capital
recovery component in the special trust account designated
in the notice dated April 2, 1985, addressed by counsel for
the Creditors to Planters Foundation. Such proceeds shall be
deposited by FPA on or before the 15th day of each month.

The capital recovery component shall continue to be

charged and collected until payment in full of (a) the Unpaid
Capital and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date
hereof on the amounts which may be outstanding from time
to time of the Unpaid Capital and/or the Subsidy Receivables
and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the
carrying cost shall be at such rate as will represent the full
and reasonable cost to Planters of servicing its debts, taking
into account both its peso and foreign currency-
denominated obligations. (Records, pp. 42-43)

Appellants proposition is open to question, to say the least. The LOU

issued by then Prime Minister Virata taken together with the Justice
Secretarys Opinion does not preponderantly demonstrate that the
 collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient evidence
to establish its claims, this Court is constrained to rely on what is explicitly
provided in LOI 1465 that one of the primary aims in imposing the levy is
to support the successful rehabilitation and continued viability of PPI.[18]

PPI moved for reconsideration but its motion was denied.[19] 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.[20] (Underscoring supplied)

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction of
the RTC to resolve constitutional issues.

Fertiphil has locus standi because it suffered

direct injury; doctrine of standing is a mere
procedural technicality which may be waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality
of LOI No. 1465 because it does not have a personal and substantial interest in the
case or will sustain direct injury as a result of its enforcement.[21] It asserts that
Fertiphil did not suffer any damage from the CRC imposition because incidence of
the levy fell on the ultimate consumer or the farmers themselves, not on the seller
fertilizer company.[22]

We cannot agree. The doctrine of locus standi or the right of appearance in a

court of justice has been adequately discussed by this Court in a catena of
cases. Succinctly put, the doctrine requires a litigant to have a material interest in
the outcome of a case. In private suits, locus standi requires a litigant to be a real
party in interest, which is defined as the
party who stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit.[23]

In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public
because of conflicting public policy issues. [24] On one end, there is the right of the
ordinary citizen to petition the courts to 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,[25] it was held that a person who impugns the
validity of a statute must have a personal and substantial interest in the case such
that he has sustained, or will sustain direct injury as a result. The direct injury test in
public suits is similar to the real party in interest rule for private suits under Section
2, Rule 3 of the 1997 Rules of Civil Procedure.[26]

Recognizing that a strict application of the direct injury test may hamper
public interest, this Court relaxed the requirement in cases of transcendental
importance or with far reaching implications. Being a mere procedural technicality,
it has also been held that locus standi may be waived in the public interest.[27]

Whether or not the complaint for collection is characterized as a private or

public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from
the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy
imposed for every bag of fertilizer sold on the domestic market. It may be true that
Fertiphil has passed some or all of the levy to the ultimate consumer, but that does
not disqualify it from attacking the constitutionality of the LOI or from seeking a
refund. As seller, it bore the ultimate burden of paying the levy. It faced the
possibility of severe sanctions for failure to pay the levy. The fact of payment is
sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because
it was compelled to factor in its product the levy. The levy certainly rendered the
fertilizer products of Fertiphil and other domestic sellers much more expensive. The
harm to their business consists not only in fewer clients because of the increased
price, but also in adopting alternative corporate strategies to meet the demands of
LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of
the levy just to be competitive in the market. The harm occasioned on the business
of Fertiphil is sufficient injury for purposes of locus standi.

Even assuming arguendo that there is no direct injury, We find that the liberal
policy consistently adopted by this Court on locus standi must apply. The issues
raised by Fertiphil are of paramount public importance. It involves not only the
constitutionality of a tax law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI becoming financially viable. The LOI
provided that the capital contribution shall be collected until adequate capital is
raised to make PPI viable.

The constitutionality of the levy is already in doubt on a plain reading of the

statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter
of all justiciable controversies. The doctrine of standing, being a mere procedural
technicality, should be waived, if at all, to adequately thresh out an important
constitutional issue.
RTC may resolve constitutional issues; the
constitutional issue was adequately raised in
the complaint; it is the lis mota of the case.

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

Fertiphil counters that the constitutionality of the LOI was adequately pleaded
in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis
mota of the case because the trial court cannot determine its claim without
resolving the issue.[30]

It is settled that the RTC has jurisdiction to resolve the constitutionality of a

statute, presidential decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

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,[31] this Court recognized the power of

the RTC to resolve constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a statute,
presidential decree, or executive order. The Constitution vests the power
of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance,
or regulation not only in this Court, but in all Regional Trial Courts.[32]

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign

Affairs,[33] this Court reiterated:

There is no denying that regular courts have jurisdiction over cases

involving the validity or constitutionality of a rule or regulation issued by
administrative agencies. Such jurisdiction, however, is not limited to the
Court of Appeals or to this Court alone for even the regional trial courts
can take cognizance of actions assailing a specific rule or set of rules
promulgated by administrative bodies. Indeed, the Constitution vests the
power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order,
 instruction, ordinance, or regulation in the courts, including the regional
trial courts.[34]

