G.R. No.

L-29059 December 15, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.

CRUZ, J.:

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on
appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was
ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98, representing
overpayments of ad valorem taxes on cement produced and sold by it after October 1957. 1

On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and
the private respondent, the latter moved for a writ of execution to enforce the said judgment . 2

The motion was opposed by the petitioner on the ground that the private respondent had an
outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was
stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus
28% surcharge. 3

On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private
respondent was still being questioned and therefore could not be set-off against the refund. 4

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the
refund should be charged against the tax deficiency of the private respondent on the sales of cement
under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral
product and therefore not exempt from sales taxes. He adds that enforcement of the said tax
deficiency was properly effected through his power of distraint of personal property under Sections
316 and 318 of the said Code and, moreover, the collection of any national internal revenue tax
5

may not be enjoined under Section 305, subject only to the exception prescribed in Rep. Act No.
6

1125. This is not applicable to the instant case. The petitioner also denies that the sales tax
7

assessments have already prescribed because the prescriptive period should be counted from the
filing of the sales tax returns, which had not yet been done by the private respondent.

For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement
is not a manufactured product but a mineral product. As such, it was exempted from sales taxes
8

under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in
accordance with Cebu Portland Cement Co. v. Collector of Internal Revenue, decided in 1968. Here 9

Justice Eugenio Angeles declared that "before the effectivity of Rep. Act No. 1299, amending
Section 246 of the National Internal Revenue Code, cement was taxable as a manufactured product
under Section 186, in connection with Section 194(4) of the said Code," thereby implying that it was
not considered a manufactured product afterwards. Also, the alleged sales tax deficiency could not
as yet be enforced against it because the tax assessment was not yet final, the same being still
under protest and still to be definitely resolved on the merits. Besides, the assessment had already
prescribed, not having been made within the reglementary five-year period from the filing of the tax
returns. 10

Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that
cement has always been considered a manufactured product and not a mineral product. This matter
was extensively discussed and categorically resolved in Commissioner of Internal Revenue v.
Republic Cement Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the
pertinent cases, declared for a unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never
considered as a mineral product within the meaning of Section 246 of the Tax Code,
notwithstanding that at least 80% of its components are minerals, for the simple
reason that cement is the product of a manufacturing process and is no longer the
mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple
treatments) for the purpose of imposing the ad valorem tax.

What has apparently encouraged the herein respondents to maintain their present
posture is the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-
20563, Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some
portions of that decision give the impression that Republic Act No. 1299, which
amended Section 246, reclassified cement as a mineral product that was not subject
to sales tax. ...

xxx xxx xxx

After a careful study of the foregoing, we conclude that reliance on the decision
penned by Justice Angeles is misplaced. The said decision is no authority for the
proposition that after the enactment of Republic Act No. 1299 in 1955 (defining
mineral product as things with at least 80% mineral content), cement became a
'mineral product," as distinguished from a "manufactured product," and therefore
ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was
enough for the Court to say in effect that even assuming Republic Act No. 1299 had
reclassified cement was a mineral product, the reclassification could not be given
retrospective application (so as to justify the refund of sales taxes paid before
Republic Act 1299 was adopted) because laws operate prospectively only, unless the
legislative intent to the contrary is manifest, which was not so in the case of Republic
Act 1266. [The situation would have been different if the Court instead had ruled in
favor of refund, in which case it would have been absolutely necessary (1) to make
an unconditional ruling that Republic Act 1299 re-classified cement as a mineral
product (not subject to sales tax), and (2) to declare the law retroactive, as a basis
for granting refund of sales tax paid before Republic Act 1299.]

In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-
20563) insofar as its pronouncements or any implication therefrom conflict with the
instant decision.

The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:

The nature of cement as a "manufactured product" (rather than a "mineral product")

is well-settled. The issue has repeatedly presented itself as a threshold question for
determining the basis for computing the ad valorem mining tax to be paid by cement
Companies. No pronouncement was made in these cases that as a "manufactured
product" cement is subject to sales tax because this was not at issue.

The decision sought to be reconsidered here referred to the legislative history of

Republic Act No. 1299 which introduced a definition of the terms "mineral" and
"mineral products" in Sec. 246 of the Tax Code. Given the legislative intent, the
holding in the CEPOC case (G.R. No. L-20563) that cement was subject to sales tax
 prior to the effectivity f Republic Act No. 1299 cannot be construed to mean that,
after the law took effect, cement ceased to be so subject to the tax. To erase any and
all misconceptions that may have been spawned by reliance on the case of Cebu
Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968
(28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly
overruled it insofar as it may conflict with the decision of August 10, 1983, now
subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year reglementary period
for the assessment of its tax liability started from the time it filed its gross sales returns on June 30,
1962. Hence, the assessment for sales taxes made on January 16, 1968 and March 4, 1968, were
already out of time. We disagree. This contention must fail for what CEPOC filed was not the sales
returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the
Tax Code. As Justice Irene R. Cortes emphasized in the aforestated resolution:

In order to avail itself of the benefits of the five-year prescription period under Section
331 of the Tax Code, the taxpayer should have filed the required return for the tax
involved, that is, a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-
21516, April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax
returns of its gross sales for the subject periods. Both parties admit that returns were
made for the ad valorem mining tax. CEPOC argues that said returns contain the
information necessary for the assessment of the sales tax. The Commissioner does
not consider such returns as compliance with the requirement for the filing of tax
returns so as to start the running of the five-year prescriptive period.

We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA,
supra, that the filing of an income tax return cannot be considered as substantial
compliance with the requirement of filing sales tax returns, in the same way that an
income tax return cannot be considered as a return for compensating tax for the
purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land
Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-
11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute
of stations in Sec. 331 did not begin to run against the government. The assessment
made by the Commissioner in 1968 on CEPOC's cement sales during the period
from July 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive
period. Absent a return or when the return is false or fraudulent, the applicable period
is ten (10) days from the discovery of the fraud, falsity or omission. The question in
this case is: When was CEPOC's omission to file tha return deemed discovered by
the government, so as to start the running of said period? 13

The argument that the assessment cannot as yet be enforced because it is still being contested
loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If the
payment of taxes could be postponed by simply questioning their validity, the machinery of the state
would grind to a halt and all government functions would be paralyzed. That is the reason why, save
for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. — No court shall have
authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment is already being
questioned in a court of justice but more so if, as in the instant case, the challenge to the
assessment is still-and only-on the administrative level. There is all the more reason to apply the rule
here because it appears that even after crediting of the refund against the tax deficiency, a balance
of more than P 4 million is still due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of the judgment
debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an
Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786
is SET ASIDE, without any pronouncement as to costs.

SO ORDERED.

G.R. Nos. 89898-99 October 1, 1990

MUNICIPALITY OF MAKATI, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. SALVADOR P. DE GUZMAN, JR., as Judge
RTC of Makati, Branch CXLII ADMIRAL FINANCE CREDITORS CONSORTIUM, INC., and
SHERIFF SILVINO R. PASTRANA, respondents.

Defante & Elegado for petitioner.

Roberto B. Lugue for private respondent Admiral Finance Creditors' Consortium, Inc.

RESOLUTION

CORTÉS, J.:

The present petition for review is an off-shoot of expropriation proceedings initiated by petitioner Municipality of Makati against private
respondent Admiral Finance Creditors Consortium, Inc., Home Building System & Realty Corporation and one Arceli P. Jo, involving a parcel
of land and improvements thereon located at Mayapis St., San Antonio Village, Makati and registered in the name of Arceli P. Jo under TCT
No. S-5499.

It appears that the action for eminent domain was filed on May 20, 1986, docketed as Civil Case No.
13699. Attached to petitioner's complaint was a certification that a bank account (Account No. S/A
265-537154-3) had been opened with the PNB Buendia Branch under petitioner's name containing
the sum of P417,510.00, made pursuant to the provisions of Pres. Decree No. 42. After due hearing
where the parties presented their respective appraisal reports regarding the value of the property,
respondent RTC judge rendered a decision on June 4, 1987, fixing the appraised value of the
property at P5,291,666.00, and ordering petitioner to pay this amount minus the advanced payment
of P338,160.00 which was earlier released to private respondent.

After this decision became final and executory, private respondent moved for the issuance of a writ
of execution. This motion was granted by respondent RTC judge. After issuance of the writ of
execution, a Notice of Garnishment dated January 14, 1988 was served by respondent sheriff
Silvino R. Pastrana upon the manager of the PNB Buendia Branch. However, respondent sheriff was
informed that a "hold code" was placed on the account of petitioner. As a result of this, private
respondent filed a motion dated January 27, 1988 praying that an order be issued directing the bank
to deliver to respondent sheriff the amount equivalent to the unpaid balance due under the RTC
decision dated June 4, 1987.

Petitioner filed a motion to lift the garnishment, on the ground that the manner of payment of the
expropriation amount should be done in installments which the respondent RTC judge failed to state
in his decision. Private respondent filed its opposition to the motion.

Pending resolution of the above motions, petitioner filed on July 20, 1988 a "Manifestation" informing
the court that private respondent was no longer the true and lawful owner of the subject property
because a new title over the property had been registered in the name of Philippine Savings Bank,
Inc. (PSB) Respondent RTC judge issued an order requiring PSB to make available the documents
pertaining to its transactions over the subject property, and the PNB Buendia Branch to reveal the
amount in petitioner's account which was garnished by respondent sheriff. In compliance with this
order, PSB filed a manifestation informing the court that it had consolidated its ownership over the
property as mortgagee/purchaser at an extrajudicial foreclosure sale held on April 20, 1987. After
several conferences, PSB and private respondent entered into a compromise agreement whereby
they agreed to divide between themselves the compensation due from the expropriation
proceedings.

Respondent trial judge subsequently issued an order dated September 8, 1988 which: (1) approved
the compromise agreement; (2) ordered PNB Buendia Branch to immediately release to PSB the
sum of P4,953,506.45 which corresponds to the balance of the appraised value of the subject
property under the RTC decision dated June 4, 1987, from the garnished account of petitioner; and,
(3) ordered PSB and private respondent to execute the necessary deed of conveyance over the
subject property in favor of petitioner. Petitioner's motion to lift the garnishment was denied.

Petitioner filed a motion for reconsideration, which was duly opposed by private respondent. On the
other hand, for failure of the manager of the PNB Buendia Branch to comply with the order dated
September 8, 1988, private respondent filed two succeeding motions to require the bank manager to
show cause why he should not be held in contempt of court. During the hearings conducted for the
above motions, the general manager of the PNB Buendia Branch, a Mr. Antonio Bautista, informed
the court that he was still waiting for proper authorization from the PNB head office enabling him to
make a disbursement for the amount so ordered. For its part, petitioner contended that its funds at
the PNB Buendia Branch could neither be garnished nor levied upon execution, for to do so would
result in the disbursement of public funds without the proper appropriation required under the law,
citing the case of Republic of the Philippines v. Palacio [G.R. No. L-20322, May 29, 1968, 23 SCRA
899].

Respondent trial judge issued an order dated December 21, 1988 denying petitioner's motion for
reconsideration on the ground that the doctrine enunciated in Republic v. Palacio did not apply to the
case because petitioner's PNB Account No. S/A 265-537154-3 was an account specifically opened
for the expropriation proceedings of the subject property pursuant to Pres. Decree No. 42.
Respondent RTC judge likewise declared Mr. Antonio Bautista guilty of contempt of court for his
inexcusable refusal to obey the order dated September 8, 1988, and thus ordered his arrest and
detention until his compliance with the said order.

Petitioner and the bank manager of PNB Buendia Branch then filed separate petitions
for certiorari with the Court of Appeals, which were eventually consolidated. In a decision
promulgated on June 28, 1989, the Court of Appeals dismissed both petitions for lack of merit,
sustained the jurisdiction of respondent RTC judge over the funds contained in petitioner's PNB
Account No. 265-537154-3, and affirmed his authority to levy on such funds.

Its motion for reconsideration having been denied by the Court of Appeals, petitioner now files the
present petition for review with prayer for preliminary injunction.

On November 20, 1989, the Court resolved to issue a temporary restraining order enjoining
respondent RTC judge, respondent sheriff, and their representatives, from enforcing and/or carrying
out the RTC order dated December 21, 1988 and the writ of garnishment issued pursuant thereto.
Private respondent then filed its comment to the petition, while petitioner filed its reply.

Petitioner not only reiterates the arguments adduced in its petition before the Court of Appeals, but
also alleges for the first time that it has actually two accounts with the PNB Buendia Branch, to wit:

xxx xxx xxx

(1) Account No. S/A 265-537154-3 — exclusively for the expropriation of the subject
property, with an outstanding balance of P99,743.94.

(2) Account No. S/A 263-530850-7 — for statutory obligations and other purposes of
the municipal government, with a balance of P170,098,421.72, as of July 12, 1989.

xxx xxx xxx

[Petition, pp. 6-7; Rollo, pp. 11-12.]

Because the petitioner has belatedly alleged only in this Court the existence of two bank accounts, it
may fairly be asked whether the second account was opened only for the purpose of undermining
the legal basis of the assailed orders of respondent RTC judge and the decision of the Court of
Appeals, and strengthening its reliance on the doctrine that public funds are exempted from
garnishment or execution as enunciated in Republic v. Palacio [supra.] At any rate, the Court will
give petitioner the benefit of the doubt, and proceed to resolve the principal issues presented based
on the factual circumstances thus alleged by petitioner.

Admitting that its PNB Account No. S/A 265-537154-3 was specifically opened for expropriation
proceedings it had initiated over the subject property, petitioner poses no objection to the
garnishment or the levy under execution of the funds deposited therein amounting to P99,743.94.
However, it is petitioner's main contention that inasmuch as the assailed orders of respondent RTC
judge involved the net amount of P4,965,506.45, the funds garnished by respondent sheriff in
excess of P99,743.94, which are public funds earmarked for the municipal government's other
statutory obligations, are exempted from execution without the proper appropriation required under
the law.

There is merit in this contention. The funds deposited in the second PNB Account No. S/A 263-
530850-7 are public funds of the municipal government. In this jurisdiction, well-settled is the rule
that public funds are not subject to levy and execution, unless otherwise provided for by statute
[Republic v. Palacio, supra.; The Commissioner of Public Highways v. San Diego, G.R. No. L-30098,
February 18, 1970, 31 SCRA 616]. More particularly, the properties of a municipality, whether real or
personal, which are necessary for public use cannot be attached and sold at execution sale to
satisfy a money judgment against the municipality. Municipal revenues derived from taxes, licenses
and market fees, and which are intended primarily and exclusively for the purpose of financing the
governmental activities and functions of the municipality, are exempt from execution [See Viuda De
Tan Toco v. The Municipal Council of Iloilo, 49 Phil. 52 (1926): The Municipality of Paoay, Ilocos
Norte v. Manaois, 86 Phil. 629 (1950); Municipality of San Miguel, Bulacan v. Fernandez, G.R. No.
61744, June 25, 1984, 130 SCRA 56]. The foregoing rule finds application in the case at bar. Absent
a showing that the municipal council of Makati has passed an ordinance appropriating from its public
funds an amount corresponding to the balance due under the RTC decision dated June 4, 1987, less
the sum of P99,743.94 deposited in Account No. S/A 265-537154-3, no levy under execution may be
validly effected on the public funds of petitioner deposited in Account No. S/A 263-530850-7.

Nevertheless, this is not to say that private respondent and PSB are left with no legal recourse.
Where a municipality fails or refuses, without justifiable reason, to effect payment of a final money
judgment rendered against it, the claimant may avail of the remedy of mandamus in order to compel
the enactment and approval of the necessary appropriation ordinance, and the corresponding
disbursement of municipal funds therefor [See Viuda De Tan Toco v. The Municipal Council of
Iloilo, supra; Baldivia v. Lota, 107 Phil. 1099 (1960); Yuviengco v. Gonzales, 108 Phil. 247 (1960)].

In the case at bar, the validity of the RTC decision dated June 4, 1987 is not disputed by petitioner.
No appeal was taken therefrom. For three years now, petitioner has enjoyed possession and use of
the subject property notwithstanding its inexcusable failure to comply with its legal obligation to pay
just compensation. Petitioner has benefited from its possession of the property since the same has
been the site of Makati West High School since the school year 1986-1987. This Court will not
condone petitioner's blatant refusal to settle its legal obligation arising from expropriation
proceedings it had in fact initiated. It cannot be over-emphasized that, within the context of the
State's inherent power of eminent domain,

. . . [j]ust compensation means not only the correct determination of the amount to be
paid to the owner of the land but also the payment of the land within a reasonable
time from its taking. Without prompt payment, compensation cannot be considered
"just" for the property owner is made to suffer the consequence of being immediately
deprived of his land while being made to wait for a decade or more before actually
receiving the amount necessary to cope with his loss [Cosculluela v. The Honorable
Court of Appeals, G.R. No. 77765, August 15, 1988, 164 SCRA 393, 400. See also
Provincial Government of Sorsogon v. Vda. de Villaroya, G.R. No. 64037, August 27,
1987, 153 SCRA 291].

The State's power of eminent domain should be exercised within the bounds of fair play and justice.
In the case at bar, considering that valuable property has been taken, the compensation to be paid
fixed and the municipality is in full possession and utilizing the property for public purpose, for three
(3) years, the Court finds that the municipality has had more than reasonable time to pay full
compensation.

WHEREFORE, the Court Resolved to ORDER petitioner Municipality of Makati to immediately pay
Philippine Savings Bank, Inc. and private respondent the amount of P4,953,506.45. Petitioner is
hereby required to submit to this Court a report of its compliance with the foregoing order within a
non-extendible period of SIXTY (60) DAYS from the date of receipt of this resolution.

The order of respondent RTC judge dated December 21, 1988, which was rendered in Civil Case
No. 13699, is SET ASIDE and the temporary restraining order issued by the Court on November 20,
1989 is MADE PERMANENT.

SO ORDERED.
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959. On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter
1

was stamp received on the same day in the office of the petitioner. On March 12, 1965, a warrant of2

distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. A search of the protest 3

in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat
to BIR agent Ramon Reyes, who deferred service of the warrant. On April 7, 1965, Atty. Guevara 4

was finally informed that the BIR was not taking any action on the protest and it was only then that
he accepted the warrant of distraint and levy earlier sought to be served. Sixteen days later, on April 5

23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged. It is true 7

that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" and 8

renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof
9

and makes the said request deemed rejected." But there is a special circumstance in the case at
10

bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.

As the Court of Tax Appeals correctly noted," the protest filed by private respondent was not pro
11

forma and was based on strong legal considerations. It thus had the effect of suspending on January
18, 1965, when it was filed, the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest and the warrant
was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.
Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income but later conformed to the decision of the respondent
12

court rejecting this assertion. In fact, as the said court found, the amount was earned through the
13

joint efforts of the persons among whom it was distributed It has been established that the Philippine
Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately, after its
14

incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties. For this sale, Algue received as agent a commission of P126,000.00, and it was
15

from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals.
16

There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also found, after
17

examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose. It should be
19

remembered that this was a family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the end of the year, when the
books were to be closed, each payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. Admittedly, everything seemed to be informal. This
20

arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear
21

profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following provision of the
Tax Code:
 SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.

SO ORDERED.

G.R. No. 141973 June 28, 2005

PHILIPPINE PHOSPHATE FERTILIZER CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Once more, we stand by our ruling that:

If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess payments. When it is undisputed that a
taxpayer is entitled to a refund, the State should not invoke technicalities to keep money not
belonging to it. No one, not even the State, should enrich oneself at the expense of another. 1

The antecedents of this case are as follows:

Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation registered with the
Export Processing Zone Authority (EPZA). It manufactures fertilizers for domestic and international
distribution and as such, utilizes fuel, oil and other petroleum products which it procures locally from
Petron Philippines Corporation (Petron). Petron initially pays the Bureau of Internal Revenue (BIR)
and the Bureau of Customs the taxes and duties imposed upon the petroleum products. Petron is
then reimbursed by petitioner when Petron sells such petroleum products to the petitioner. In a letter
dated August 28, 1995, petitioner sought a refund of specific taxes paid on the purchases of
petroleum products from Petron for the period of September 1993 to December 1994 in the total
amount of ₱602,349.00 which claim is pursuant to the incentives it enjoyed by virtue of its EPZA
registration. Since the two-year period within which petitioner could file a case for tax refund before
the Court of Tax Appeals (CTA) was about to expire and no action had been taken by the BIR,
petitioner instituted a petition for review before the CTA against the Commissioner of Internal
Revenue (CIR).2 During the trial, to prove that the duties imposed upon the petroleum products
delivered to petitioner by Petron had been duly paid for by petitioner, petitioner presented a
Certification from Petron dated August 17, 1995; a schedule of petroleum products sold and
delivered to petitioner detailing the volume of sales and the excise taxes paid thereon; photocopies
of Authority to Accept Payment for Excise Taxes issued by the CIR pertaining to petroleum products
purchased; as well as the testimony of Sylvia Osorio, officer of Petron, to attest to the summary and
certification presented.3 The CIR did not present any evidence to controvert the ones presented by
petitioner nor did it file an opposition to petitioner’s formal offer of evidence. 4

On August 11, 1998, the CTA promulgated its Decision finding that while petitioner is exempt from
the payment of excise taxes, it failed to sufficiently prove that it is entitled to refund in this particular
case since it did not submit invoices to support the summary of petroleum products sold and
delivered to it by Petron.5 The CTA rationalized thus:

…[P]etitioner, as an EPZA registered enterprise is exempted from the payment of excise

taxes, and if said taxes were passed on by the supplier to EPZA registered enterprise like the
petitioner, tax credit shall be granted to the latter. The fact that it was not the petitioner who
had paid the taxes directly to the Bureau of Internal Revenue does not have an adverse effect
on petitioner’s action for refund. The law granting the exemption makes no distinction as to the
circumstances when the law shall apply. Since the law makes no distinction, neither should we. The
exemption is so broad as to cover the present situation. Since an export processing zone is not
considered to be covered by Philippine customs and internal revenue laws, the taxes paid by
the petitioner on the petroleum products should be refunded or credited in its favor. Thus, the
only thing left for us to do is to determine whether or not petitioner is entitled to the amount
claimed for refund. After a careful scrutiny of the evidence presented, however, there appears to be
a dispute with respect to the amount claimed. Petitioner submitted in evidence a certification issued
by Petron to prove that the duties imposed upon the petroleum products delivered to petitioner by
Petron had been duly paid for by petitioner (Exhibit "A", p. 71, CTA records). Petitioner likewise
presented a schedule of petroleum products sold and delivered to petitioner detailing the volume of
sales and the excise taxes paid thereon (Exhibits "A-1" to "A-1a", pp. 72-73, CTA records). However,
to show that Petron had previously paid the excise taxes on these petroleum products, petitioner
presented photocopies of Authority to Accept Payment for Excise Taxes issued by respondent
pertaining to petroleum products purchased (Exhibits "A-2" to "A-80), pp. 74-152, CTA records).

Although these Authority to Accept Payment for Excise Taxes reflect therein the amount of excise
taxes paid by Petron to respondent, this Court cannot verify the exact amount of excise taxes
which correspond to the petroleum products delivered to petitioner. This Authority to Accept
Payment for Excise Taxes only proves the payment of millions of pesos in excise taxes made by
Petron during the period covered by the claim but they fail to show to this Court which part of this
huge amount actually represents the excise taxes paid on the petroleum products actually delivered
to herein petitioner. Petitioner merely presented a summary of petroleum products sold and
delivered by Petron during the period covered by the claim. We cannot, by the summary
alone, ascertain the veracity of the amount being claimed neither can it prove the existence
of the invoices being referred to therein. Petitioner should have submitted the invoices
supporting the schedules of petroleum products sold and delivered to it by Petron. These
invoices would reveal whether or not the amount claimed for refund by petitioner is
correct….

In an action for refund/credits the taxpayer has the burden of showing that the taxes paid are
erroneously collected and that failure to meet such a burden is fatal to his cause. Tax refunds
partake of the nature of the tax exemptions and therefore cannot be allowed unless granted in the
most explicit and categorical language. The grant of refund privileges must be strictly construed
against the taxpayer and liberally in favor of the government. (citations omitted) lawphil.net

Petitioner has the burden to prove the material allegations in its petition as well as the truth of its
claim.6 (Emphasis supplied) disposing of the case as follows:
WHEREFORE, in view of the foregoing, the claim of refund of petitioner in the amount of
₱602,349.00 is hereby DENIED for lack of merit.7

On August 31, 1998, petitioner filed a motion for reconsideration alleging that it failed to submit
invoices because it thought that the presentation of said invoices was not necessary to prove the
claim for refund, since petitioner’s previous claims, in CTA Case Nos. 4654, 4993 and
4994,8 involving similar facts, were granted by the CTA even without the presentation of invoices. It
then prayed that the CTA decision be reconsidered and its claim for refund be allowed, or in the
alternative, allow petitioner to present and offer the invoices in evidence to present its claim. 9

The CTA denied the motion for reconsideration on January 6, 1999, explaining as follows:

It is important to note at the outset that Petitioner’s reliance on CTA Case Nos. 4994, 4654 and 4993
is misplaced because during the hearings of these cases up to the time of formal offer of evidence,
CTA Circular No. 1-95 was not yet in effect. The nature and presentation of evidence involving
voluminous documents prior to the effectivity of CTA Circular No. 1-95 differ from that which is
required by this Court from the effectivity of said Circular beginning January 25, 1995. In the instant
case, the Petition for Review was filed on September 1, 1995. It is obviously clear that the provisions
of CTA Circular 1-95 already applied to Petitioner’s presentation of evidence. Quoted hereunder are
portions of CTA Circular 1-95:

1. The party who desires to introduce as evidence such voluminous documents must
present: (a) Summary containing the total amount/s of the tax account or tax paid for the
period involved and a chronological or numerical list of the numbers, dates and amounts
covered by the invoices or receipts; and (b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the summary after making an
examination and evaluation of the voluminous receipts and invoices. Such summary and
certification must properly be identified by a competent witness from the accounting firm.

2. The method of individual presentation of each and every receipt or invoice or other
documents for marking, identification and comparison with the originals thereof need not be
done before the Court or the Commissioner anymore after the introduction of the summary
and CPA certification. It is enough that the receipts, invoices and other documents covering
the said accounts or payments must be pre-marked by the party concerned and submitted to
the Court in order to be made accessible to the adverse party whenever she/he desires to
check and verify the correctness of the summary and CPA certification. However, the
originals of the said receipts, invoices or documents should be ready for verification and
comparison in case doubts on the authenticity of the particular documents presented is
raised during the hearing of the case.

It can be revealed from the evidence presented by the Petitioner that it failed to present a
certification of an independent Certified Public Accountant, as well as the invoices
supporting the schedules of petroleum products sold and delivered to it by Petron. From this
perspective alone, the claim for refund was correctly denied. Now that an unfavorable
decision has been rendered by this Court, Petitioner belatedly seeks to present the invoices
as additional evidence.

The prayer to present additional evidence partakes of the nature of a motion for new trial under
Section 1 Rule 37 of the 1997 Rules of Civil Procedure. It has already been emphasized in several
cases that failure to present evidence already existing at the time of trial does not warrant the grant
of a new trial because said evidence can no longer be considered newly discovered but is more in
the nature of forgotten evidence. Neither can such inadvertence on the part of the counsel to present
said evidence qualify as excusable negligence.10 (Emphasis supplied)

CTA Presiding Judge Ernesto D. Acosta dissented with the view that in the interest of justice,
petitioner should be given a chance to prove its case by allowing it to present the invoices of its
purchases.11 He reasoned that:

…A review of the schedule of invoices, Exhibits "A-1" "A-1-a", reveals that there are only about
ninety four (94) invoices which does not need the assistance of an independent CPA. It can easily be
presented before this Court or before a Clerk of Court for markings and comparison.

The reason advanced by the Petitioner was that they thought the presentation by the Manager of
Petron Corporation of a duly notarized certification (supporting the schedules of invoices), coupled
with testimonies of witness, Mrs. Sylvia Osorio of Petron Corporation, are enough to prove their
case. Respondent did not even controvert said exhibits and testimonies. It is this Court that raised
1avvphi1 .zw+

doubts on the veracity of the claim in view of the absence of the invoices. This ground could easily
fall under the phrase "mistake or excusable negligence" as a ground for new trial under Sec. 1(a) of
Rule 37 and not under the phrase "newly discovered evidence" as stated in our said resolution. The
denial of this motion is too harsh considering that this case is only civil in nature, govern (sic) merely
by the rule on preponderance of evidence.12

On January 25, 1999, petitioner filed another motion for reconsideration with motion for new trial
praying that it be allowed to present an additional witness and to have invoices and receipts pre-
marked in accordance with CTA Circular No. 1-95.13 The CTA denied the same for the reason that it
found no convincing reason to reverse its earlier decision and the motion for new trial was filed
beyond the period prescribed by Sec. 1, Rule 37 of the Rules of Court as well as for appeals as
provided under Sec. 4, Rule 43.14

Petitioner then went to the Court of Appeals (CA) which issued the herein assailed Resolution
dismissing the petition for review, to wit:

Considering that the "AFFIDAVIT OF NON-FORUM SHOPPING" was executed by petitioner’s

counsel, when under Adm. Circular No. 04-94, the petitioner should be the one to certify as to the
facts and undertakings as required; and since any violation of the circular "shall be a cause for the
dismissal" of the petition, the petition for review is hereby DENIED DUE COURSE OUTRIGHT, and
is DISMISSED.

SO ORDERED.15

The motion for reconsideration was likewise denied.16

Hence the present petition raising the following issues:

1. Whether or not the Court of Tax Appeals should have granted petitioner’s claim for refund.

2. Whether or not the Court of Appeals should have given due course to the Petition for
Review.17

Anent the first issue, petitioner argues that: the CTA erred in denying its claim for refund for its failure
to present invoices and receipts; the evidence it adduced, which the CIR did not controvert nor
contest, is sufficient to support petitioner’s claim for refund or tax credit; as opined by the Presiding
Judge of the CTA in his dissenting opinion, the failure of petitioner to present invoices and receipts is
a minor infraction of CTA Circular No. 1-95 which should not defeat petitioner’s right to refund; there
is nothing in said circular which will support the contention of the CTA that the petitioner is mandated
to present the invoices in the present case; the CTA, in its previous decisions involving the petitioner,
one of which was even affirmed by the CA, held that a refund may be granted solely on the basis of
certifications issued by Petron;18 if it is the avowed purpose of CTA Circular No. 1-95 to ensure the
speedy administration of justice, it should not compel petitioner to present additional voluminous
evidence which will require the presentation of a Certified Public Accountant (CPA) for court
examination aside from entailing additional costs to petitioner; petitioner’s counsel was of the honest
belief that he was not required to adhere to what is provided in CTA Circular No. 1-95; petitioner
should not be burdened by the infraction of its counsel and should be given the fullest opportunity to
establish the merits of its action rather than for it to lose property on mere technicalities; it has also
been held that evidence not offered and formally presented in evidence during the trial may still be
considered by a court in the exercise of its discretion so as not to allow a mere technicality to
overcome justice and fairness; petitioner should be granted its claim for refund, or, in the alternative,
be given an opportunity to present the pre-marked invoices in accordance with CTA Circular No. 1-
95.19

As to the second issue, petitioner explains that: its counsel was of the belief that he was authorized
to execute the affidavit of non-forum shopping; in any event, its counsel immediately attached to the
motion a copy of the affidavit of non-forum shopping executed by petitioner’s President, Ramon C.
Avecilla as soon as he learned of his error; and Supreme Court Administrative Circular No. 04-94
should be liberally construed following Maricalum Mining Corp. vs. NLRC,20 Loyola vs. Court of
Appeals,21 and Philippine Fishing Boat Officers and Engineers Union vs. Court of Industrial
Relations.22

It then prayed that: the resolutions of the CA and the Decision of the CTA be reversed; and an order
be issued to award petitioner tax credit certificate/refund in the amount of ₱602,349.00 representing
excise taxes paid for the period of September 1993 to December 1994 or in the alternative to allow
petitioner to adduce evidence before the CTA to support its case. 23

The CIR, in his Comment, contends that: the burden of proving entitlement to the refund/credit rests
upon petitioner; the CTA was correct in requiring the submission of the invoices to support the
schedules presented especially in this case where the CTA cannot determine which part of the huge
amount paid by Petron actually represents the excise taxes paid on the petroleum products actually
delivered to petitioner; the schedules are self-serving and if not corroborated by evidence have no
evidentiary weight; the CTA is not precluded from requiring other evidence which will once and for all
erase doubts to the claim for refund; claims for refund, partaking of the nature of tax exemptions, are
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; even
setting aside the requirements in CTA Circular No. 1-95, petitioner is still obliged to present the
invoices in order to corroborate the entries in the summary and to reveal whether or not the amount
claimed for refund by petitioner is correct; petitioner’s Motion for Reconsideration and Motion for
New Trial filed on January 25, 1999 were properly denied by the CTA for having been filed out of
time; and the CTA’s decision must be respected on appeal since it has developed an expertise on
the subject.24

Anent the second issue, respondent avers that the CA did not err in dismissing the petition for review
on the ground that the affidavit of non-forum shopping was executed by petitioner’s counsel contrary
to the requirements in Sec. 5, Rule 7 of the Rules of Court; and that the denial of the motion for
reconsideration was also proper since the failure to comply with the requirements of non-forum
shopping shall not be curable by mere amendment to the complaint. 25
For clarity, we shall first discuss the issue of whether or not the CA should have given due course to
the petition for review.

The primary question that has to be resolved is whether an Affidavit of Non-Forum Shopping,
erroneously signed by counsel, may be cured by subsequent compliance.

Generally, subsequent compliance with the requirement of affidavit of non-forum shopping does not
excuse a party from failure to comply in the first instance.26

Supreme Court Administrative Circular No. 04-94 of Section 5, Rule 7 of the 1997 Rules of Civil
Procedure which requires the pleader to submit a certificate of non-forum shopping to be executed
by the plaintiff or principal party is mandatory.27 A certification of the plaintiff’s counsel will not suffice
for the reason that it is petitioner, and not the counsel, who is in the best position to know whether he
actually filed or caused the filing of a petition.28 A certification against forum shopping signed by
counsel is a defective certification that is equivalent to non-compliance with the requirement and
constitutes a valid cause for the dismissal of the petition.29 Hence, strictly speaking, the CA was
correct in dismissing the petition.

There are instances, however, when we treated compliance with the rule with relative liberality,
especially when there are circumstances or compelling reasons making the strict application of the
rule clearly unjustified.30

In the case of Far Eastern Shipping Co. vs. Court of Appeals,31 while we said that, strictly, a
certification against forum shopping by counsel is a defective certification, the verification, signed by
petitioner’s counsel in said case, is substantial compliance inasmuch as it served the purpose of the
Rules of informing the Court of the pendency of another action or proceeding involving the same
issues.32 We then explained that procedural rules are instruments in the speedy and efficient
administration of justice which should be used to achieve such end and not to derail it. 33

In Damasco vs. NLRC,34 the certifications against forum shopping were erroneously signed by
petitioners’ lawyers, which, generally, would warrant the outright dismissal of their actions. 35 We
resolved however that as a matter of social justice, technicality should not be allowed to stand in the
way of equitably and completely resolving the rights and obligations of the parties. 36 In Cavile vs.
Heirs of Clarita Cavile,37 we likewise held that the merits of the substantive aspects of the case may
be deemed as "special circumstance" for the Court to take cognizance of a petition although the
certification against forum shopping was executed and signed by only one of the petitioners. 38Finally,
in Sy Chin vs. Court of Appeals,39 we categorically stated that while a petition may be flawed as the
certificate of non-forum shopping was signed only by counsel and not by the party, such procedural
lapse may be overlooked in the interest of substantial justice. 40

Here, the affidavit of non-forum shopping was signed by petitioner’s counsel. Upon receipt of the
resolution of the CA, however, which dismissed its petition for non-compliance with the rules on
affidavit of non-forum shopping, petitioner submitted, together with its motion for reconsideration, an
affidavit signed by petitioner’s president in compliance with the said rule. 41 We deem this to be
sufficient especially in view of the merits of the case, which may be considered as a special
circumstance or a compelling reason that would justify tempering the hard consequence of the
procedural requirement on non-forum shopping.42

Which brings us to the other issue of whether or not the CTA should have granted petitioner’s claim
for refund.
The general rule is that claimants of tax refunds bear the burden of proving the factual basis of their
claims.43 This is because tax refunds are in the nature of tax exemptions, the statutes of which are
construed strictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority. 44 Taxes
are the lifeblood of the nation, therefore statutes that allow exemptions are construed strictly against
the grantee and liberally in favor of the government. 45

In this case, there is no dispute that petitioner is entitled to exemption from the payment of excise
taxes by virtue of its being an EPZA registered enterprise. 46 As stated by the CTA, the only thing left
to be determined is whether or not petitioner is entitled to the amount claimed for refund.47

Petitioner’s entire claim for refund, however, was denied for petitioner’s failure to present invoices
allegedly in violation of CTA Circular No. 1-95. But nowhere in said Circular is it stated that invoices
are required to be presented in claiming refunds. What the Circular states is that:

1. The party who desires to introduce as evidence such voluminous documents must present: (a)
Summary containing the total amount/s of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts covered by the invoices or
receipts; and (b) a Certification of an independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an examination and evaluation of the
voluminous receipts and invoices. Such summary and certification must properly be identified by a
competent witness from the accounting firm. (Emphasis supplied)

The CTA in denying petitioner’s motion for reconsideration, also mentioned for the first time that
petitioner’s failure to present "a certification of an independent CPA" is another ground that justified
the denial of its claim for refund.

Again, we find such reasoning to be erroneous. The certification of an independent CPA is not
another mandatory requirement under the Circular which petitioner failed to comply with. It is rather
a requirement that must accompany the invoices should one decide to present invoices under the
Circular. Since petitioner did not present invoices, on the assumption that such were not necessary
in this case, it logically did not present a certification because there was nothing to certify.

The CTA also could not deny that in its previous decisions involving petitioner’s claims for refund,
invoices were not deemed necessary to grant such claims. It merely said that in said decisions, CTA
Circular No. 1-95 was not yet in effect.48 Since CTA Circular No. 1-95 did not make it mandatory to
present invoices, coupled with the previous cases of petitioner where the certifications issued by
Petron sufficed, it is understandable that petitioner did not think it necessary to present invoices and
the accompanying certifications when it filed the present case for refund before the CTA.

Even then, petitioner, in its motion for reconsideration, asked the CTA for an opportunity to present
invoices to substantiate its claims. But this was denied by the CTA explaining that its prayer to
present additional evidence partakes of the nature of a motion for new trial under Section 1, Rule 37
of the Rules of Court. The CTA held that under such rule, failure to present evidence already existing
at the time of trial does not warrant the grant of a new trial because such evidence is not newly
discovered but is more in the nature of forgotten evidence which is not excusable. 49

On this point, we agree with the dissenting opinion of CTA Presiding Judge Ernesto D. Acosta who
stated that:

The reason advanced by the Petitioner…that they thought the presentation by the Manager of
Petron Corporation of a duly notarized certification (supporting the schedules of invoices), coupled
with testimonies of witness, Mrs. Sylvia Osorio of Petron Corporation, are enough to prove their
case… could easily fall under the phrase "mistake or excusable negligence" as a ground for new trial
under Sec. 1(a) of Rule 37 and not under the phrase "newly discovered evidence" as stated in our
said resolution. The denial of this motion is too harsh considering that this case is only civil in nature,
govern (sic) merely by the rule on preponderance of evidence.50

Sec. 1, Rule 37 of the Rules of Court provides as follows:

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration.--- Within the
period for taking an appeal, the aggrieved party may move the trial court to set aside the judgment or
final order and grant a new trial for one or more of the following causes materially affecting the
substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not
have guarded against and by reason of which such aggrieved party has probably been
impaired in his rights; or

(b) Newly discovered evidence, which could not, with reasonable diligence, have discovered
and produced at the trial, and which if presented would probably alter the result.

It is true that petitioner could not move for new trial on the basis of newly discovered evidence
because in order to have a new trial on the basis of newly discovered evidence, it must be proved
that: (a) the evidence was discovered after the trial; (b) such evidence could not have been
discovered and produced at the trial with reasonable diligence; (c) it is material, not merely
cumulative, corroborative or impeaching; and (d) it is of such weight that, if admitted, will probably
change the judgment.51 This does not mean however, that petitioner is altogether barred from having
a new trial. As pointed out by Judge Acosta, the reasons put forth by petitioner could fall under
mistake or excusable negligence.

The "mistake" that is allowable in Rule 37 is one which ordinary prudence could not have guarded
against.52Negligence to be "excusable" must also be one which ordinary diligence and prudence
could not have guarded against and by reason of which the rights of an aggrieved party have
probably been impaired.53 The test of excusable negligence is whether a party has acted with
ordinary prudence while transacting important business.54

In this case, it cannot be said that petitioner did not act with ordinary prudence in claiming its refund
with the CTA, in light of its previous cases with the CTA which did not require invoices and the non-
mandatory nature of CTA Circular No. 1-95.

Respondent also argues that petitioner’s motion for new trial was filed out of time and should
therefore be dismissed in view of Sec. 1, Rule 37 and Sec. 4, Rule 43 of the Rules of Court.

Sec. 1, Rule 37 provides that:

Section 1. Grounds of and period for filing motion for new trial or reconsideration.--- Within the period
for taking an appeal, the aggrieved party may move the trial court to set aside the judgment or final
order and grant a new trial …

and Sec. 4, Rule 43 holds that:

Section 4. Period of appeal. --- The appeal shall be taken within fifteen (15) days from notice of the
award, judgment, final order or resolution, or from the date of its last publication, if publication is
required by law for its effectivity, or of the denial of petitioner’s motion for new trial or reconsideration
duly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion for
reconsideration shall be allowed. Upon proper motion and the payment of the full amount of the
docket fee before the expiration of the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the petition for review. No further
extension shall be granted except for the most compelling reason and in no case to exceed fifteen
(15) days.