Judicial review of official acts on the ground of unconstitutionality may be

sought or availed of through any of the actions cognizable by courts of justice, not
necessarily in a suit for declaratory relief. Such review may be had in criminal
actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct
Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds[36] 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 motapresented.[37]

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and
adequately raised in the complaint for collection filed with the RTC. The pertinent
portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales
of all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for,
unreasonable, inequitable and oppressive because:
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.[38] (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint
for collection. Fertiphil filed the complaint to compel PPI to refund the levies paid
under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be refunded under the
civil code principle against unjust enrichment. The refund is a mere consequence of
the law being declared unconstitutional. The RTC surely cannot order PPI to refund
Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality
of the LOI which triggers the refund. The issue of constitutionality is the very lis
mota of the complaint with the RTC.
The P10 levy under LOI No. 1465 is an exercise
of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or
the power of taxation. It claims that the LOI was implemented for the purpose of
assuring the fertilizer supply and distribution in the country and for benefiting a
foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to

give benefit to a private company. The levy was imposed to pay the corporate debt
of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power,
it is still unconstitutional because it did not promote the general welfare of the
people or public interest.

Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for validity. Police power is
the power of the State to enact legislation that may interfere with personal liberty
or property in order to promote the general welfare,[39] while the power of taxation
is the power to levy taxes to be used for public purpose. The main purpose of police
power is the regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to determine the
validity of a law enacted under the police power.[40] The power of taxation, on the
other hand, is circumscribed by inherent and constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the
State of its taxation power. While it is true that the power of taxation can be used
as an implement of police power,[41] the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called a tax.[42]

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

It is clear from the provisions of Section 73 of Commonwealth Act

123 and Section 61 of the Land Transportation and Traffic Code that the
legislative intent and purpose behind the law requiring owners of vehicles
to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the
operating expenses of the administering agency. x x x Fees may be
properly regarded as taxes even though they also serve as an instrument
of regulation.

Taxation may be made the implement of the state's police power

(Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section 59(b) in the Land
Transportation Code.It is patent therefrom that the legislators had in mind
a regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a tax or fee. x x x Simply put,
if the exaction under Rep. Act 4136 were merely a regulatory fee, the
imposition in Rep. Act 5448 need not be an additional tax. Rep. Act 4136
also speaks of other fees such as the special permit fees for certain types
of motor vehicles (Sec. 10) and additional fees for change of registration
(Sec. 11). These are not to be understood as taxes because such fees are
very minimal to be revenue-raising. Thus, they are not mentioned by Sec.
59(b) of the Code as taxes like the motor vehicle registration fee and
chauffeurs license fee. Such fees are to go into the expenditures of the
 Land Transportation Commission as provided for in the last proviso of Sec.
61.[44] (Underscoring supplied)

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate
consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A
plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed until adequate
capital is raised to make PPI viable.

Taxes are exacted only for a public purpose.

The P10 levy is unconstitutional because it was
not for a public purpose. The levy was imposed
to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are

exacted only for a public purpose. They cannot be used for purely private purposes
or for the exclusive benefit of private persons.[46] The reason for this is simple. The
power to tax exists for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose. It would be a robbery for
the State to tax its citizens and use the funds generated for a private purpose. As an
old United States case bluntly put it: To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it upon
favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called
taxation.[47]

The term public purpose is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that public purpose should
be given a broad interpretation. It does not only pertain to those purposes which
are traditionally viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes designed to promote
social justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually
expanding in light of the expansion of government functions, the inherent
requirement that taxes can only 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.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be

given a literal meaning. In this case, the text of the LOI is plain that the levy was
imposed in order to raise capital for PPI. The framers of the LOI did not even hide
the insidious purpose of the law. They were cavalier enough to name PPI as the
ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive
that a tax law would expressly name a private company as the ultimate beneficiary
of the taxes to be levied from the public. This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the P10 levy was conditional
and dependent upon PPI becoming financially viable. This suggests that the levy was
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount
when PPI is deemed financially viable. Worse, the liability of Fertiphil and other
domestic sellers of fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly
remitted and deposited by FPA to Far East Bank and Trust Company, the depositary
bank of PPI.[49] This proves that PPI benefited from the LOI. It is also proves that the
main purpose of the law was to give undue benefit and advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the
Letter of Understanding[50] 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[51]
 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.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private
corporation. We quote with approval the CA ratiocination on this point, thus:

It is upon applying this established tests that We sustain the trial

courts holding LOI 1465 unconstitutional. 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.[53] PPI did not
raise the applicability of the doctrine of operative fact with the RTC and the CA. It
cannot belatedly raise the issue with Us in order to extricate itself from the dire
effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords no
protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has
not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies
paid should be refunded in accordance with the general civil code principle against
unjust enrichment. The general rule is supported by Article 7 of the Civil Code, which
provides:

ART. 7. Laws are repealed only by subsequent ones, and their

violation or non-observance shall not be excused by disuse or custom or
practice to the contrary.

When the courts declare a law to be inconsistent with the

Constitution, the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only

applies as a matter of equity and fair play.[55] It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased
by a new judicial declaration.[56]

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[57] or would put in limbo the acts done by a municipality
in reliance upon a law creating it.[58]

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.