It is borne by the records however that in its first motion for reconsideration duly filed on time,
petitioner had already prayed that it be allowed to present and offer the pieces of evidence deemed
lacking by the CTA in its Decision dated August 11, 1998. 55 Thus, while it named its pleading as a
Motion for New Trial only in its motion dated January 25, 1999, petitioner should not be deemed to
have moved for new trial only at such time.

We reiterate the fundamental principle that technical rules of procedure are not ends in themselves
but are primarily designed to aid in the administration of justice. 56 And in cases before tax courts,
Rules of Court applies only by analogy or in a suppletory character and whenever practicable and
convenient shall be liberally construed in order to promote its objective of securing a just, speedy
and inexpensive disposition of every action and proceeding.57The quest for orderly presentation of
issues is not an absolute.58 It should not bar the courts from considering undisputed facts to arrive at
a just determination of a controversy.59 This is because, after all, the paramount consideration
remains the ascertainment of truth.60 Section 8 of R.A. No. 1125 creating the CTA also expressly
provides that it shall not be governed strictly by technical rules of evidence. 61

Since it is not disputed that petitioner is entitled to tax exemption, it should not be precluded from
presenting evidence to substantiate the amount of refund it is claiming on mere technicality
especially in this case, where the failure to present invoices at the first instance was adequately
explained by petitioner.

As we pronounced in BPI-Family Savings Bank, Inc. vs. Court of Appeals:62

…Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the
State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply
the same standard against itself in refunding excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and uprightness. 63

WHEREFORE, the petition is GRANTED. The assailed resolution is SET ASIDE and the case
REMANDED to the Court of Tax Appeals for the reception of evidence, particularly invoices
supporting the schedules of petroleum products sold and delivered to petitioner by Petron and the
corresponding certification of an independent Certified Public Accountant, for the proper and
immediate determination of the amount to be refunded to petitioner.

SO ORDERED.

G.R. No. 107434 October 10, 1997

CITIBANK, N.A., petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

PANGANIBAN, J.:

The law requires a lessee to withhold and remit to the Bureau of Internal Revenue (BIR) five percent
(5%) of the rental due the lessor, by way of advance payment of the latter's income tax liability. Is the
lessor entitled to a refund of such withheld amount after it is determined that the lessor was not, in
fact, liable for any income tax at all because its annual operation resulted in a net loss as shown in
its income tax return filed at the end of the taxable year?

This is the question raised in this petition for review on certiorari of the Court of
Appeals Decision promulgated on May 27, 1992 and Resolution promulgated on October 27, 1992
1 2 3

in CA-G.R. No. SP-26555, reversing the decision of the Court of Tax Appeals which allowed the tax
refund.

The Facts

The facts, as found by Respondent Court, are undisputed. 4

From the pleadings and supporting papers on hand, it can be gathered that Citibank
N.A. Philippine Branch (CITIBANK) is a foreign corporation doing business in the
Philippines. In 1979 and 1980, its tenants withheld and paid to the Bureau of Internal
Revenue the following taxes on rents due to Citibank, pursuant to Section 1(c) of the
Expanded Withholding Tax Regulations (BIR Revenue Regulations No. 13-78, as
amended), to wit:

1979

First quarter P60,690.97

Second quarter 69,897.08

Third quarter 69,160.89

Fourth quarter 70,160.56

—————

P270,160.56

1980

First quarter P78,370.22

Second quarter 69,049.37

Third quarter 79,139.60

 Fourth quarter 72,270.10
—————

P298,829.29

On April 15, 1980, Citibank filed its corporate income tax returns for the year ended
December 31, 1979 (Exh. "E:), showing a net loss of P74,854,916.00 and its tax
credits totalled P6,257,780.00, even without including the amounts withheld on rental
income under the Expanded Withholding Tax System, the same not having been
utilized or applied for the reason that the year's operation resulted in a loss. (Exh. &
"E-1 & E-2"). The taxes thus withheld by the tenants from rentals paid to Citibank in
1979 were not included as tax credits although a rental income amounting to
P7,796,811.00 was included in its income declared for the year ended December 31,
1979 (Exhs. "E-3" & "E-4").

For the year ended December 31, 1980, Citibank's corporate income tax returns
(Exh. "EC"), filed on April 15, 1981, showed a net loss of P77,071,790.00 for income
tax purposes. Its available tax credit (refundable) at the end of 1980 amounting to
P11,532,855.00 (Exh. "BC-1" & "BC-2") was not utilized or applied. The said
available tax credits did not include the amounts withheld by Citibank's tenants from
rental payments in 1980 but the rental payments for that year were declared as part
of its gross income included in its annual income tax returns (Exh. "BC-3").

On October 31, 1981, Citibank submitted its claim for refund of the aforesaid
amounts of P270,160.56 and P298,829, respectively, or a total of P568,989.85; and
on October 12, 1981 filed a petition for review with the Court of Tax Appeals
concerning subject claim for tax refund, docketed as CTA Case No. 3378. 5

On August 30, 1981, the Court of Tax Appeals adjudged Citibank's entitlement to the
tax refund sought for, representing the 5% tax withheld and paid on Citibank's rental
income for 1979 and 1980. . . .

In its decision granting a refund to petitioner, the Court of Tax Appeals rejected Respondent
6 7

Commissioner's argument that the claim was not seasonably filed:

WHEREFORE, respondent is hereby ordered to grant the refund of the amount

sought by the petitioner. No costs.

Not satisfied, the Commissioner appealed to the Court of Appeals. In due course, Respondent Court
issued the assailed Decision and Resolution, ruling that the five percent tax withheld by tenants from
the rental income of Citibank for the years 1979 and 1980 was in accordance with Section 1(c) of the
Expanded Withholding Tax Regulations (BIR Revenue Regulation No. 13-78, as amended) and did
not involve illegally or erroneously collected taxes. The dispositive portion of the Decision reads:8

WHEREFORE, the appealed judgment of August 30, 1991, adjudging Citibank, N.A.,
Philippine Branch, entitled to a tax refund/credit in the amount of P569,989.85,
representing the 5% withheld tax on Citibank's rental income for the taxable years
1979 and 1980 is hereby REVERSED. No pronouncement as to costs.

Respondent Court denied the motion for reconsideration of the petitioner-bank in the assailed
Resolution, the dispositive portion of which reads: 9
 WHEREFORE, for want of merit, the motion for reconsideration, dated June 19,
1992, of respondent Citibank, N.A. is hereby DENIED.

SO ORDERED.

Hence, this petition under Rule 45 of the Rules of Court.

The Issues

The appellate court ruled that it was not enough for petitioner to show its lack of income tax liability
against which the five percent withholding tax could be credited. Petitioner should have also shown
that the withholding tax was illegally or erroneously collected and remitted by the tenants. On the
other hand, petitioner counters that Respondent Court failed to grasp "two fundamental concepts in
the present income tax system, namely: (1) the yearly computation of the corporate income tax and
(2) the nature of the creditable withholding tax."

In the main, petitioner thus raises the following issues: (1) For creditable withholding tax to be
refundable, when should the illegality or error in its assessment or collection be reckoned: at the time
of withholding or at the end of the taxable year? (2) Where the income tax returns show that no
income tax is payable to the government, is a creditable withholding tax, as contradistinguished from
a final tax, refundable (or creditable) at the end of the taxable year?

The Court's Ruling

The petition is meritorious.

First Issue: Determination of the Illegality or Error in Assessment or Collection

Tax refunds are allowed under Section 230 of the National Internal Revenue Code:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears clearly to have
been erroneously paid.

Petitioner maintains that it is entitled to a refund of the five percent creditable withholding tax
in 1979 and 1980, since its operations resulted in a net loss and thus did not have any
income tax liability for such years. Respondent Court refused to allow the claim for refund for
the reason that the taxes were "not illegally or erroneously collected:" 10
 It is decisively clear that the instant claim for tax refund under scrutiny does not
involve illegally or erroneously collected taxes. It involves the 5% tax withheld by
tenants from the rental income of Citibank for the years 1979 and 1980, in
accordance with Section 1(c) of the Expanded Withholding Tax Regulations (BIR
Revenue Regulation No. 13-78 as amended) . . .

It is thus evident that the tenants or lessee of Citibank were required by law to
withhold and pay to BIR 5% of their rental and, therefore, such withholding taxes
were not illegally or erroneously collected. It was the burden of Citibank to prove that
the taxes it asked to be refunded were illegally or erroneously collected; an onus
probandi Citibank utterly failed to discharge.

We disagree with the Court of Appeals. In several cases, we have already ruled that income taxes
remitted partially on a periodic or quarterly basis should be credited or refunded to the taxpayer on
the basis of the taxpayer's final adjusted returns, nor on such periodic or quarterly basis. For
11

instance, in the recent case of Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co., the Court held:
12

. . . When applied to taxpayers filing income tax returns on a quarterly basis, the date
of payment mentioned in Section 292 (now Section 230) must be deemed to be
qualified by Sections 68 and 69 of the present Tax Code . . .

It may be observed that although quarterly taxes due are required to be paid within
60 days from the close of each quarter, the fact that the amount shall be deducted
from the tax due for the succeeding quarter shows that until a final adjustment return
shall have been filed, the taxes paid in the preceding quarters are merely partial
taxes due from a corporation. Neither amount can serve as the final figure to quantify
what is due the government nor what should be refunded to the corporation.

This interpretation may be gleaned from the last paragraph of Section 69 of the Tax
Code which provides that the refundable amount, in case a refund is due a
corporation, is that amount which is shown on its final adjustment return and not on
its quarterly returns.

xxx xxx xxx

Clearly the prescriptive period of two years should commence to run only from the
time that the refund is ascertained, which can only be determined after a final
adjustment return is accomplished. Private respondent being a corporation, Section
292 (now Section 230) cannot serve as the sole basis for determining the two-year
prescriptive period for refunds. . . .

In the present case, there is no question that the taxes were withheld in accordance with Section
1(c), Rev. Reg. No. 13-78. In that sense, it can be said that they were withheld legally by the tenants.
However, the annual income tax returns of petitioner-bank for tax years 1979 and 1980 undisputedly
reflected the net losses it suffered. The question arises: whether the taxes withheld remained legal
and correct at the end of each taxable year. We hold in the negative.

The withholding tax system was devised for two main reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; and second, to ensure the collection of
the income tax which could otherwise be lost or substantially reduced through failure to file the
corresponding returns. To these, a third reason may be added: to improve the government's cash
13
flow. Under Section 53 a-f of the tax code which was in effect at the time this case ripened,
withholding of tax at source was mandated in cases of: (a) tax free covenant bonds, (b) payments of
interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual, periodical, or casual gains,
profits and income, and capital gains of non-resident aliens and foreign corporations; (c) dividends
from a domestic corporation and royalties received by resident individuals and corporation; (d)
certain dividends; (e) interest on bank deposit; and (f) other items of income payable to resident
individuals or corporations. Section 53-f was amended by Presidential Decree No. 1351, delegating
to the Secretary of Finance the power to require the withholding of a tax, as follows:

Sec. 1. Section 53 (f) of the National Internal Revenue Code of 1997 is hereby
amended to read as follows:

(f) The Secretary of Finance may, upon recommendation of the Commissioner of

Internal Revenue, require also the withholding of a tax on the same items of income
payable to persons (natural or juridical) residing in the Philippines by the same
persons mentioned in paragraph (b) (1) of this Section at the rate of not less than 2-
1/2% but not more than 35% thereof which shall be credited against the income tax
liability of the taxpayer for the taxable year.

Pursuant to said P.D. No. 1351 and in accordance with Section 4 in relation to Section 326 of the
14

National Internal Revenue Code, the Commissioner promulgated on September 7, 1978, Revenue
Regulations No. 13-78 to implement the withholding of creditable income taxes from certain types of
income. Rev. Reg. No. 13-78 requires that a certain percentage of income be deducted and withheld
by a payor, who is constituted as the withholding agent, and paid to the revenue district officer or BIR
collection agent. Section 1 of this revenue regulation provides:

Sec. 1. Income payments subject to withholding tax and rates prescribed therein. —
Except as herein otherwise provided, there shall be withheld a creditable income tax
at the rates herein specified for each class of payee from the following items of
income payments to persons residing in the Philippines:

(a) xxx xxx xxx

(b) xxx xxx xxx

(c) Rentals. — When the gross rental or other payment required to be made as a
condition to the continued use or possession of property, whether real or personal, to
which the payor or obligor has not taken or is not taking title or in which he has no
equity, exceeds five hundred pesos (P500.00) — fiveper centum (5%).

xxx xxx xxx

Under this system, income is viewed as a flow and is measured over a period of time known as an
15

"accounting period." An accounting period covers twelve months, subdivided into four equal
segments known as "quarters." Income realized within the taxpayer's annual accounting period
(fiscal or calendar year) becomes the basis for the computation of the gross income and the tax
liability.
16

The same basic principles apply under the prevailing tax laws. Under the present tax code, the types
of income subject to withholding tax in Section 53, now Section 50, is simplified into three
categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source;
and (c) tax free covenant bonds.

Accordingly, the withheld amounts equivalent to five percent of the gross rental are remitted to the
BIR and are considered creditable withholding taxes under Section 53-f, i.e., creditable against
income tax liability for that year. The taxes withheld, as ruled in Gibbs vs. Commissioner of Internal
Revenue, are in the nature of payment by a taxpayer in order to extinguish his possible tax
17

obligation. They are installments on the annual tax which may be due at the end of the taxable
year.18

In this case, petitioner's lessees withheld and remitted to the BIR the amounts now claimed as tax
refunds. That they were withheld and remitted pursuant to Rev. Reg. No. 13-78 does not derogate
from the fact that they were merely partial payments of probable taxes. Like the corporate quarterly
income tax, creditable withholding taxes are subject to adjustment upon determination of the correct
income tax liability after the filing of the corporate income tax return, as at the end of the taxable
year. This final determination of the corporate income tax liability is provided in Section 69, NIRC:

Sec. 69. Final Adjustment Return. — Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes paid, the refundable amount shown on its final adjustment return may
be credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable year.

The taxes thus withheld and remitted are provisional in nature. We repeat: five per cent of the
19

rental income withheld and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the
withholding of final taxes on passive incomes, a creditable withholding tax; that is, creditable against
income tax liability if any, for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., this Court ruled that the payments of
20

quarterly income taxes (per Section 68, NIRC) should be considered mere installments of the annual
tax due. These quarterly tax payments, which are computed based on the cumulative figures of
gross receipts and deductions in order to arrive at a net taxable income, should be treated as
advances or portions of the annual income tax due, to be adjusted at the end of the calendar or
fiscal year. The same holds true in the case of the withholding of creditable tax at source.
Withholding taxes are "deposits" which are subject to adjustments at the proper time when the
complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income
tax liability, if any, of petitioner-bank, determined after the filing of the corporate income tax returns
on April 15, 1980 and April 15, 1981. As petitioner posted net losses in its 1979 and 1980 returns, it
was not liable for any income taxes. Consequently and clearly, the taxes withheld during the course
of the taxable year, while collected legally under the aforesaid revenue regulation, became
untenable and took on the nature of erroneously collected taxes at the end of the taxable year.
 Second Issue: Onus of Disputing a Claim for Refund

In general, there is no disagreement that a claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed
21

strictly against the taxpayer. The mechanics of a tax refunds provided in Rev. Reg. No. 13-78:

Sec. 8. Claims for tax credit or refund. — Claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is
shown on the return that the income payment received was declared as part of the
gross income and the fact of withholding is established by a copy of the statement,
duly issued by the payor to the payee (BIR Form No. 1743-A) showing the amount
paid and the amount of tax withheld therefrom.

A refund claimant is required to prove the inclusion of the income payments which were the basis of
the withholding taxes and the fact of withholding. However, detailed proof of the truthfulness of each
and every item in the income tax return is nor required. That function is lodged in the commissioner
of internal revenue by the NIRC which requires the commissioner to assess internal revenue taxes
within three years after the last day prescribed by law for the filing of the return. In San Carlos
22

Milling Co., Inc. vs. Commissioner of Internal Revenue, the Court held that the internal revenue
23

branch of government must investigate and confirm the claims for tax refund or credit before
taxpayers may avail themselves of this option. The grant of a refund is founded on the assumption
that the tax return is valid; that is, the facts stated therein are true and correct. In fact, even without
24

petitioner's tax claim, the commissioner can proceed to examine the books, records of the petitioner-
bank, or any data which may be relevant or material in accordance with Section 16 of the present
NIRC.

In the case in hand, Respondent Commissioner examined petitioner's income tax returns and
presumably found no false declaration in them, because he did not allege any such false declaration
before Respondent Court and the Court of Tax Appeals (CTA). In the CTA, Respondent
Commissioner's refusal to refund was based on the argument that the claim filed on October 31,
1981 was time-barred. It bears stressing that this issue was not raised in the appeal before us. The
issue of operational losses was not raised until the appeal before Respondent Court was filed on
February 5, 1992. By such time, at least a decade had already passed since the pertinent books and
accounting records of petitioner-bank were closed. Section 235 of the Tax Code requires the
preservation of the books of account and records only "for a period beginning from the last entry in
each book until the last day prescribed by Section 203." Section 203 provides that internal revenue
taxes shall be assessed within three years after the last day prescribed by law for the filing of the
return, and no proceeding in Court without an assessment for the collection of such taxes shall begin
after the expiration of such period. To expect petitioner to have its book and records on hand during
the appeal was obviously unreasonable and violative of Section 235 in relation to Section 203 of the
Tax Code.

In addition, the Tax Code has placed several safety measures to prevent falsification of income tax
returns which the Court recognized in Commissioner vs. TMX Sales, Inc.: 25

Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code
requires that the books of accounts of companies or persons with gross quarterly
sales or earnings exceeding Twenty Five Thousand Pesos (P25,000.00) be audited
and examined yearly by an independent Certified Public Accountant and their income
tax returns be accompanied by certified balance sheets, profit and loss statements,
schedules listing income producing properties and the corresponding incomes
therefrom and other related statements.
 It is generally recognized that before an accountant can make a certification on the
financial statements or render an auditor's opinion, an audit of the books of accounts
has to be conducted in accordance with generally accepted auditing standards.

Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to
be conducted yearly, then it is the Final Adjustment Return, where the figures of the
gross receipts and deductions have been audited and adjusted, that is truly reflective
of the results of the operations of a business enterprise. Thus, it is only when the
Adjustment Return covering the whole year is filed that the taxpayer would know
whether a tax is still due or a refund can be claimed based on the adjusted and
audited figures.

Therefore, the alleged irregularity in the declared operational losses is a matter which must be
proven by competent evidence. In resisting the claims of petitioner, Respondent Commissioner set
up the defense of the legality of the collection of the creditable withholding tax as well as
prescription, instead of presenting an assessment of the proper tax liability of the petitioner. This fact
leads us to the conclusion that the income tax returns were accepted as accurate and regular by the
BIR.

After this case was filed, the Commissioner clarified on June 27, 1994, the onus probandi of a
taxpayer claiming refund of overpaid withholding taxes, inter alia, in Revenue Regulation No. 12-94,
Section 10:

Sec. 10. Claim for Tax Credit or Refund.—

(a) Claims for Tax Credit or Refund of income tax deducted and withheld on income
payments shall be given due course only when it is shown on the return that the
income payment received has been declared as part of the gross income and the
fact of withholding is established by a copy of the Withholding Tax Statement duly
issued by the payor to the payee showing the amount paid and the amount of tax
withheld therefrom.

(b) Excess Credits. — A taxpayer's excess expanded withholding tax credits for the
taxable quarter/taxable year shall automatically be allowed as a credit for purposes
of filing his income tax return for the taxable quarter/taxable year immediately
succeeding the taxable quarter/taxable year in which the aforesaid excess credit
arose, provided, however, he submits with his income tax return a copy of his income
tax return for the aforesaid previous taxable period showing the amount of his
aforementioned excess withholding tax credits.

If the taxpayer, in lieu of the aforesaid automatic application of his excess credit,
wants a cash refund or a tax credit certificate for use in payment of his other national
internal tax liabilities, he shall make a written request therefor. Upon filing of his
request, the taxpayer's income tax return showing the excess expanded withholding
tax credits shall be examined. The excess expanded withholding tax, if any, shall
determined and refunded/credited to the taxpayer-applicant. The refunded/credit
shall be made within a period of sixty (60) days from date of the taxpayer's request
provided, however, that the taxpayer-applicant submitted for audit all his pertinent
accounting records and that the aforesaid records established the veracity of his
claim for a refund/credit of his excess expanded withholding tax credits.
Prior to Rev. Reg. 12-94, the requisites for a refund were: (1) the income tax return for the previous
year must show that income payment (rental in this case) was reported as part of the gross income;
and (2) the withholding tax statement of the withholding tax agent must show that payment of the
creditable withholding tax was made. However, even without this regulation, the commissioner may
inspect the books of the taxpayer and reassess a taxpayer for deficiency tax payments under
Sections 7, NICR. We stress that what was required under Rev. Reg. 12-94 was only a submission
of records but the verification of the tax return remained the function of the commissioner.

Worth emphasizing are these uncontested facts: (1) the amounts withheld were actually remitted to
the BIR and (2) the final adjusted returns — which the BIR did not question — showed that, for 1979
and 1980, no income taxes from petitioner were due. Hence, under the principle of solutio
indebiti provided in Art. 2154, Civil Code, the BIR received something when "there [was] no right to
26

demand it," and thus "the obligation to return arises." Heavily militating against Respondent
27

Commissioner is the ancient principle that no one, not even the state, shall enrich oneself at the
expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes.

WHEREFORE, the assailed Decision is hereby REVERSED and the decision of the Court of Tax
Appeals is REINSTATED. No costs.

SO ORDERED.

G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for respondents.

REGALADO, J.:

These cases, involving the same issue being contested by the same parties and having originated
from the same factual antecedents generating the claims for tax credit of private respondents, the
same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided
herein.

The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines,
for purposes of the projected expansion of the productive capacity of the former's mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a new concentrator for copper
production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from
said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan
was to be used for the purchase of the concentrator machinery from Japan. 1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on
May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for
¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is
equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to
Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and
as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
the total amount of loan by September 30, 1981. 2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former
to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax
thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53
(b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly
remitted to the Government. 3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later
noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi
executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed
a petition for review with respondent court, docketed therein as CTA Case No. 2801. The petition
5

was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing
institution owned, controlled and financed by the Japanese Government. Such governmental status
of Eximbank, if it may be so called, is the basis for private repondents' claim for exemption from
paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the
interest payments on the loan from the consortium of Japanese banks were likewise exempt
because said loan supposedly came from or were financed by Eximbank. The provision of the
National Internal Revenue Code relied upon is Section 29 (b) (7) (A), which excludes from gross
6

income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1)
foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing
from them, and (3) international or regional financing institutions established by
governments.

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was
later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous
payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The
records show that on November 16, 1976, the said division recommended to petitioner the approval
of private respondent's claim. However, before action could be taken thereon, respondent court
scheduled the case for hearing on September 30, 1977, during which trial private respondents
presented their evidence while petitioner submitted his case on the basis of the records of the
Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit
in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner
admitted the material averments of private respondents when he supposedly prayed "for judgment
on the pleadings without off-spring proof as to the truth of his allegations." Furthermore, the court
8

declared that all papers and documents pertaining to the loan of ¥4,320,000,000.00 obtained by
Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that
the money for the loans from the consortium of private Japanese banks in the sum of
¥2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the
ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit
through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9

A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an
appeal to this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was
withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner,
repeating the same basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a
letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of
factual or legal basis.
10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated
September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with
respondent court and a petition for review was filed with this Court on December 19, 1987. Said later
case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the
tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether
or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when it
submitted the case on the basis of the pleadings and records of the bureau. There is nothing to
indicate such admission on the part of petitioner nor can we accept respondent court's
pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the
Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's
supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the
findings of respondent court were based not only on the pleadings but on the evidence adduced by
the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the
highest respect and can only be disturbed on appeal if they are not supported by substantial
evidence or if there is a showing of gross error or abuse on the part of the tax court. Thus,
11
ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a
mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however,
warrant a departure from said general rule since we are convinced that there is a misapprehension
of facts on the part of the tax court to the extent that its conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language
used in the document, one prestation was in consideration of the other. The specific terms and the
reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier
assertion that Mitsubishi was a mere agent in said transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a
loan to and in consideration for importing copper concentrates from Atlas. Such an innocuous
12

statement of purpose could not have been intended for, nor could it legally constitute, a contract of
agency. If that had been the purpose as respondent court believes, said corporations would have
specifically so stated, especially considering their experience and expertise in financial transactions,
not to speak of the amount involved and its purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the
following arguments of petitioner:

The nature of the above contract shows that the same is not just a simple contract of loan. It
is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS
and MITSUBISHI where the latter shall provide the funds in the installation of a new
concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which,
shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be
produced by the installed concentrator.

Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified
term was the consideration of the granting of the amount of $20 million to ATLAS.
MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to
secure a loan or loans from other sources. And from what sources, it is immaterial as far as
ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the
EXIMBANK, of Japan and the consortium of Japanese banks financed through the
EXIMBANK, of Japan.

When MITSUBISHI therefore secured such loans, it was in its own independent capacity as
a private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK
of Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in
consideration for importing copper concentrates from ATLAS," the fact remains that it was a
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.

Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which
stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity,
private or public, for that matter.
 Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that
when a contract of loan is completed, the money ceases to be the property of the former
owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy,
50 Phil. 558).

In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of
Japan, said amount ceased to be the property of the bank and became the property of
MITSUBISHI.

The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan contract
with EXIMBANK of Japan.

The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different
from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the
subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to
EXIMBANK, but the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be
distorted by other considerations aliunde. The application for the loan was approved on May 20,
1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on April
17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the
amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that
this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice
for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the
parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting
the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual,
especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it
that the same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it
from making loans except to Japanese individuals and corporations. We are not impressed. Not only
is there a failure to establish such submission by adequate evidence but it posits the unfair and
unexplained imputation that, for reasons subject only of surmise, said financing institution would
deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,
assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi
is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed
as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was
agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the
latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi
imposes interest at the rate of 75% per annum, while Mitsubishis contract with Atlas merely states
that the "interest on the amount of the loan shall be the actual cost beginning from and including
other dates of releases against loan." 14

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents are not even among the
entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which
should indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations
suffer due to diminution of much needed funds. Nor can we close this discussion without taking
cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity
is invoked in this case on the nebulous representation that the funds involved in the loans are those
of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the
violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into
a contract for loans or other domestic securities with private foreign entities, which in turn will
negotiate independently with their governments, could be availed of to take advantage of the tax
exemption law under discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated
April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

SO ORDERED.

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF
APPEALS, respondent.

QUISUMBING, J.:

This petition for review assails the Resolution of the Court of Appeals dated September 22,
1

1993 affirming the Decision and a Resolution of the Court Of Tax Appeals which denied the claims
2 3

of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due
course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED. 4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for
1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond
the reglementary period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood automatically credited
the same to the succeeding year. The petition for review is dismissed for lack of
merit.

SO ORDERED. 5
The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly

organized under Philippine laws, filed its quarterly income tax returns for the first and second
quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due
were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and
P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns
for the year-ended December 31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a
tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of
1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their
lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted
a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition
was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs.
Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for
1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986

——— ———

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

———————— ———————

Excess Tax Payments P5,299,749.50* P234,077.69

 =============== =============

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95.

A forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of
petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was
filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically
credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same
was denied due course for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the
Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's
resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the

formal assurances of BIR in RMC No. 7-85 and did not immediately
file with the CTA a petition for review asking for the refund/tax credit
of its 1985-86 excess quarterly income tax payments — can be
prejudiced by the subsequent BIR rejection, applied retroactivity, of its
assurances in RMC No. 7-85 that the prescriptive period for the
refund/tax credit of excess quarterly income tax payments is not two
years but ten (10).7

II. Whether the Court of Appeals seriously erred in affirming the CTA
decision which denied PBCom's claim for the refund of P234,077.69
income tax overpaid in 1986 on the mere speculation, without proof,
that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year.
8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea
for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-
85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying
on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular
states that overpaid income taxes are not covered by the two-year prescriptive period under the tax
Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the
BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular
reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX

CREDIT OF EXCESS CORPORATE INCOME TAX
 RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations

Nos. 10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of payment, in accordance with
sections 292 and 295 of the National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of the corporation to claim
the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax
under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund
of the overpaid income tax or claim for automatic tax credit. To insure prompt action
on corporate annual income tax returns showing refundable amounts arising from
overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which,
the refund or tax credit is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of
Tax Appeals in order to preserve the right to claim refund or tax credit the two year
period. As already stated, actions hereon by the Bureau are immediate after only a
cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from
the Bureau of Internal Revenue excess income tax paid under the provisions of
Section 86 of the Tax Code within 10 years from the date of payment considering that
it is an obligation created by law (Article 1144 of the Civil Code). (Emphasis
9

supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared
circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs.
Court of Tax Appeals petitioner claims that rulings or circulars promulgated by the Commissioner of
10

Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case,
the Court held that the government is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where there has been a misrepresentation
to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this
rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any

of the rules and regulations promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial to
the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits

material facts from his return or in any document
required of him by the Bureau of Internal Revenue;

b). where the facts subsequently gathered by the

Bureau of Internal Revenue are materially different
from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on
April 15 following the close of the calendar year. As precedents, respondent Commissioner cited
cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et
al., and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. Respondent Commissioner
11 12

also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year
1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief
from the court. Further, respondent Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such
failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary
to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as
it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate
funds for the State to finance the needs of the citizenry and to advance the common weal. Due 13

process of law under the Constitution does not require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed
by law because the BIR being an administrative body enforced to collect taxes, its functions should
not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)
provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or
illegally collected, viz.:
 Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years
from the date of payment of the tax or penalty regardless of any supervening cause
that may arise after payment; Provided however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of
Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced.
The two-year prescriptive period provided, should be computed from the time of filing the Adjustment
Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., this Court
15

explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the
time that the refund is ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. . . . As we have earlier said in
the TMX Sales case, Sections 68. 69, and 70 on Quarterly Corporate Income
16 17 18

Tax Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed
upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance administrative issuances that override, instead of
20

remaining consistent and in harmony with the law they seek to apply and implement. 21

In the case of People vs. Lim, it was held that rules and regulations issued by administrative
22

officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No 37-1 fixed no
 period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the
part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to
implement a law cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of
Department Heads who draft rules and regulation is called to the importance and
necessity of closely following the terms and provisions of the law which they intended
to implement, this to avoid any possible misunderstanding or confusion as in the
present case. 23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of
its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85
24

issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is

not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating

RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a
claim for a refund or tax credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period of limitation on
refund from two to ten years would be adverse to public policy and run counter to the
positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the case at bar because it was
not the Commissioner of Internal Revenue who denied petitioner's claim of refund or
tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is out of harmony with or
contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence,
cannot be given weight for to do so would in effect amend the statute. 25

Art. 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the
26

legal system of the country. But administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against
judicial action. For there are no vested rights to speak of respecting a wrong construction of the law
by the administrative officials and such wrong interpretation could not place the Government in
estoppel to correct or overrule the same. Moreover, the non-retroactivity of rulings by the
27

Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85
was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must
be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against the taxpayer. 28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming
CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere
speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total
29

quarterly payments over the actual income tax computed in the adjustment or final corporate income
tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box
provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax
credit for the succeeding taxable year. To ease the administration of tax collection, these remedies
are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax credit.
This was the basis used (vis-avis the fact that the 1987 annual corporate tax return
was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies
of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as
specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no
showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from
is AFFIRMED, with COSTS against the petitioner. 1âwphi1.nêt

SO ORDERED.

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

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

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends
Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the
net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-visthose which
are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class
legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the equal protection and due
process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General,
was filed on May 28, 1982. The facts as alleged were admitted but not the allegations which to their
8

mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them]
being those stated [in their] Special and Affirmative Defenses." The answer then affirmed: "Batas
9

Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited
while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the
petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual or
group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The
Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay
properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to
the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the
intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed
away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the
Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide by
its command, then this Court must so declare and adjudge it null. The injury thus is centered on the
question of whether the imposition of a higher tax rate on taxable net income derived from business
or profession than on compensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It
then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly
calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the
state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process
grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the
assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far
from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds
no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed.
Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person
under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same formulation
applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of
the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very
essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the
'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws
are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties,
address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the view that classification if rational in
character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." This requirement is met according to Justice Laurel
24

in Philippine Trust Company v. Yatco, decided in 1940, when the tax "operates with the same force
25

and effect in every place where the subject may be found. " He likewise added: "The rule of
26

uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." The problem of classification did not present itself in that case. It did not arise until nine
27

years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of taxation, ... . As 28

clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." There is quite a similarity then to the standard of equal protection for all that is
29

required is that the tax "applies equally to all persons, firms and corporations placed in similar
situation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax
rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; (2) the force of 31

controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals
and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente
and Cuevas, JJ., concur.
G.R. Nos. L-49839-46 April 26, 1991
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as appointed
and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H.
NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities as appointed
and Acting Members of the BOARD OF ASSESSMENT APPEALS of Manila; and NICOLAS
CATIIL in his capacity as City Assessor of Manila,respondents.

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board
of Assessment Appeals in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v.
1

Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29,
1976 decision of the Board of Tax Assessment Appeals in BTAA Cases Nos. 614, 614-A-J, 615,
2

615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros
Reyes v. City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.

The facts of the case are as follows:

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

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

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

The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among
1âwphi1

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

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

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

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

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

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

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES

APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question.
Petitioners maintain that the "Income Approach" method would have been more realistic for in
disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new
assessed values at levels so high and successive that the resulting annual real estate taxes would
admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under
P.D. 20. Hence, petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that
the income approach is used in determining land values in some vicinities, it maintains that when
income is affected by some sort of price control, the same is rejected in the consideration and study
of land values as in the case of properties affected by the Rent Control Law for they do not project
the true market value in the open market (Rollo, p. 21). Thus, respondents opted instead for the
"Comparable Sales Approach" on the ground that the value estimate of the properties predicated
upon prices paid in actual, market transactions would be a uniform and a more credible standards to
use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market
value of properties within its coverage. In any event, it is unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are generally acceptable methods of appraisal for
taxation purposes (The Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition).
However, it is conceded that the propriety of one as against the other would of course depend on
several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v. Wenceslao
Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in finding the value
of the property, have to consider all the circumstances and elements of value and must exercise a
prudent discretion in reaching conclusions.

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

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

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

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

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

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the privileges conferred and the liabilities imposed
(Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes
is that the property must be "appraised at its current and fair market value."
By no strength of the imagination can the market value of properties covered by P.D. No. 20 be
equated with the market value of properties not so covered. The former has naturally a much lesser
market value in view of the rental restrictions.

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

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

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

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

SO ORDERED.

G.R. No. 78780 July 23, 1987

DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT
OF THE PHILIPPINES, respondents.

Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53,
respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila,
seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and
the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from
their salaries.

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial
officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10,
Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary
shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in
and by said Constitution."

It may be pointed out that, early on, the Court had dealt with the matter administratively in response
to representations that the Court direct its Finance Officer to discontinue the withholding of taxes
from salaries of members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the
Chief Justice's directive as follows:

RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief
Justice's previous and standing directive to the Fiscal Management and Budget Office of this
Court to continue with the deduction of the withholding taxes from the salaries of the Justices
of the Supreme Court as well as from the salaries of all other members of the judiciary.

That should have resolved the question. However, with the filing of this petition, the Court has
deemed it best to settle the legal issue raised through this judicial pronouncement. As will be shown
hereinafter, the clear intent of the Constitutional Commission was to delete the proposed express
grant of exemption from payment of income tax to members of the Judiciary, so as to "give
substance to equality among the three branches of Government" in the words of Commissioner
Rigos. In the course of the deliberations, it was further expressly made clear, specially with regard to
Commissioner Joaquin F. Bernas' accepted amendment to the amendment of Commissioner Rigos,
that the salaries of members of the Judiciary would be subject to the general income tax applied to
all taxpayers.

This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as
approved and ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured
by the failure to include in the General Provisions a proscription against exemption of any public
officer or employee, including constitutional officers, from payment of income tax, the Court since
then has authorized the continuation of the deduction of the withholding tax from the salaries of the
members of the Supreme Court, as well as from the salaries of all other members of the Judiciary.
The Court hereby makes of record that it had then discarded the ruling in Perfecto vs. Meer and
Endencia vs. David, infra, that declared the salaries of members of the Judiciary exempt from
payment of the income tax and considered such payment as a diminution of their salaries during
their continuance in office. The Court hereby reiterates that the salaries of Justices and Judges are
properly subject to a general income tax law applicable to all income earners and that the payment
of such income tax by Justices and Judges does not fall within the constitutional protection against
decrease of their salaries during their continuance in office.

A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:

... (The members of the Supreme Court and all judges of inferior courts) shall receive such
compensation as may be fixed by law, which shall not be diminished during their continuance
in office ... (Emphasis supplied).
1

Under the 1973 Constitution, the same provision read:

The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of
judges of inferior courts shall be fixed by law, which shall not be decreased during their
continuance in office. ... (Emphasis ours).
2

And in respect of income tax exemption, another provision in the same 1973 Constitution specifically
stipulated:
 No salary or any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax. 3

The provision in the 1987 Constitution, which petitioners rely on, reads:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in office, their salary
shall not be decreased. (Emphasis supplied).
4

The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973
Constitution, for which reason, petitioners claim that the intent of the framers is to revert to the
original concept of "non-diminution "of salaries of judicial officers.

The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate
such contention.

The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:

Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court
and of judges of the lower courts shall be fixed by law. During their continuance in office,
their salary shall not be diminished nor subjected to income tax. Until the National Assembly
shall provide otherwise, the Chief Justice shall receive an annual salary of _____________
and each Associate Justice ______________ pesos. (Emphasis ours)
5

During the debates on the draft Article (Committee Report No. 18), two Commissioners presented
their objections to the provision on tax exemption, thus:

MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this
not violate the principle of the uniformity of taxation and the principle of equal protection of
the law? After all, tax is levied not on the salary but on the combined income, such that when
the judge receives a salary and it is comingled with the other income, we tax the income, not
the salary. Why do we have to give special privileges to the salary of justices?

MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or

decrease of their salary during their term. This is an indirect way of decreasing their salary
and affecting the independence of the judges.

MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the
special privilege on taxation might, in effect, be a violation of the principle of uniformity in
taxation and the equal protection clause. 6

xxx xxx xxx

MR. OPLE. x x x

Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto
Concepcion, for whom we have the highest respect, to surround the Supreme Court and the
judicial system as a whole with the whole armor of defense against the executive and
legislative invasion of their independence. But in so doing, some of the citizens outside,
especially the humble government employees, might say that in trying to erect a bastion of
justice, we might end up with the fortress of privileges, an island of extra territoriality under
 the Republic of the Philippines, because a good number of powers and rights accorded to
the Judiciary here may not be enjoyed in the remotest degree by other employees of the
government.

An example is the exception from income tax, which is a kind of economic immunity, which
is, of course, denied to the entire executive department and the legislative. 7

And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A.
Rigos proposed that the term "diminished" be changed to "decreased" and that the words "nor
subjected to income tax" be deleted so as to "give substance to equality among the three branches
in the government.

Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the
original draft and referred to the ruling of this Court in Perfecto vs. Meer that "the independence of
8

the judges is of far greater importance than any revenue that could come from taxing their salaries."
Commissioner Rigos then moved that the matter be put to a vote. Commissioner Joaquin G. Bernas
stood up "in support of an amendment to the amendment with the request for a modification of the
amendment," as follows:

FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is
not enough to drop the phrase "shall not be subjected to income tax," because if that is all
that the Gentleman will do, then he will just fall back on the decision in Perfecto vs. Meer and
in Dencia vs. David [should be Endencia and Jugo vs. David, etc., 93 Phil. 696[ which
excludes them from income tax, but rather I would propose that the statement will read:
"During their continuance in office, their salary shall not be diminished BUT MAY BE
SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say that the
argument seems to be that the justice and judges should not be subjected to income tax
because they already gave up the income from their practice. That is true also of Cabinet
members and all other employees. And I know right now, for instance, there are many people
who have accepted employment in the government involving a reduction of income and yet
are still subject to income tax. So, they are not the only citizens whose income is reduced by
accepting service in government.

Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico
F. de los Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner
Bernas announced:

During the suspension, we came to an understanding with the original proponent,

Commissioner Rigos, that his amendment on page 6,. line 4 would read: "During their
continuance in office, their salary shall not be DECREASED."But this is on the understanding
that there will be a provision in the Constitution similar to Section 6 of Article XV, the General
Provisions of the 1973 Constitution, which says:

No salary or any form of emolument of any public officer or employee, including

constitutional officers, shall be exempt from payment of income tax.

So, we put a period (.) after "DECREASED" on the understanding that the salary of justices
is subject to tax.

When queried about the specific Article in the General Provisions on non-exemption from tax of
salaries of public officers, Commissioner Bernas replied:
 FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions.
But at any rate, when we put a period (.) after "DECREASED," it is on the understanding that
the doctrine in Perfecto vs. Meer and Dencia vs. David will not apply anymore.

The amendment to the original draft, as discussed and understood, was finally approved without
objection.

THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will
be a provision under the Article on General Provisions. Could Commissioner Rosario Braid
kindly take note that the salaries of officials of the government including constitutional
officers shall not be exempt from income tax? The amendment proposed herein and
accepted by the Committee now reads as follows: "During their continuance in office, their
salary shall not be DECREASED"; and the phrase "nor subjected to income tax" is deleted. 9

The debates, interpellations and opinions expressed regarding the constitutional provision in
question until it was finally approved by the Commission disclosed that the true intent of the framers
of the 1987 Constitution, in adopting it, was to make the salaries of members of the Judiciary
taxable. The ascertainment of that intent is but in keeping with the fundamental principle of
constitutional construction that the intent of the framers of the organic law and of the people adopting
it should be given effect. The primary task in constitutional construction is to ascertain and thereafter
10

assure the realization of the purpose of the framers and of the people in the adoption of the
Constitution. it may also be safely assumed that the people in ratifying the Constitution were guided
11

mainly by the explanation offered by the framers. 12

1avvphi1

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again
reproduced hereunder:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of
judges of lower courts shall be fixed by law. During their continuance in office, their salary
shall not be decreased. (Emphasis supplied).

it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation
of Justices and Judges but such rate must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a
strained construction to read into the provision an exemption from taxation in the light of the
discussion in the Constitutional Commission.

With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income
tax upon the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs.
Meer, as affirmed in Endencia vs. David must be declared discarded. The framers of the
13 14

fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the
meaning and import of Section 10, Article VIII, of the 1987 Constitution that they have adopted

Stated otherwise, we accord due respect to the intent of the people, through the discussions and
deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the
cost of maintaining the government and should share the burden of general income taxation
equitably.

WHEREFORE, the instant petition for Prohibition is hereby dismissed.

PAL vs. Secretary of Finance

GR 115852 August 25, 1994

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well
as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross
value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the
sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT
system and enhance its administration by amending the National Internal Revenue Code.

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic Act
No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as follows:

I. Procedural Issues:

A. Does Republic Act No. 7716 violate Art. VI, § 24 of the Constitution?

B. Does it violate Art. VI, § 26(2) of the Constitution?

C. What is the extent of the power of the Bicameral Conference Committee?

II. Substantive Issues:

A. Does the law violate the following provisions in the Bill of Rights (Art. III)?

1. §1

2. § 4

3. § 5

4. § 10

B. Does the law violate the following other provisions of the Constitution?

1. Art. VI, § 28(1)

2. Art. VI, § 28(3)

These questions will be dealt in the order they are stated above. As will presently be explained not
all of these questions are judicially cognizable, because not all provisions of the Constitution are self
executing and, therefore, judicially enforceable. The other departments of the government are
equally charged with the enforcement of the Constitution, especially the provisions relating to them.

I. PROCEDURAL ISSUES

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-
Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated
in the House of Representatives, it was not passed by the Senate but was simply consolidated with
the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the
President signed into law. The following provisions of the Constitution are cited in support of the
proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in the
House of Representatives and it has not thereby become a law:

Art. VI, § 24: All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in the
House of Representatives, but the Senate may propose or concur with amendments.

Id., § 26(2): No bill passed by either House shall become a law unless it has passed
three readings on separate days, and printed copies thereof in its final form have
been distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills were 1

introduced in the House of Representatives seeking to amend certain provisions of the National
Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the
House Ways and Means Committee which recommended for approval a substitute measure, H. No.
11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN

ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE
PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF
TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND
REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on
November 17, 1993, it was approved by the House of Representatives after third and final reading.

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on
Ways and Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No.
1630, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN

ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE
PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE
IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING
SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197."

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on
the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill
on third reading by the affirmative votes of 13 of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee
which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No.
11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy
of the bill as reconciled and approved by the conferees."

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX
(VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was
thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2,
1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994,
signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published
in two newspapers of general circulation and, on May 28, 1994, it took effect, although its
implementation was suspended until June 30, 1994 to allow time for the registration of business
entities. It would have been enforced on July 1, 1994 but its enforcement was stopped because the
Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30, 1994.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House
of Representatives as required by Art. VI, §24 of the Constitution, because it is in fact the result of
the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection, petitioners
point out that although Art. VI, SS 24 was adopted from the American Federal Constitution, it is
2

notable in two respects: the verb "shall originate" is qualified in the Philippine Constitution by the
word "exclusively" and the phrase "as on other bills" in the American version is omitted. This means,
according to them, that to be considered as having originated in the House, Republic Act No. 7716
must retain the essence of H. No. 11197.

This argument will not bear analysis. To begin with, it is not the law — but the revenue bill — which is
required by the Constitution to "originate exclusively" in the House of Representatives. It is important
to emphasize this, because a bill originating in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the whole. The possibility of a third version by the
conference committee will be discussed later. At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. To insist that a revenue statute — and
not only the bill which initiated the legislative process culminating in the enactment of the law —
must substantially be the same as the House bill would be to deny the Senate's power not only to
"concur with amendments" but also to "propose amendments." It would be to violate the coequality
of legislative power of the two houses of Congress and in fact make the House superior to the
Senate.

The contention that the constitutional design is to limit the Senate's power in respect of revenue bills
in order to compensate for the grant to the Senate of the treaty-ratifying power and thereby
3

equalize its powers and those of the House overlooks the fact that the powers being compared are
different. We are dealing here with the legislative power which under the Constitution is vested not in
any particular chamber but in the Congress of the Philippines, consisting of "a Senate and a House
of Representatives." The exercise of the treaty-ratifying power is not the exercise of legislative
4

power. It is the exercise of a check on the executive power. There is, therefore, no justification for
comparing the legislative powers of the House and of the Senate on the basis of the possession of
such nonlegislative power by the Senate. The possession of a similar power by the U.S.
Senate has never been thought of as giving it more legislative powers than the House of
5

Representatives.

In the United States, the validity of a provision (§ 37) imposing an ad valorem tax based on the
weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against
the claim that the provision was a revenue bill which originated in the Senate in contravention of Art.
I, § 7 of the U.S. Constitution. Nor is the power to amend limited to adding a provision or two in a
6

revenue bill emanating from the House. The U.S. Senate has gone so far as changing the whole of
bills following the enacting clause and substituting its own versions. In 1883, for example, it struck
out everything after the enacting clause of a tariff bill and wrote in its place its own measure, and the
House subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments to
what later became the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the Tariff Act of
1921; it rewrote an extensive tax revision bill in the same year and recast most of the tariff bill of
1922. Given, then, the power of the Senate to propose amendments, the Senate can propose its
7

own version even with respect to bills which are required by the Constitution to originate in the
House.

It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another
Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H. No. 11197]
into consideration" in enacting S. No. 1630. There is really no difference between the Senate
preserving H. No. 11197 up to the enacting clause and then writing its own version following the
enacting clause (which, it would seem, petitioners admit is an amendment by substitution), and, on
the other hand, separately presenting a bill of its own on the same subject matter. In either case the
result are two bills on the same subject.

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills,
bills authorizing an increase of the public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs and problems. On
the other hand, the senators, who are elected at large, are expected to approach the same problems
from the national perspective. Both views are thereby made to bear on the enactment of such laws.

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending
receipt of the House bill. The Court cannot, therefore, understand the alarm expressed over the fact
that on March 1, 1993, eight months before the House passed H. No. 11197, S. No. 1129 had been
filed in the Senate. After all it does not appear that the Senate ever considered it. It was only after
the Senate had received H. No. 11197 on November 23, 1993 that the process of legislation in
respect of it began with the referral to the Senate Committee on Ways and Means of H. No. 11197
and the submission by the Committee on February 7, 1994 of S. No. 1630. For that matter, if the
question were simply the priority in the time of filing of bills, the fact is that it was in the House that a
bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had been
filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a substitute
of those earlier bills.

Second. Enough has been said to show that it was within the power of the Senate to propose S. No.
1630. We now pass to the next argument of petitioners that S. No. 1630 did not pass three readings
on separate days as required by the Constitution because the second and third readings were done
8

on the same day, March 24, 1994. But this was because on February 24, 1994 and again on March
9

22, 1994, the President had certified S. No. 1630 as urgent. The presidential certification
10

dispensed with the requirement not only of printing but also that of reading the bill on separate days.
The phrase "except when the President certifies to the necessity of its immediate enactment, etc." in
Art. VI, § 26(2) qualifies the two stated conditions before a bill can become a law: (i) the bill has
passed three readings on separate days and (ii) it has been printed in its final form and distributed
three days before it is finally approved.
In other words, the "unless" clause must be read in relation to the "except" clause, because the two
are really coordinate clauses of the same sentence. To construe the "except" clause as simply
dispensing with the second requirement in the "unless" clause (i.e., printing and distribution three
days before final approval) would not only violate the rules of grammar. It would also negate the very
premise of the "except" clause: the necessity of securing the immediate enactment of a bill which is
certified in order to meet a public calamity or emergency. For if it is only the printing that is dispensed
with by presidential certification, the time saved would be so negligible as to be of any use in
insuring immediate enactment. It may well be doubted whether doing away with the necessity of
printing and distributing copies of the bill three days before the third reading would insure speedy
enactment of a law in the face of an emergency requiring the calling of a special election for
President and Vice-President. Under the Constitution such a law is required to be made within seven
days of the convening of Congress in emergency session. 11

That upon the certification of a bill by the President the requirement of three readings on separate
days and of printing and distribution can be dispensed with is supported by the weight of legislative
practice. For example, the bill defining the certiorari jurisdiction of this Court which, in consolidation
with the Senate version, became Republic Act No. 5440, was passed on second and third readings
in the House of Representatives on the same day (May 14, 1968) after the bill had been certified by
the President as urgent. 12

There is, therefore, no merit in the contention that presidential certification dispenses only with the
requirement for the printing of the bill and its distribution three days before its passage but not with
the requirement of three readings on separate days, also.

It is nonetheless urged that the certification of the bill in this case was invalid because there was no
emergency, the condition stated in the certification of a "growing budget deficit" not being an unusual
condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of
the certification. To the contrary, by passing S. No. 1630 on second and third readings on March 24,
1994, the Senate accepted the President's certification. Should such certification be now reviewed
by this Court, especially when no evidence has been shown that, because S. No. 1630 was taken up
on second and third readings on the same day, the members of the Senate were deprived of the
time needed for the study of a vital piece of legislation?

The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of
martial law under Art. VII, § 18, or the existence of a national emergency justifying the delegation of
extraordinary powers to the President under Art. VI, § 23(2), is subject to judicial review because
basic rights of individuals may be at hazard. But the factual basis of presidential certification of bills,
which involves doing away with procedural requirements designed to insure that bills are duly
considered by members of Congress, certainly should elicit a different standard of review.

Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No.
11197. That is because S. No. 1630 was what the Senate was considering. When the matter was
before the House, the President likewise certified H. No. 9210 the pending in the House.

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the
Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that
the Conference Committee report included provisions not found in either the House bill or the Senate
bill and that these provisions were "surreptitiously" inserted by the Conference Committee. Much is
made of the fact that in the last two days of its session on April 21 and 25, 1994 the Committee met
behind closed doors. We are not told, however, whether the provisions were not the result of the give
and take that often mark the proceedings of conference committees.

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in
executive sessions. Often the only way to reach agreement on conflicting provisions is to meet
behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be
made. The Court is not about to take the suggestion of a cabal or sinister motive attributed to the
conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read anything
into the incomplete remarks of the members, marked in the transcript of stenographic notes by
ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the
incoherence that sometimes characterize conversations. William Safire noted some such lapses in
recorded talks even by recent past Presidents of the United States.

In any event, in the United States conference committees had been customarily held in executive
sessions with only the conferees and their staffs in attendance. Only in November 1975 was a new
13

rule adopted requiring open sessions. Even then a majority of either chamber's conferees may vote
in public to close the meetings. 14

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been
explained:

Under congressional rules of procedure, conference committees are not expected to

make any material change in the measure at issue, either by deleting provisions to
which both houses have already agreed or by inserting new provisions. But this is a
difficult provision to enforce. Note the problem when one house amends a proposal
originating in either house by striking out everything following the enacting clause
and substituting provisions which make it an entirely new bill. The versions are now
altogether different, permitting a conference committee to draft essentially a new
bill. . . .
15

The result is a third version, which is considered an "amendment in the nature of a substitute," the
only requirement for which being that the third version be germane to the subject of the House and
Senate bills.16

Indeed, this Court recently held that it is within the power of a conference committee to include in its
report an entirely new provision that is not found either in the House bill or in the Senate bill. If the
17

committee can propose an amendment consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as an "amendment in the nature of a
substitute," so long as such amendment is germane to the subject of the bills before the committee.
After all, its report was not final but needed the approval of both houses of Congress to become valid
as an act of the legislative department. The charge that in this case the Conference Committee
acted as a third legislative chamber is thus without any basis. 18

Nonetheless, it is argued that under the respective Rules of the Senate and the House of
Representatives a conference committee can only act on the differing provisions of a Senate bill and
a House bill, and that contrary to these Rules the Conference Committee inserted provisions not
found in the bills submitted to it. The following provisions are cited in support of this contention:

Rules of the Senate

Rule XII:
 § 26. In the event that the Senate does not agree with the House of Representatives
on the provision of any bill or joint resolution, the differences shall be settled by a
conference committee of both Houses which shall meet within ten days after their
composition.

The President shall designate the members of the conference committee in

accordance with subparagraph (c), Section 3 of Rule III.

Each Conference Committee Report shall contain a detailed and sufficiently explicit
statement of the changes in or amendments to the subject measure, and shall be
signed by the conferees.

The consideration of such report shall not be in order unless the report has been filed
with the Secretary of the Senate and copies thereof have been distributed to the
Members.

(Emphasis added)

Rules of the House of Representatives

Rule XIV:

§ 85. Conference Committee Reports. — In the event that the House does not agree
with the Senate on the amendments to any bill or joint resolution, the differences
may be settled by conference committees of both Chambers.

The consideration of conference committee reports shall always be in order, except

when the journal is being read, while the roll is being called or the House is dividing
on any question. Each of the pages of such reports shall be signed by the
conferees. Each report shall contain a detailed, sufficiently explicit statement of the
changes in or amendments to the subject measure.

The consideration of such report shall not be in order unless copies thereof are
distributed to the Members: Provided, That in the last fifteen days of each session
period it shall be deemed sufficient that three copies of the report, signed as above
provided, are deposited in the office of the Secretary General.

(Emphasis added)

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting

provisions. But Rule XLIV, § 112 of the Rules of the Senate is cited to the effect that "If there is no
Rule applicable to a specific case the precedents of the Legislative Department of the Philippines
shall be resorted to, and as a supplement of these, the Rules contained in Jefferson's Manual." The
following is then quoted from the Jefferson's Manual:

The managers of a conference must confine themselves to the differences

committed to them. . . and may not include subjects not within disagreements, even
though germane to a question in issue.

Note that, according to Rule XLIX, § 112, in case there is no specific rule applicable, resort must be
to the legislative practice. The Jefferson's Manual is resorted to only as supplement. It is common
place in Congress that conference committee reports include new matters which, though germane,
have not been committed to the committee. This practice was admitted by Senator Raul S. Roco,
petitioner in G.R. No. 115543, during the oral argument in these cases. Whatever, then, may be
provided in the Jefferson's Manual must be considered to have been modified by the legislative
practice. If a change is desired in the practice it must be sought in Congress since this question is
not covered by any constitutional provision but is only an internal rule of each house. Thus, Art. VI, §
16(3) of the Constitution provides that "Each House may determine the rules of its proceedings. . . ."

This observation applies to the other contention that the Rules of the two chambers were likewise
disregarded in the preparation of the Conference Committee Report because the Report did not
contain a "detailed and sufficiently explicit statement of changes in, or amendments to, the subject
measure." The Report used brackets and capital letters to indicate the changes. This is a standard
practice in bill-drafting. We cannot say that in using these marks and symbols the Committee
violated the Rules of the Senate and the House. Moreover, this Court is not the proper forum for the
enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary rules
are merely procedural and with their observance the courts have no concern." Our concern is with
19

the procedural requirements of the Constitution for the enactment of laws. As far as these
requirements are concerned, we are satisfied that they have been faithfully observed in these cases.

Nor is there any reason for requiring that the Committee's Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modifications of the compromise bill. The nature of the bill,
therefore, requires that it be acted upon by each house on a "take it or leave it" basis, with the only
alternative that if it is not approved by both houses, another conference committee must be
appointed. But then again the result would still be a compromise measure that may not be wholly
satisfying to both houses.

Art. VI, § 26(2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report. For if the purpose of requiring
three readings is to give members of Congress time to study bills, it cannot be gainsaid that H. No.
11197 was passed in the House after three readings; that in the Senate it was considered on first
reading and then referred to a committee of that body; that although the Senate committee did not
report out the House bill, it submitted a version (S. No. 1630) which it had prepared by "taking into
consideration" the House bill; that for its part the Conference Committee consolidated the two bills
and prepared a compromise version; that the Conference Committee Report was thereafter
approved by the House and the Senate, presumably after appropriate study by their members. We
cannot say that, as a matter of fact, the members of Congress were not fully informed of the
provisions of the bill. The allegation that the Conference Committee usurped the legislative power of
Congress is, in our view, without warrant in fact and in law.

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be
resolved in its favor. Our cases manifest firm adherence to the rule that an enrolled copy of a bill is
20

conclusive not only of its provisions but also of its due enactment. Not even claims that a proposed
constitutional amendment was invalid because the requisite votes for its approval had not been
obtained or that certain provisions of a statute had been "smuggled" in the printing of the bill have
21 22

moved or persuaded us to look behind the proceedings of a coequal branch of the government.
There is no reason now to depart from this rule.

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case we "went behind"
23

an enrolled bill and consulted the Journal to determine whether certain provisions of a statute had
been approved by the Senate in view of the fact that the President of the Senate himself, who had
signed the enrolled bill, admitted a mistake and withdrew his signature, so that in effect there was no
longer an enrolled bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not been
observed have no more basis than another allegation that the Conference Committee
"surreptitiously" inserted provisions into a bill which it had prepared, we should decline the invitation
to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in such cases would be
to disregard the respect due the other two departments of our government.

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine
Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, § 26(1) which provides that
"Every bill passed by Congress shall embrace only one subject which shall be expressed in the title
thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption
of PAL transactions from the payment of the VAT and that this was made only in the Conference
Committee bill which became Republic Act No. 7716 without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING

ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.

Among the provisions of the NIRC amended is § 103, which originally read:

§ 103. Exempt transactions. — The following shall be exempt from the value-added
tax:

....

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory. Among the transactions exempted from the VAT
were those of PAL because it was exempted under its franchise (P.D. No. 1590) from
the payment of all "other taxes . . . now or in the near future," in consideration of the
payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now provides:

§ 103. Exempt transactions. — The following shall be exempt from the value-added
tax:

....

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is
concerned.
The question is whether this amendment of § 103 of the NIRC is fairly embraced in the title of
Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among those which
the statute amends. We think it is, since the title states that the purpose of the statute is to expand
the VAT system, and one way of doing this is to widen its base by withdrawing some of the
exemptions granted before. To insist that P.D. No. 1590 be mentioned in the title of the law, in
addition to § 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a
bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one subject
which shall be expressed in its title is intended to prevent surprise upon the members of Congress
and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it.
If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not
because of any defect in the title but perhaps for the same reason other statutes, although
published, pass unnoticed until some event somehow calls attention to their existence. Indeed, the
title of Republic Act No. 7716 is not any more general than the title of PAL's own franchise under
P.D. No. 1590, and yet no mention is made of its tax exemption. The title of P.D. No. 1590 is:

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO

ESTABLISH, OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE
PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.

The trend in our cases is to construe the constitutional requirement in such a manner that courts do
not unduly interfere with the enactment of necessary legislation and to consider it sufficient if the title
expresses the general subject of the statute and all its provisions are germane to the general subject
thus expressed. 24

It is further contended that amendment of petitioner's franchise may only be made by special law, in
view of § 24 of P.D. No. 1590 which provides:

This franchise, as amended, or any section or provision hereof may only be modified,
amended, or repealed expressly by a special law or decree that shall specifically
modify, amend, or repeal this franchise or any section or provision thereof.

This provision is evidently intended to prevent the amendment of the franchise by mere implication
resulting from the enactment of a later inconsistent statute, in consideration of the fact that a
franchise is a contract which can be altered only by consent of the parties. Thus in Manila Railroad
Co. v.
Rafferty, it was held that an Act of the U.S. Congress, which provided for the payment of tax on
25

certain goods and articles imported into the Philippines, did not amend the franchise of plaintiff,
which exempted it from all taxes except those mentioned in its franchise. It was held that a special
law cannot be amended by a general law.

In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No.
1590) by specifically excepting from the grant of exemptions from the VAT PAL's exemption under
P.D. No. 1590. This is within the power of Congress to do under Art. XII, § 11 of the Constitution,
which provides that the grant of a franchise for the operation of a public utility is subject to
amendment, alteration or repeal by Congress when the common good so requires.

II. SUBSTANTIVE ISSUES

A. Claims of Press Freedom, Freedom of Thought

and Religious Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of
newspaper publishers established for the improvement of journalism in the Philippines. On the other
hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization
engaged in the printing and distribution of bibles and other religious articles. Both petitioners claim
violations of their rights under § § 4 and 5 of the Bill of Rights as a result of the enactment of the VAT
Law.

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press
under § 103 (f) of the NIRC. Although the exemption was subsequently restored by administrative
regulation with respect to the circulation income of newspapers, the PPI presses its claim because of
the possibility that the exemption may still be removed by mere revocation of the regulation of the
Secretary of Finance. On the other hand, the PBS goes so far as to question the Secretary's power
to grant exemption for two reasons: (1) The Secretary of Finance has no power to grant tax
exemption because this is vested in Congress and requires for its exercise the vote of a majority of
all its members and (2) the Secretary's duty is to execute the law.
26

§ 103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions
previously granted exemption were:

(f) Printing, publication, importation or sale of books and any newspaper, magazine,
review, or bulletin which appears at regular intervals with fixed prices for subscription
and sale and which is devoted principally to the publication of advertisements.

Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print media became
subject to the VAT with respect to all aspects of their operations. Later, however, based on a
memorandum of the Secretary of Justice, respondent Secretary of Finance issued Revenue
Regulations No. 11-94, dated June 27, 1994, exempting the "circulation income of print media
pursuant to § 4 Article III of the 1987 Philippine Constitution guaranteeing against abridgment of
freedom of the press, among others." The exemption of "circulation income" has left income from
advertisements still subject to the VAT.

It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of
the Secretary of Finance to give, in view of PPI's contention that even with the exemption of the
circulation revenue of print media there is still an unconstitutional abridgment of press freedom
because of the imposition of the VAT on the gross receipts of newspapers from advertisements and
on their acquisition of paper, ink and services for publication. Even on the assumption that no
exemption has effectively been granted to print media transactions, we find no violation of press
freedom in these cases.

To be sure, we are not dealing here with a statute that on its face operates in the area of press
freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges press freedom.
Even with due recognition of its high estate and its importance in a democratic society, however, the
press is not immune from general regulation by the State. It has been held:

The publisher of a newspaper has no immunity from the application of general laws.
He has no special privilege to invade the rights and liberties of others. He must
answer for libel. He may be punished for contempt of court. . . . Like others, he must
pay equitable and nondiscriminatory taxes on his business. . . . 27

The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption previously granted to print media transactions
involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled
out the press for discriminatory treatment and that within the class of mass media the law
discriminates against print media by giving broadcast media favored treatment. We have carefully
examined this argument, but we are unable to find a differential treatment of the press by the law,
much less any censorial motivation for its enactment. If the press is now required to pay a value-
added tax on its transactions, it is not because it is being singled out, much less targeted, for special
treatment but only because of the removal of the exemption previously granted to it by law. The
withdrawal of exemption is all that is involved in these cases. Other transactions, likewise previously
granted exemption, have been delisted as part of the scheme to expand the base and the scope of
the VAT system. The law would perhaps be open to the charge of discriminatory treatment if the only
privilege withdrawn had been that granted to the press. But that is not the case.

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim
that Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited, the
discriminatory purpose was clear either from the background of the law or from its operation. For
example, in Grosjean v. American Press Co., the law imposed a license tax equivalent to 2% of the
28

gross receipts derived from advertisements only on newspapers which had a circulation of more
than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone
but was measured by the extent of its circulation as well, the law applied only to the thirteen large
newspapers in Louisiana, leaving untaxed four papers with circulation of only slightly less than
20,000 copies a week and 120 weekly newspapers which were in serious competition with the
thirteen newspapers in question. It was well known that the thirteen newspapers had been critical of
Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by taxing what
Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax
was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was
"a deliberate and calculated device in the guise of a tax to limit the circulation of information to which
the public is entitled in virtue of the constitutional guaranties." The case is a classic illustration of
29

the warning that the power to tax is the power to destroy.

In the other case invoked by the PPI, the press was also found to have been singled out because
30

everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a
tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax on
the privilege of "using, storing or consuming in that state tangible personal property" by eliminating
the residents' incentive to get goods from outside states where the sales tax might be lower.
The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however,
the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink
used for publication. The law was held to have singled out the press because (1) there was no
reason for imposing the "use tax" since the press was exempt from the sales tax and (2) the "use
tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had a
heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S.
Supreme Court found the law to be discriminatory because the legislature, by again amending the
law so as to exempt the first $100,000 of paper and ink used, further narrowed the coverage of the
tax so that "only a handful of publishers pay any tax at all and even fewer pay any significant amount
of tax." The discriminatory purpose was thus very clear.
31

More recently, in Arkansas Writers' Project, Inc. v. Ragland, it was held that a law which taxed
32

general interest magazines but not newspapers and religious, professional, trade and sports journals
was discriminatory because while the tax did not single out the press as a whole, it targeted a small
group within the press. What is more, by differentiating on the basis of contents (i.e., between
general interest and special interests such as religion or sports) the law became "entirely
incompatible with the First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the press creates
risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide
range of goods and services. The argument that, by imposing the VAT only on print media whose
gross sales exceeds P480,000 but not more than P750,000, the law discriminates is without merit
33

since it has not been shown that as a result the class subject to tax has been unreasonably
narrowed. The fact is that this limitation does not apply to the press along but to all sales. Nor is
impermissible motive shown by the fact that print media and broadcast media are treated differently.
The press is taxed on its transactions involving printing and publication, which are different from the
transactions of broadcast media. There is thus a reasonable basis for the classification.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are
immune from any forms of ordinary taxation." The license tax in the Grosjean case was declared
invalid because it was "one single in kind, with a long history of hostile misuse against the freedom
of the
press." On the other hand, Minneapolis Star acknowledged that "The First Amendment does not
34

prohibit all regulation of the press [and that] the States and the Federal Government can subject
newspapers to generally applicable economic regulations without creating constitutional problems." 35

What has been said above also disposes of the allegations of the PBS that the removal of the
exemption of printing, publication or importation of books and religious articles, as well as their
printing and publication, likewise violates freedom of thought and of conscience. For as the U.S.
Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization, the Free
36

Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax on
the sale of religious materials by a religious organization.

This brings us to the question whether the registration provision of the law, although of general
37

applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on its
essential freedom. The case of American Bible Society v. City of Manila is cited by both the PBS
38

and the PPI in support of their contention that the law imposes censorship. There, this Court held
that an ordinance of the City of Manila, which imposed a license fee on those engaged in the
business of general merchandise, could not be applied to the appellant's sale of bibles and other
religious literature. This Court relied on Murdock v. Pennsylvania, in which it was held that, as a
39

license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when
applied to a religious sect, was actually being imposed as a condition for the exercise of the sect's
right under the Constitution. For that reason, it was held, the license fee "restrains in advance those
constitutional liberties of press and religion and inevitably tends to suppress their exercise." 40

But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed for the exercise
of a privilege but only for the purpose of defraying part of the cost of registration. The registration
requirement is a central feature of the VAT system. It is designed to provide a record of tax credits
because any person who is subject to the payment of the VAT pays an input tax, even as he collects
an output tax on sales made or services rendered. The registration fee is thus a mere administrative
fee, one not imposed on the exercise of a privilege, much less a constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends
the free speech, press and freedom of religion guarantees of the Constitution to be without merit. For
the same reasons, we find the claim of the Philippine Educational Publishers Association (PEPA) in
G.R. No. 115931 that the increase in the price of books and other educational materials as a result
of the VAT would violate the constitutional mandate to the government to give priority to education,
science and technology (Art. II, § 17) to be untenable.
 B. Claims of Regressivity, Denial of Due Process,
Equal Protection, and Impairment
of Contracts

There is basis for passing upon claims that on its face the statute violates the guarantees of freedom
of speech, press and religion. The possible "chilling effect" which it may have on the essential
freedom of the mind and conscience and the need to assure that the channels of communication are
open and operating importunately demand the exercise of this Court's power of review.

There is, however, no justification for passing upon the claims that the law also violates the rule that
taxation must be progressive and that it denies petitioners' right to due process and that equal
protection of the laws. The reason for this different treatment has been cogently stated by an
eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law, it is
freedom that commands a momentum of respect; when property is imperiled it is the lawmakers'
judgment that commands respect. This dual standard may not precisely reverse the presumption of
constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the
due process clause." 41

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less
evident and underscores the essential nature of petitioners' attack on the law on the grounds of
regressivity, denial of due process and equal protection and impairment of contracts as a mere
academic discussion of the merits of the law. For the fact is that there have even been no notices of
assessments issued to petitioners and no determinations at the administrative levels of their claims
so as to illuminate the actual operation of the law and enable us to reach sound judgment regarding
so fundamental questions as those raised in these suits.

Thus, the broad argument against the VAT is that it is regressive and that it violates the requirement
that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive
system of taxation." Petitioners in G.R. No. 115781 quote from a paper, entitled "VAT Policy Issues:
42

Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the International Monetary Fund, that
"VAT payment by low-income households will be a higher proportion of their incomes (and
expenditures) than payments by higher-income households. That is, the VAT will be regressive."
Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption goods of those
who are in the higher-income bracket, which before were taxed at a rate higher than 10%, has been
reduced, while basic commodities, which before were taxed at rates ranging from 3% to 5%, are now
taxed at a higher rate.

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax burden to as many goods and services as possible
particularly to those which are within the reach of higher-income groups, even as the law exempts
basic goods and services. It is thus equitable. The goods and properties subject to the VAT are those
used or consumed by higher-income groups. These include real properties held primarily for sale to
customers or held for lease in the ordinary course of business, the right or privilege to use industrial,
commercial or scientific equipment, hotels, restaurants and similar places, tourist buses, and the
like. On the other hand, small business establishments, with annual gross sales of less than
P500,000, are exempted. This, according to respondents, removes from the coverage of the law
some 30,000 business establishments. On the other hand, an occasional paper of the Center for
43

Research and Communication cities a NEDA study that the VAT has minimal impact on inflation and
income distribution and that while additional expenditure for the lowest income class is only P301 or
1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding these arguments, any discussion
whether the VAT is regressive in the sense that it will hit the "poor" and middle-income group in
society harder than it will the "rich," as the Cooperative Union of the Philippines (CUP) claims in G.R.
No. 115873, is largely an academic exercise. On the other hand, the CUP's contention that
Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service
cooperatives, while maintaining that granted to electric cooperatives, not only goes against the
constitutional policy to promote cooperatives as instruments of social justice (Art. XII, § 15) but also
denies such cooperatives the equal protection of the law is actually a policy argument. The
legislature is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in
G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any
more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press Institute,
petitioner in G.R. No. 115544, that the VAT will drive some of its members out of circulation because
their profits from advertisements will not be enough to pay for their tax liability, while purporting to be
based on the financial statements of the newspapers in question, still falls short of the establishment
of facts by evidence so necessary for adjudicating the question whether the tax is oppressive and
confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by
the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress,
just like the directive to it to give priority to the enactment of laws for the enhancement of human
dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the
promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the
Constitution as moral incentives to legislation, not as judicially enforceable rights.

At all events, our 1988 decision in Kapatiran should have laid to rest the questions now raised
45

against the VAT. There similar arguments made against the original VAT Law (Executive Order No.
273) were held to be hypothetical, with no more basis than newspaper articles which this Court
found to be "hearsay and [without] evidentiary value." As Republic Act No. 7716 merely expands the
base of the VAT system and its coverage as provided in the original VAT Law, further debate on the
desirability and wisdom of the law should have shifted to Congress.

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the
imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior
to the effectivity of the law would violate the constitutional provision that "No law impairing the
obligation of contracts shall be passed." It is enough to say that the parties to a contract cannot,
through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State.
For not only are existing laws read into contracts in order to fix obligations as between parties, but
the reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment presupposes the
maintenance of a government which retains adequate authority to secure the peace and good order
of society.46

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's
power of taxation save only where a tax exemption has been granted for a valid
consideration. Such is not the case of PAL in G.R. No. 115852, and we do not understand it to
47

make this claim. Rather, its position, as discussed above, is that the removal of its tax exemption
cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical form
because of the lack of a concrete record. We accept that this Court does not only adjudicate private
cases; that public actions by "non-Hohfeldian" or ideological plaintiffs are now cognizable provided
48

they meet the standing requirement of the Constitution; that under Art. VIII, § 1, ¶ 2 the Court has a
"special function" of vindicating constitutional rights. Nonetheless the feeling cannot be escaped that
we do not have before us in these cases a fully developed factual record that alone can impart to our
adjudication the impact of actuality to insure that decision-making is informed and well grounded.
49

Needless to say, we do not have power to render advisory opinions or even jurisdiction over petitions
for declaratory judgment. In effect we are being asked to do what the Conference Committee is
precisely accused of having done in these cases — to sit as a third legislative chamber to review
legislation.

We are told, however, that the power of judicial review is not so much power as it is duty imposed on
this Court by the Constitution and that we would be remiss in the performance of that duty if we
decline to look behind the barriers set by the principle of separation of powers. Art. VIII, § 1, ¶ 2 is
cited in support of this view:

Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the Government.

To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in 1803,
to justify the assertion of this power in Marbury v. Madison:

It is emphatically the province and duty of the judicial department to say what the law
is. Those who apply the rule to particular cases must of necessity expound and
interpret that rule. If two laws conflict with each other, the courts must decide on the
operation of each. 50

Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

And when the judiciary mediates to allocate constitutional boundaries, it does not
assert any superiority over the other departments; it does not in reality nullify or
invalidate an act of the legislature, but only asserts the solemn and sacred obligation
assigned to it by the Constitution to determine conflicting claims of authority under
the Constitution and to establish for the parties in an actual controversy the rights
which that instrument secures and guarantees to them. 51

This conception of the judicial power has been affirmed in several

cases of this Court following Angara.
52

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is
essentially a case that at best is not ripe for adjudication. That duty must still be performed in the
context of a concrete case or controversy, as Art. VIII, § 5(2) clearly defines our jurisdiction in terms
of "cases," and nothing but "cases." That the other departments of the government may have
committed a grave abuse of discretion is not an independent ground for exercising our power.
Disregard of the essential limits imposed by the case and controversy requirement can in the long
run only result in undermining our authority as a court of law. For, as judges, what we are called
upon to render is judgment according to law, not according to what may appear to be the opinion of
the day.

_______________________________
In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act
No. 7716 in its formal and substantive aspects as this has been raised in the various cases before
us. To sum up, we hold:

(1) That the procedural requirements of the Constitution have been complied with by Congress in the
enactment of the statute;

(2) That judicial inquiry whether the formal requirements for the enactment of statutes — beyond
those prescribed by the Constitution — have been observed is precluded by the principle of
separation of powers;

(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the
free exercise of religion, nor deny to any of the parties the right to an education; and

(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive,
oppressive and confiscatory and that it violates vested rights protected under the Contract Clause
are prematurely raised and do not justify the grant of prospective relief by writ of prohibition.

WHEREFORE, the petitions in these cases are DISMISSED.

Tolentino vs. Secretary of Finance and CIR

GR 115452

These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine Educational Publishers Association,
Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In
turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino,
Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders
Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution. Although
they admit that H. No. 11197 was filed in the House of Representatives where it passed three
readings and that afterward it was sent to the Senate where after first reading it was referred to the
Senate Ways and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have
done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of
S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes
the text (only the text) of the House bill."
The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment
to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions
during the Eighth Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President
on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the
House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3,
1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO
ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the
President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by the
House of Representatives on August 2, 1989, and S. No. 807, which was approved by the Senate on
October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers of
Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR

THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO

REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING
FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO

PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24,
1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL

SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS
AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY
CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO
THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION

OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER
PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES

OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE
OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A
 NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5,
1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of
its power to propose amendments to bills required to originate in the House, passed its own version
of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners
Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would make
if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a
substitute measure, "taking into Consideration . . . H.B. 11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is

submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the
subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution.
(emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate
possesses less power than the U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of Representatives; but the
Senate may propose or concur with amendments as on other Bills.
Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and
"the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be
like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional
intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be
recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it
was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the
procedure for lawmaking by the Senate and the House of Representatives. The work of proposing
amendments to the Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the following
provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose
or concur with amendments. In case of disapproval by the Senate of any such bills,
the Assembly may repass the same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted and may be submitted to
the President for corresponding action. In the event that the Senate should fail to
finally act on any such bills, the Assembly may, after thirty days from the opening of
the next regular session of the same legislative term, reapprove the same with a vote
of two-thirds of all the members of the Assembly. And upon such reapproval, the bill
shall be deemed enacted and may be submitted to the President for corresponding
action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal.
It deleted everything after the first sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO,
KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the
people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was
not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments
must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills
are required to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by
the House, however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur is
clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently

without restriction. It would seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House and leave only a trace of
the original bill. For example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of an inheritance tax .
This was changed by the Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55
L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247

(1961))

The above-mentioned bills are supposed to be initiated by the House of

Representatives because it is more numerous in membership and therefore also
more representative of the people. Moreover, its members are presumed to be more
familiar with the needs of the country in regard to the enactment of the legislation
involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose
or concur with amendments to the bills initiated by the House of Representatives.
Thus, in one case, a bill introduced in the U.S. House of Representatives was
changed by the Senate to make a proposed inheritance tax a corporation tax. It is
also accepted practice for the Senate to introduce what is known as an amendment
by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is
referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill
as a substitute, in which case it will be known as a committee bill; or (4) to make no
report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House by
prescribing that the number of the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be incorporated in place of the original
body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S.
No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any
which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that
S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification
that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res.
No. 734 and H.B. No. 11197," implying that there is something substantially different between the
reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude that
R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two "half-
baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates that
the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was
a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two bills could be referred to the Conference
Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When
the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank
deposits), were referred to a conference committee, the question was raised whether the two bills
could be the subject of such conference, considering that the bill from one house had not been
passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill
is passed by the House but not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the House, can the two bills be
the subject of a conference, and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in

cases like this where a conference should be had. If the House bill had been
approved by the Senate, there would have been no need of a conference; but
precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of
that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct
and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that
because the President separately certified to the need for the immediate enactment of these
measures, his certification was ineffectual and void. The certification had to be made of the version
of the same revenue bill which at the moment was being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the bill he has already certified. It is enough
that he certifies the bill which, at the time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified.
For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision
that the phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also the requirement that
before a bill can become a law it must have passed "three readings on separate days." There is not
only textual support for such construction but historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed and
copies thereof in its final form furnished its Members at least three calendar days
prior to its passage, except when the President shall have certified to the necessity of
its immediate enactment. Upon the last reading of a bill, no amendment thereof shall
be allowed and the question upon its passage shall be taken immediately thereafter,
and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been distributed to the Members
three days before its passage, except when the Prime Minister certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. Upon
the last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas and nays entered in the
Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the
present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the President
certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three readings on separate
days are required and a bill has to be printed in final form before it can be passed, the need for a law
may be rendered academic by the occurrence of the very emergency or public calamity which it is
meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an
enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation
calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed
that there was an urgent need for consideration of S. No. 1630, because they responded to the call
of the President by voting on the bill on second and third readings on the same day. While the
judicial department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it
was discussed for six days. Only its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second
reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on
third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND
STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially
achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of
the constitutional policy of full public disclosure and the people's right to know (Art. II, §28 and Art. III,
§7) the Conference Committee met for two days in executive session with only the conferees
present.

As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new
rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress
has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least
staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case who
on the last two days of the conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of
their meetings. Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing versions of the
House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in the original bills without the need of a
statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a
point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of
the conference committee regarding House Bill No. 2557 by reason of the provision
of Section 11, Article XII, of the Rules of this House which provides specifically that
the conference report must be accompanied by a detailed statement of the effects of
the amendment on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to
consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection
with the point of order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill
have been amended. In this case before us an entire bill is presented; therefore, it
can be easily seen from the reading of the bill what the provisions are. Besides, this
procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for
the provisions of the Rules, and the reason for the requirement in the provision cited
by the gentleman from Pangasinan is when there are only certain words or phrases
inserted in or deleted from the provisions of the bill included in the conference report,
and we cannot understand what those words and phrases mean and their relation to
the bill. In that case, it is necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when the reason
for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was sustained
by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long
as these are germane to the subject of the conference. As this Court held in Philippine Judges
Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving differences between the Senate
and the House. It may propose an entirely new provision. What is important is that its report is
subsequently approved by the respective houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been added by the conference committee,
there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that
an amendment was made upon the last reading of the bill that eventually became
R.A. No. 7354 and that copies thereof in its final form were not distributed among the
members of each House. Both the enrolled bill and the legislative journals certify that
the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a coordinate department
of the government, to which we owe, at the very least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a

1979 study:

Conference committees may be of two types: free or instructed. These committees

may be given instructions by their parent bodies or they may be left without
instructions. Normally the conference committees are without instructions, and this is
why they are often critically referred to as "the little legislatures." Once bills have
been sent to them, the conferees have almost unlimited authority to change the
clauses of the bills and in fact sometimes introduce new measures that were not in
the original legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his idealism put it
this way: "I killed a bill on export incentives for my interest group [copra] in the
conference committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the report is
not accepted, then the committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND

LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only
to say that conference committees here are no different from their counterparts in the United States
whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under
Art. VI, §16(3) each house has the power "to determine the rules of its proceedings," including those
of its committees. Any meaningful change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26
(1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one
subject which shall be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or
description, imposed, levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by §103 of the National
Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added
tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
§103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added
tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING

ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM
[BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES," Congress thereby
clearly expresses its intention to amend any provision of the NIRC which stands in the way of
accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions
of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually, it is the bill
which becomes a law that is required to express in its title the subject of legislation. The titles of H.
No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It
contained a provision repealing all franking privileges. It was contended that the withdrawal of
franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court
held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley, Constitutional Limitations,
8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its

title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly be
included in the act. Thus, it is proper to create in the same act the
machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also have
special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the
press is not exempt from the taxing power of the State and that what the constitutional guarantee of
free press prohibits are laws which single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the press on the basis of the content of
the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to
which other businesses have long ago been subject. It is thus different from the tax involved in the
cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L.
Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts
only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied
only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long
who controlled the state legislature which enacted the license tax. The censorial motivation for the
law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have
been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing
or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes.
It was, however, later made to pay a special use tax on the cost of paper and ink which made these
items "the only items subject to the use tax that were component of goods to be sold at retail." The
U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely
and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously
granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially
withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)

The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
 The fact that the ordinance is "nondiscriminatory" is immaterial. The protection
afforded by the First Amendment is not so restricted. A license tax certainly does not
acquire constitutional validity because it classifies the privileges protected by the
First Amendment along with the wares and merchandise of hucksters and peddlers
and treats them all alike. Such equality in treatment does not save the ordinance.
Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with
the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by
the American Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or
properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to violate its freedom
under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to those
who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the
volume of sale. Granting that to be the case, the resulting burden on the exercise of religious
freedom is so incidental as to make it difficult to differentiate it from any other economic imposition
that might make the right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by
§7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies
transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of
the sale of real property by installment or on deferred payment basis would result in substantial
increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it
is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous
sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of
the Constitution. Even though such taxation may affect particular contracts, as it may increase the
debt of one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of contract can extend
to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be
exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can afford to rent houses in the meantime that
they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is
inherent in the power to tax that the State be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for taxation,
or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord,
City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1)
which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or
ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of
Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A.
No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on
grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory,
unjust and regressive in violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform.
...

The sales tax adopted in EO 273 is applied similarly on all goods and services sold
to the public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from
its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of
the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation."
The constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress
is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII,
§17(1) of the 1973 Constitution from which the present Art. VI, §28(1) was taken. Sales taxes are
also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from
the VAT:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
 (b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. These include real properties
held primarily for sale to customers or for lease in the ordinary course of trade or business, the right
or privilege to use patent, copyright, and other similar property or right, the right or privilege to use
industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television,
satellite transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services
of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its effect on property rights.
For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is
not made concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere

allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a
provision as void on its face, he has not made out a case. This is merely to adhere to
the authoritative doctrine that where the due process and equal protection clauses
are invoked, considering that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual
case and not an abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone 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.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the government." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" and all that
Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial
power to determine questions of grave abuse of discretion by any branch or instrumentality of the
government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a
court to hear and decide cases pending between parties who have the right to sue and be sued in
the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly appropriated until it is apportioned
among several courts either by the Constitution, as in the case of Art. VIII, §5, or by statute, as in the
case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P.
Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this
Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the
government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of
the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a
definite policy of granting tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986,
P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December
31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the
framers of the Constitution "repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of
tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the
underprivileged.

The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
 domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged
to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5.
What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments theretofore
granted to private business enterprises in general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions of cooperatives in
1986, the exemption was again repealed by E.O. No. 93, §1, but then again cooperatives were not
the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all,
including government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and viability.
Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put
an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter
of policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt
from taxation. Such theory is contrary to the Constitution under which only the following are exempt
from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3), and
non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the
equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life. We cannot
say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No.
7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the other branches of the government does
not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency
must be addressed to Congress as the body which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the
people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194
U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in
arguing that we should enforce the public accountability of legislators, that those who took part in
passing the law in question by voting for it in Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining
order previously iG.R. No. 168056 September 1, 2005 issued is hereby lifted.

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and
ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY
OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.

The expenses of government, having for their object the interest of all, should be borne by everyone,
and the more man enjoys the advantages of society, the more he ought to hold himself honored in
contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full value-added tax benefits … these are the
reasons why Republic Act No. 9337 (R.A. No. 9337) 1 was enacted. Reasons, the wisdom of which,
the Court even with its extensive constitutional power of review, cannot probe. The petitioners in
these cases, however, question not only the wisdom of the law, but also perceived constitutional
infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding,
petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not
unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and
Senate Bill No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on
Ways and Means approved the bill, in substitution of House Bill No. 1468, which Representative
(Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7,
2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the
bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep.
Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill"
is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2,
2005. The President also certified it as urgent on February 8, 2005. The House of Representatives
approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March
7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House
Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill
Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis
N. Pangilinan. The President certified the bill on March 11, 2005, and was approved by the Senate
on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives
for a committee conference on the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555,
House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in full free and
conference," recommended the approval of its report, which the Senate did on May 10, 2005, and
with the House of Representatives agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted
to the President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337. 5 When said date came, the Court issued a
temporary restraining order, effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking
through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5
o’clock in the afternoon. But before that, there was a lot of complaints aired on television and on
radio. Some people in a gas station were complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices that they’ll have to pay would have to go up by
10%. While all that was being aired, per your presentation and per our own understanding of the law,
that’s not true. It’s not true that the e-vat law necessarily increased prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of
the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum
dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would probably
be in the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point
that different industries, different products, different services are hit differently. So it’s not correct to
say that all prices must go up by 10%.

ATTY. BANIQUED : You’re right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%,
correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were
being increased arbitrarily by 10%. And that’s one reason among many others this Court had to
issue TRO because of the confusion in the implementation. That’s why we added as an issue in this
case, even if it’s tangentially taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the mercy of that confusion of an across
the board increase of 10%, which you yourself now admit and I think even the Government will admit
is incorrect. In some cases, it should be 3% only, in some cases it should be 6% depending on these
mitigating measures and the location and situation of each product, of each service, of each
company, isn’t it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification
of all these and we wish the government will take time to clarify all these by means of a more
detailed implementing rules, in case the law is upheld by this Court. . . . 6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code
(NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10%
VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or
lease of properties. These questioned provisions contain a uniform proviso authorizing the President,
upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1,
2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing
the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to
12%, on the ground that it amounts to an undue delegation of legislative power, petitioners also
contend that the increase in the VAT rate to 12% contingent on any of the two conditions being
satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it
imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be returned to the original 10% if the
conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure
of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed
to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the
Bicameral Conference Committee is a violation of the "no-amendment rule" upon last reading of a
bill laid down in Article VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell
Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable
goods shall be amortized over a 60-month period, if the acquisition, excluding the VAT components,
exceeds One Million Pesos (₱1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax
to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final
withholding tax on gross payments of goods and services, which are subject to 10% VAT under
Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.

Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or

property without due process of law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount of input tax that may be
claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be
confiscated, appropriated, or limited without due process of law. Petitioners further contend that like
any other property or property right, the input tax credit may be transferred or disposed of, and that
by limiting the same, the government gets to tax a profit or value-added even if there is no profit or
value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection
of the law under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax
if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several
transactions with the government, is not based on real and substantial differences to meet a valid
classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to output
tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the
petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed
this petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on
the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121,
125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI,
Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall
originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July
20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable
input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect,
thus violating the principle that tax collection and revenue should be solely allocated for public
purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to
pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the
Constitution.

RESPONDENTS’ COMMENT
 The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners
failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of the two conditions provided
therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70%
limitation on the creditable input tax, the 60-month amortization on the purchase or importation of
capital goods exceeding ₱1,000,000.00, and the 5% final withholding tax by government agencies,
is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on
progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform
agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt the
balance towards a sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions
of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added
tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of
goods or properties and services.8 Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, 9 with the seller acting merely as a tax
collector.10 The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-
consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in, without transferring the burden to someone else.11 Examples are individual and
corporate income taxes, transfer taxes, and residence taxes.12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction
method" and was payable only by the original sellers. The single-stage system was subsequently
modified, and a mixture of the "cost deduction method" and "tax credit method" was used to
determine the value-added tax payable.13 Under the "tax credit method," an entity can credit against
or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the
VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the
"tax credit method."15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or the
Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee
exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the
output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes
in addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would
be utterly impracticable to transact the business of the nation, either at all, or at least with
decency, deliberation, and order."19 Thus, Article VI, Section 16 (3) of the Constitution provides
that "each House may determine the rules of its proceedings." Pursuant to this inherent
constitutional power to promulgate and implement its own rules of procedure, the respective rules of
each house of Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:

Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on
the amendment to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they materially
impair the House Bill, the panel shall report such fact to the House for the latter’s appropriate action.

Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.

...

The Chairman of the House panel may be interpellated on the Conference Committee Report prior
to the voting thereon. The House shall vote on the Conference Committee Report in the same
manner and procedure as it votes on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee of
both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the
changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version
thereof with the explanatory statement of the conference committee shall be attached to the report.
...

The creation of such conference committee was apparently in response to a problem, not addressed
by any constitutional provision, where the two houses of Congress find themselves in disagreement
over changes or amendments introduced by the other house in a legislative bill. Given that one of
the most basic powers of the legislative branch is to formulate and implement its own rules of
proceedings and to discipline its members, may the Court then delve into the details of how
Congress complies with its internal rules or how it conducts its business of passing legislation? Note
that in the present petitions, the issue is not whether provisions of the rules of both houses creating
the bicameral conference committee are unconstitutional, but whether the bicameral conference
committee has strictly complied with the rules of both houses, thereby remaining within the
jurisdiction conferred upon it by Congress.

In the recent case of Fariñas vs. The Executive Secretary,20 the Court En
Banc, unanimously reiterated and emphasized its adherence to the "enrolled bill doctrine," thus,
declining therein petitioners’ plea for the Court to go behind the enrolled copy of the bill. Assailed in
said case was Congress’s creation of two sets of bicameral conference committees, the lack of
records of said committees’ proceedings, the alleged violation of said committees of the rules of both
houses, and the disappearance or deletion of one of the provisions in the compromise bill submitted
by the bicameral conference committee. It was argued that such irregularities in the passage of the
law nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of both Houses of Congress that it was passed are
conclusive of its due enactment. A review of cases reveals the Court’s consistent adherence to the
rule. The Court finds no reason to deviate from the salutary rule in this case where the
irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the
proper forum for the enforcement of these internal rules of Congress, whether House or
Senate. Parliamentary rules are merely procedural and with their observance the courts have
no concern. Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must
be resolved in its favor.The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms of expression, all deny to the courts the
power to inquire into allegations that, in enacting a law, a House of Congress failed to comply
with its own rules, in the absence of showing that there was a violation of a constitutional
provision or the rights of private individuals. In Osmeña v. Pendatun, it was held: "At any rate,
courts have declared that ‘the rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them.’ And it has been said that
"Parliamentary rules are merely procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the legislative body." Consequently, "mere
failure to conform to parliamentary usage will not invalidate the action (taken by a
deliberative body) when the requisite number of members have agreed to a particular
measure."21 (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting provisions in
the House and Senate bills. Akin to the Fariñas case,22 the present petitions also raise an issue
regarding the actions taken by the conference committee on matters regarding Congress’
compliance with its own internal rules. As stated earlier, one of the most basic and inherent power of
the legislature is the power to formulate rules for its proceedings and the discipline of its members.
Congress is the best judge of how it should conduct its own business expeditiously and in the most
orderly manner. It is also the sole

concern of Congress to instill discipline among the members of its conference committee if it
believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction
of this Court cannot apply to questions regarding only the internal operation of Congress, thus, the
Court is wont to deny a review of the internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of
Finance,23 the Court already made the pronouncement that "[i]f a change is desired in the practice
[of the Bicameral Conference Committee] it must be sought in Congress since this question
is not covered by any constitutional provision but is only an internal rule of each house." 24 To
date, Congress has not seen it fit to make such changes adverted to by the Court. It seems,
therefore, that Congress finds the practices of the bicameral conference committee to be very useful
for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements
were as follows:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950

With regard to "Stand-By Authority" in favor of President

Provides for 12% VAT on
every sale of goods or
properties (amending Sec.
106 of NIRC); 12% VAT on
importation of goods
(amending Sec. 107 of
NIRC); and 12% VAT on
sale of services and use or
lease of properties
(amending Sec. 108 of
NIRC)
Provides for 12% VAT in general Provides for a single rate of
on sales of goods or properties 10% VAT on sale of goods or
and reduced rates for sale of properties (amending Sec.
certain locally manufactured 106 of NIRC), 10% VAT on
goods and petroleum products sale of services including sale
and raw materials to be used in of electricity by generation
the manufacture thereof companies, transmission and
(amending Sec. 106 of NIRC); distribution companies, and
12% VAT on importation of use or lease of properties
goods and reduced rates for (amending Sec. 108 of NIRC)
certain imported products
including petroleum products
(amending Sec. 107 of NIRC);
and 12% VAT on sale of services
and use or lease of properties
and a reduced rate for certain
services including power
generation (amending Sec. 108
of NIRC)
 With regard to the "no pass-on" provision
No similar provision
With regard to 70% limit on input tax credit
Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and
services other than capital
goods shall not exceed 5%
of the total amount of such
goods and services; and for
persons engaged in retail
trading of goods, the
allowable input tax credit
shall not exceed 11% of the
total amount of goods
purchased.
With regard to amendments to be made to NIRC provisions regarding income and excise
No similar provision
Provides that the VAT imposed
on power generation and on the
sale of petroleum products shall
be absorbed by generation
companies or sellers,
respectively, and shall not be
passed on to consumers
No similar provision
taxes
No similar provision
Provides that the VAT
imposed on sales of
electricity by generation
companies and services of
transmission companies and
distribution companies, as
well as those of franchise
grantees of electric utilities
shall not apply to residential
end-users. VAT shall be
absorbed by generation,
transmission, and distribution
companies.
Provides that the input tax
credit for capital goods on
which a VAT has been paid
shall be equally distributed
over 5 years or the
depreciable life of such
capital goods; the input tax
credit for goods and services
other than capital goods shall
not exceed 90% of the output
VAT.
Provided for amendments to
several NIRC provisions
regarding corporate income,
 percentage, franchise and
excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to
(1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers, as proposed in the
Senate bill, or both the VAT imposed on electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner input tax credits should be limited; (4)
and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise
taxes should be amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate
bills, the Bicameral Conference Committee was mandated by the rules of both houses of Congress
to act on the same by settling said differences and/or disagreements. The Bicameral Conference
Committee acted on the disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap in
the difference between the 10% VAT rate proposed by the Senate, and the various rates with 12%
as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10%
VAT rate would be retained until certain conditions arise, i.e., the value-added tax collection as a
percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the previous year exceeds 1½%, when the President,
upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective
January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers or whether both the
VAT imposed on electricity generation, transmission and distribution companies and the VAT
imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference
Committee chose to settle such disagreement by altogether deleting from its Report any no pass-
on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the
Bicameral Conference Committee decided to adopt the position of the House by putting a limitation
on the amount of input tax that may be credited against the output tax, although it crafted its own
language as to the amount of the limitation on input tax credits and the manner of computing the
same by providing thus:

(A) Creditable Input Tax. – . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition
cost for such goods, excluding the VAT component thereof, exceeds one million Pesos
(₱1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such
shorter period: . . .

(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output
tax, the excess shall be carried over to the succeeding quarter or quarters: PROVIDED that the input
tax inclusive of input VAT carried over from the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT
any input tax attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax,
franchise, percentage and excise taxes, the conference committee decided to include such
amendments and basically adopted the provisions found in Senate Bill No. 1950, with some changes
as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated to settle the differences between the disagreeing
provisions in the House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and
"harmonize."25 To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the provisions in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for it
did not inject any idea or intent that is wholly foreign to the subject embraced by the original
provisions.

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by
the Senate is retained until such time that certain conditions arise when the 12% VAT wanted by the
House shall be imposed, appears to be a compromise to try to bridge the difference in the rate of
VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within
the subject of what rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the
Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate
Panel, explained the reason for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no
sector should be a beneficiary of legislative grace, neither should any sector be discriminated on.
The VAT is an indirect tax. It is a pass on-tax. And let’s keep it plain and simple. Let’s not confuse
the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in this two-
thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the thinking of the
Senate is basically simple, let’s keep the VAT simple.26 (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really
enjoyed the support of either House."27
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference
Committee came to a compromise on the percentage rate of the limitation or cap on such input tax
credit, but again, the change introduced by the Bicameral Conference Committee was totally within
the intent of both houses to put a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of
Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y
introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed
our collection efforts at an apparent disadvantage."28

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in
Senate Bill No. 1950, since said provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane
to subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of
Finance,30 the Court recognized the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate and the House. Thus, in
the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision
that is not found either in the House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two provisions, there is no reason why it cannot propose several
provisions, collectively considered as an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the committee. After all, its report was not
final but needed the approval of both houses of Congress to become valid as an act of the legislative
department. The charge that in this case the Conference Committee acted as a third legislative
chamber is thus without any basis.31 (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-
Amendment Rule"

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the necessity of its immediate enactment
to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays
entered in the Journal.

Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or
delete provisions in the House bill and the Senate bill after these had passed three readings is in
effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails
to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committee’s Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modification of the compromise bill. . . .

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first
time in either house of Congress, not to the conference committee report. 32 (Emphasis
supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be
followed by each house of Congress with regard to bills initiated in each of said respective
houses, before said bill is transmitted to the other house for its concurrence or amendment.
Verily, to construe said provision in a way as to proscribe any further changes to a bill after one
house has voted on it would lead to absurdity as this would mean that the other house of Congress
would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art.
VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in bills that have
been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination
of Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on
corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to
wit:

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation

28(B)(1) Inter-corporate Dividends

34(B)(1) Inter-corporate Dividends

116 Tax on Persons Exempt from VAT

117 Percentage Tax on domestic carriers and keepers of Garage

119 Tax on franchises

121 Tax on banks and Non-Bank Financial Intermediaries

148 Excise Tax on manufactured oils and other fuels

151 Excise Tax on mineral products

236 Registration requirements

237 Issuance of receipts or sales or commercial invoices

288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from
the House. They aver that House Bill No. 3555 proposed amendments only regarding Sections 106,
107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to
Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the
Senate amended but which amendments were not found in the House bills are not intended to be
amended by the House of Representatives. Hence, they argue that since the proposed amendments
did not originate from the House, such amendments are a violation of Article VI, Section 24 of the
Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax.
Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the value-added tax but also amendments to
NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not dealing
directly with the value- added tax, which is the only kind of tax being amended in the House bills, still
within the purview of the constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held,
thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because a
bill originating in the House may undergo such extensive changes in the Senate that the result may
be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only the
bill which initiated the legislative process culminating in the enactment of the law – must
substantially be the same as the House bill would be to deny the Senate’s power not only to
"concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House superior to
the Senate.

…Given, then, the power of the Senate to propose amendments, the Senate can propose its
own version even with respect to bills which are required by the Constitution to originate in
the House.

...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills,
bills authorizing an increase of the public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at large, are expected to
approach the same problems from the national perspective. Both views are thereby made to
bear on the enactment of such laws.33 (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes.
Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the
extent of the amendments that may be introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
touched in the House bills are still in furtherance of the intent of the House in initiating the subject
revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on
the floor, which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving
the country’s serious financial problems. To do this, government expenditures must be strictly
monitored and controlled and revenues must be significantly increased. This may be easier said
than done, but our fiscal authorities are still optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several measures that will result to significant expenditure
savings have been identified by the administration. It is supported with a credible package of
revenue measures that include measures to improve tax administration and control the
leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged
that on top of our agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might
seem poignant in the beginning, but in the long run prove effective and beneficial to the
overall status of our economy. One such opportunity is a review of existing tax rates,
evaluating the relevance given our present conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to
bring in sizeable revenues for the government

to supplement our country’s serious financial problems, and improve tax administration and control
of the leakages in revenues from income taxes and value-added taxes. As these house bills were
transmitted to the Senate, the latter, approaching the measures from the point of national
perspective, can introduce amendments within the purposes of those bills. It can provide for ways
that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden
across all sectors instead of putting it entirely on the shoulders of the consumers. The sponsorship
speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is
worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in
additional revenues annually even while by mitigating prices of power, services and petroleum
products.

However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on
twelve goods and services. The rest of the tab – ₱10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer.
Why should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the
consumer?

The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back, not
to its old rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the tunnel,
this government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be
there to share the burden.35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the house bills which
is to raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the
reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be burdened more as they would be paying
the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften the
impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker
fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT
chain, we will however bring down the excise tax on socially sensitive products such as diesel,
bunker, fuel and kerosene.

...

What do all these exercises point to? These are not contortions of giving to the left hand what was
taken from the right. Rather, these sprang from our concern of softening the impact of VAT, so that
the people can cushion the blow of higher prices they will have to pay as a result of VAT. 36

The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes
of the house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate
acted within its power to propose those amendments.

SUBSTANTIVE ISSUES

I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from 10%
to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: provided, that the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. – There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%) after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is
a virtual abdication by Congress of its exclusive power to tax because such delegation is not within
the purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services, which cannot be included within the purview of tariffs
under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods or merchandise imported or
exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the
legislative power to tax is contrary to republicanism. They insist that accountability, responsibility and
transparency should dictate the actions of Congress and they should not pass to the President the
decision to impose taxes. They also argue that the law also effectively nullified the President’s power
of control, which includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create
the conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an unelected
bureaucrat, contrary to the principle of no taxation without representation. They submit that the
Secretary of Finance is not mandated to give a favorable recommendation and he may not even give
his recommendation. Moreover, they allege that no guiding standards are provided in the law on
what basis and as to how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the President since the
former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether
to impose the increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government
has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated
sphere.37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as

expressed in the Latin maxim: potestas delegata non delegari potest which means "what has been
delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the intervening mind of another. 39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate
and a House of Representatives." The powers which Congress is prohibited from delegating are
those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can
never be delegated, has been described as the authority to make a complete law – complete as
to the time when it shall take effect and as to whom it shall be applicable – and to determine
the expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in
holding a statute unconstitutional as a delegation of legislative power, it must appear that the power
involved is purely legislative in nature – that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability of its use or the manner of its exercise,
which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It
is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried
out, or implemented by the delegate;41 and (b) fixes a standard — the limits of which are sufficiently
determinate and determinable — to which the delegate must conform in the performance of his
functions.42 A sufficient standard is one which defines legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to apply it. It indicates the circumstances under which
the legislative command is to be effected.43 Both tests are intended to prevent a total transference of
legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept
and extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other appointee or delegate of the
legislature.

...

‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the
law, which necessarily involves a discretion as to what it shall be, and conferring an authority
or discretion as to its execution, to be exercised under and in pursuance of the law. The first
cannot be done; to the latter no valid objection can be made.’

...

It is contended, however, that a legislative act may be made to the effect as law after it leaves the
hands of the legislature. It is true that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a particular community. In Wayman
vs. Southard, the Supreme Court of the United States ruled that the legislature may delegate a
power not legislative which it may itself rightfully exercise. The power to ascertain facts is such a
power which may be delegated. There is nothing essentially legislative in ascertaining the
existence of facts or conditions as the basis of the taking into effect of a law. That is a mental
process common to all branches of the government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative authority on account of the complexity
arising from social and economic forces at work in this modern industrial age, the orthodox
pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in the following language — speaking
of declaration of legislative power to administrative agencies: The principle which permits the
legislature to provide that the administrative agent may determine when the circumstances
are such as require the application of a law is defended upon the ground that at the time this
authority is granted, the rule of public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the legislature, as it is its duty to do,
determines that, under given circumstances, certain executive or administrative action is to
be taken, and that, under other circumstances, different or no action at all is to be taken.
What is thus left to the administrative official is not the legislative determination of what
public policy demands, but simply the ascertainment of what the facts of the case require to
be done according to the terms of the law by which he is governed. The efficiency of an Act
as a declaration of legislative will must, of course, come from Congress, but the
ascertainment of the contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that a law shall take effect
upon the happening of future specified contingencies leaving to some other person or body
the power to determine when the specified contingency has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and
repeal them; the test is the completeness of the statute in all its terms and provisions when it leaves
the hands of the legislature. To determine whether or not there is an undue delegation of legislative
power, the inquiry must be directed to the scope and definiteness of the measure enacted. The
legislative does not abdicate its functions when it describes what job must be done, who is to
do it, and what is the scope of his authority. For a complex economy, that may be the only way in
which the legislative process can go forward. A distinction has rightfully been made between
delegation of power to make the laws which necessarily involves a discretion as to what it
shall be, which constitutionally may not be done, and delegation of authority or discretion as
to its execution to be exercised under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be regarded as denying the legislature the
necessary resources of flexibility and practicability. (Emphasis supplied). 48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain
facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its
terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations
on their authority.49 While the power to tax cannot be delegated to executive agencies, details as to
the enforcement and administration of an exercise of such power may be left to them, including the
power to determine the existence of facts on which its operation depends. 50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is the kind of subsidiary activity which the
legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the absence of
accurate information on the part of the legislators, and any reasonable method of securing such
information is proper.51 The Constitution as a continuously operative charter of government does not
require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to particular
facts and circumstances impossible for Congress itself properly to investigate. 52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5
and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions
has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the law
is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact
that the word shall is used in the common proviso. The use of the word shall connotes a mandatory
order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of
discretion.53 Where the law is clear and unambiguous, it must be taken to mean exactly what it says,
and courts have no choice but to see to it that the mandate is obeyed. 54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the
existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by
the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the
President does not come into play. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the
law effectively nullified the President’s power of control over the Secretary of Finance by mandating
the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The
Court cannot also subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon
the recommendation of the Secretary of Finance." Neither does the Court find persuasive the
submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can
easily be brushed aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that
as head of the Department of Finance he is the assistant and agent of the Chief Executive. The
multifarious executive and administrative functions of the Chief Executive are performed by and
through the executive departments, and the acts of the secretaries of such departments, such as the
Department of Finance, performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief
Executive. The Secretary of Finance, as such, occupies a political position and holds office in an
advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of the
President."55

In the present case, in making his recommendation to the President on the existence of either of the
two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her
subordinate. In such instance, he is not subject to the power of control and direction of the President.
He is acting as the agent of the legislative department, to determine and declare the event upon
which its expressed will is to take effect.56 The Secretary of Finance becomes the means or tool by
which legislative policy is determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader perspective to properly evaluate
them. His function is to gather and collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. His personality in such instance is in
reality but a projection of that of Congress. Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must be imposed
by the President effective January 1, 2006. There is no undue delegation of legislative power but
only of the discretion as to the execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward. 58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President
the legislative power to tax is contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the mere implementation of the law.
The intent and will to increase the VAT rate to 12% came from Congress and the task of the
President is to simply execute the legislative policy. That Congress chose to do so in such a manner
is not within the province of the Court to inquire into, its task being to interpret the law. 59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause,
influence or create the conditions to bring about either or both the conditions precedent does not
deserve any merit as this argument is highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not
fancies; on realities, not appearances. When the Court acts on appearances instead of realities,
justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on any
of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the
VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate
from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set
forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law
are clear. It does not provide for a return to the 10% rate nor does it empower the President to so
revert if, after the rate is increased to 12%, the VAT collection goes below the 2 4/5 of the GDP of the
previous year or that the national government deficit as a percentage of GDP of the previous year
does not exceed 1½%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations

be introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress
may tread upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the
Court finds none, petitioners’ argument is, at best, purely speculative. There is no basis for
petitioners’ fear of a fluctuating VAT rate because the law itself does not provide that the rate should
go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is
that where the provision of the law is clear and unambiguous, so that there is no occasion for the
court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or
subtraction.61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be
based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is
another condition, i.e., the national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is
less than 2.8%, it means that government has weak or no capability of implementing the VAT or that
VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to
12% because such action will also be ineffectual.

2. Nat’l Gov’t Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced budget
position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase
the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT collection does
not render it unconstitutional so long as there is a public purpose for which the law was passed,
which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in
revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the state. 63

It simply means that sources of revenues must be adequate to meet government expenditures and
their variations.64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During
the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the
country’s gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position
where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. That’s interest plus amortization of our debt. So clearly, this
is not a sustainable situation. That’s the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that
borrow money from that international financial markets. Our debt to GDP is approximately equal to
our GDP. Again, that shows you that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as
benign as what it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global
growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid
increase in the interest rates in the leading economies of the world. And, therefore, our ability to
borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our ability to
access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now,
at least based on the forecast of most financial institutions. So, we were assuming that raising 80
billion would put us in a position where we can then convince them to improve our ability to borrow at
lower rates. But conditions have changed on us because the interest rates have gone up. In fact, just
within this room, we tried to access the market for a billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We
issued last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the
market was not as favorable and up to now we have not accessed and we might pull back because
the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our
deficit reduction. Because it is deficit that is causing the increase of the debt and we are in what we
call a debt spiral. The more debt you have, the more deficit you have because interest and debt
service eats and eats more of your revenue. We need to get out of this debt spiral. And the only way,
I think, we can get out of this debt spiral is really have a front-end adjustment in our revenue base. 65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the state’s economic dilemma is not for
the Court to judge. In the Fariñas case, the Court refused to consider the various arguments raised
therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing
that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the wisdom
or propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it
is based on sound economic theory, whether it is the best means to achieve the desired results,
whether, in short, the legislative discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the legislature, and the serious conflict of opinions
does not suffice to bring them within the range of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive
policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency
of legislation."67

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions
of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C)
of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the
constitutional right against deprivation of life, liberty of property without due process of law, as
embodied in Article III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection
of the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing, the presumption of validity
must prevail.68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited against the output tax. It states, in part: "[P]rovided, that the
input tax inclusive of the input VAT carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax
due from or paid by a VAT-registered person on the importation of goods or local purchase of good
and services, including lease or use of property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods
or properties or services by any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may
be claimed. In effect, a portion of the input tax that has already been paid cannot now be credited
against the output tax.

Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax,
and therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the
input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a business’s books of accounts and
remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which
provides that "if the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-registered person to apply
for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that
such input taxes have not been applied against the output taxes. Such unused input tax may be
used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-
sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It
does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may later on
be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners’ argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70%
limitation on the input tax. According to petitioner, the limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the
principle that tax collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he
buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing
the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input
taxes that he paid and passed on by the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal Revenue (BIR);69 and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes, at the taxpayer’s option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can
credit his input tax only up to the extent of 70% of the output tax. In layman’s term, the value-added
taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70%
of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax
collection because the person/taxpayer has already previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of
the tax is the seller.71 What only needs to be done is for the person/taxpayer to apply or credit these
input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes
the nature of a property that may not be confiscated, appropriated, or limited without due process of
law.

The input tax is not a property or a property right within the constitutional purview of the due process
clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons
have no vested rights in statutory privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away property, which was vested by virtue of
such rights.72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible from
the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all
sales, it was then that the crediting of the input tax paid on purchase or importation of goods and
services by VAT-registered persons against the output tax was introduced. 73 This was adopted by the
Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424).75 The right
to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also
the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition
cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(₱1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than
five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a
shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties,
the input tax shall be creditable to the purchaser, lessee or license upon payment of the
compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax
on purchase or importation of capital goods with acquisition cost of ₱1 Million pesos, exclusive of the
VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners’
argument is without basis because the taxpayer is not permanently deprived of his privilege to credit
the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this
case amounts to a 4-year interest-free loan to the government. 76 In the same breath, Congress also
justified its move by saying that the provision was designed to raise an annual revenue of 22.6
billion.77 The legislature also dispelled the fear that the provision will fend off foreign investments,
saying that foreign investors have other tax incentives provided by law, and citing the case of China,
where despite a 17.5% non-creditable VAT, foreign investments were not deterred. 78 Again, for
whatever is the purpose of the 60-month amortization, this involves executive economic policy and
legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for
taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are subject
to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final
value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject to
ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or
person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more

simplified VAT withholding system. The government in this case is constituted as a withholding agent
with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be
withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services
supplied by contractors other than by public works contractors; 8.5% on gross payments for services
supplied by public work contractors; or 10% on payment for the lease or use of properties or
property rights to nonresident owners. Under the present Section 114(C), these different rates,
except for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform
rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five
percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the
concept of final withholding tax on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily on the payor as
a withholding agent. Thus, in case of his failure to withhold the tax or in case of underwithholding,
the deficiency tax shall be collected from the payor/withholding agent. …

(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of the payee on
said income. … Taxes withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject
to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This represents
the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT
(deemed input VAT), in lieu of the actual input VAT directly or attributable to the taxable transaction. 79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to
treat differently taxable transactions with the government.80 This is supported by the fact that under
the old provision, the 5% tax withheld by the government remains creditable against the tax liability
of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Creditable Value-added Tax. – The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each purchase of goods from sellers and
services rendered by contractors which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%)
of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment which shall be creditable against the
value-added tax liability of the seller or contractor: Provided, however, That in the case of
government public works contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For
this purpose, the payor or person in control of the payment shall be considered as the withholding
agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s
intention to treat transactions with the government differently. Since it has not been shown that the
class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to
invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR,
provides that should the actual input tax exceed 5% of gross payments, the excess may form part of
the cost. Equally, should the actual input tax be less than 5%, the difference is treated as income. 81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets
to tax a profit or value-added even if there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any
disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of
sound and fury, signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It
need not take an astute businessman to know that it is a matter of exception that a business will sell
goods or services without profit or value-added. It cannot be overstressed that a business is created
precisely for profit.

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."83

The power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the
rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection,
the State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with
such power absent a clear showing of unreasonableness, discrimination, or arbitrariness. 84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input
tax, or invests in capital equipment, or has several transactions with the government, is not based on
real and substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the
subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners’ alleged distinctions are based on
variables that bear different consequences. While the implementation of the law may yield varying
end results depending on one’s profit margin and value-added, the Court cannot go beyond what the
legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or
things without distinction. This might in fact sometimes result in unequal protection. What the clause
requires is equality among equals as determined according to a valid classification. By classification
is meant the grouping of persons or things similar to each other in certain particulars and different
from all others in these same particulars.85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R.
Osmeña III and Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by
Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the
same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary
and confiscatory. On this score, suffice it to say that these are still proposed legislations. Until
Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the 70%
limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods
and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform
taxation does not deprive Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or
10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not
exceeding ₱1,500,000.00.88Also, basic marine and agricultural food products in their original state
are still not subject to the tax,89 thus ensuring that prices at the grassroots level will remain
accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding ₱200,000.00. Small
corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax
are sales of farm and marine products, so that the costs of basic food and other necessities, spared
as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of
the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly
favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize the
weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-
exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not
exceeding ₱1.5 Million. This acts as a equalizer because in effect, bigger businesses that qualify for
VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax
on those previously exempt. Excise taxes on petroleum products 91 and natural gas92 were reduced.
Percentage tax on domestic carriers was removed.93 Power producers are now exempt from paying
franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now subject
to a 35% income tax rate, from a previous 32%.95 Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but the tax credit allowed on the
corporation’s domicile was increased to 20%.96 The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore.97 Even the sale by an artist of his works or
services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It
is the smaller business with higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also
lifted from Adam Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly
as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected. 98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer
or business for every goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity
lies in the income earned by a person or profit margin marked by a business, such that the higher
the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the
end of the day, it is really the lower income group or businesses with low-profit margins that is
always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT.
What it simply provides is that Congress shall "evolve a progressive system of taxation." The Court
stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall ‘evolve a progressive system of taxation.’
The constitutional provision has been interpreted to mean simply that ‘direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be minimized.’ (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress
is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII,
§17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are
also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) 99

CONCLUSION
 It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a
first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a
deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law
seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply
because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature may
not correct, for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for
all political or social ills; We should not forget that the Constitution has judiciously allocated the
powers of government to three distinct and separate compartments; and that judicial interpretation
has tended to the preservation of the independence of the three, and a zealous regard of the
prerogatives of each, knowing full well that one is not the guardian of the others and that, for official
wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box. 100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things
considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No.
9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of
herein decision.

SO ORDERED.

ssued is hereby lifted.

SO ORDERED.

G.R. Nos. L-21633-34 June 29, 1967

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners,
vs.
BOTELHO SHIPPING CORPORATION and GENERAL SHIPPING CO., INC., respondents.

Appeal by the Government from a decision of the Court of Tax Appeals, reversing of the decisions of
the Commissioner of Internal Revenue and the Commissioner of Customs, in Cases No. 956 and
957 of said Court, holding Botelho Shipping Corporation and General Shipping Co., Inc. —
hereinafter referred to collectively as the Buyers — liable for the payment of the sum of P483,433.00
and P494,824.00, respectively, as compensating taxes on the vessels "M/S Maria Rosello" and "M/S
General Lim."

On August 30, 1960, the Reparations Commission of the Philippines — hereinafter referred to as the
Commission — and Botelho Shipping Corporation — hereinafter referred to as Botelho — entered
into a "Contract of Conditional Purchase and Sale of Reparations Goods," whereby the former
agreed to sell to Botelho for P6,798,888.88 the vessel "M/S Maria Rosello," procured by the
Commission from Japan, pursuant to the provisions of the Philippine-Japanese Reparations
Agreement of May 9, 1956. On September 19, 1960, the Commission signed a similar contract with
General Shipping Co., Inc. — hereinafter referred to as General Shipping — for the sale thereto of
"M/S General Lim" at the price of P6,951,666.66. Both agreements, couched in identical terms,
except as to price, stipulated that:

a) The Reparations Commission "retains title to and ownership of the above described
vessel until it is fully paid for." (Exh. "A", p. 2, both cases)

b) The stipulated purchase price of the M/S MARIA ROSELLO was to be paid by Botelho to
the Commission under a deferred payment plan in 10 equal yearly installments of
P717,333.49, bearing 3% interest per annum, beginning August 31, 1962 and August 31 of
every year thereafter until the year 1972, while the purchase price of the M/S GENERAL LIM
was to be paid by General Shipping to the Commission under a deferred payment plan in 10
equal yearly installments of P723,132.68, bearing 3% interest per annum beginning
September 30 of every year until the year 1972. (Exhs. 9, p. 4 and A-2, both cases) (See
Respondents' brief, p. 4.)

Delivered in Japan to its respective buyers, acting on behalf of the Commission, the vessels, upon
their departure from Tokyo, on the maiden trip thereof to the Philippines, were issued, by the
Philippine Vice-Consul in said city, provisional certificates of Philippine registry in the name of the
Commission, so that the vessels could proceed to the Philippines and secure therein the respective
final registration document.

Upon arrival at the port of Manila, the Buyer filed the corresponding applications for registration of
the vessels, but, the Bureau of Customs placed the same under custody and refused to give due
course to said applications, unless the aforementioned sums of P483,433 and P494,824 be paid as
compensating tax. As the Commissioner of Customs refused to reconsider the stand taken by his
office, the Buyers simultaneously filed with the Court of Tax Appeals their respective petitions for
review, against the Commissioner of Customs and the Commissioner of Internal Revenue —
hereinafter referred to collectively as Appellants — with urgent motion for suspension of the
collection of said tax. After a joint hearing on this motion, the same was, on October 31, 1960,
granted by the Tax Court, upon the sum of a P500,000.00 bond by each one of the Buyers.

On June 17, 1961, while these cases were pending trial in said Court, Republic Act No. 3079
amended Republic Act No. 1789 — the Original Reparations Act, under which the aforementioned
contracts with the Buyers had been executed — by exempting buyers of reparations goods acquired
from the Commission, from liability for the compensating tax. Moreover, section 20 of Republic Act
No. 3079, provides:

x x x This Act shall take effect upon its approval, except that the amendment contained in
Section seven hereof relating to the requirements of procurement orders including the
requirement of down payment by private applicant end-users shall not apply to procurement
orders already duty issued and verified at the time of the passage of this amendatory Act,
and except further that the amendment contained in Section ten relating to the insurance of
the reparations goods by the end-users upon delivery shall apply also to goods covered by
contracts already entered into by the Commission and end-user prior to the approval of this
amendatory Act as well as goods already delivered to the end-user, and except further that
the amendments contained in Sections eleven and twelve hereof relating to the terms of
installment payments on capital goods disposed of to private parties, and the execution of a
performance bond before delivery of reparations goods, shall not apply to contracts for the
utilization of reparations goods already entered into by the Commission and the end-users
 prior to the approval of this amendatory Act: Provided, That any end-user may apply for the
renovation of his utilization contract with the Commission in order to avail of any provision of
this amendatory Act which is more favorable to an applicant end-user than has heretofore
been granted in like manner and to the same extent as an end-user filing his application after
the approval of this amendatory Act, and the Commission may agree to such renovation on
condition that the end-user shall voluntarily assume all the new obligations provided for in
this amendatory Act.

Invoking the provisions of this section 20, the Buyers applied, therefore, for the renovation of their
utilizations contracts with the Commission, which granted the application, and, then, filed with the
Tax Court, their supplemental petitions for review. Subsequently, the parties submitted Stipulations of
Fact and, after a joint trial, at which they introduced additional evidence, said Court rendered the
appealed decision, reversing the decisions herein Appellants, and declared said Buyers exempt from
the compensating tax sought to be assessed against the vessels aforementioned. Hence, these
appeals by the Government G.R. No. L-21633 refers to the case as regards "M/S Maria Rosello,"
whereas "M/S General Lim" is the subject-matter of G.R. No. L-21634.

It seems clear that, under Republic Act No. 1789 — pursuant to which the contracts of Conditional
Purchase and Sale in question had been executed — the vessels "M/S Maria Rosello" and "M/S
General Lim" were subject to compensating tax. Indeed, Section 14 of said Act provides that
"reparations goods obtained by private parties shall be exempt only from the payment of customs
duties, consular fees and the special import tax." Although this Section was amended by R.A. No.
3079, to include the compensating tax" among the exemptions enumerated therein, such
amendment took place, not only after the contracts involved in these appeals had been perfected
and partly consummated, but, also, after the corresponding compensating tax had become due and
payment thereof demanded by Appellants herein. It is, moreover, obvious that said additional
exemption should not and cannot be given retroactive operation, in the absence of a manifest intent
of Congress to do this effect. The issue in the cases at bar hinges on whether or not such intent is
clear.

Appellants maintain the negative, upon the ground that a tax exemption must be clear and explicit;
that there is no express provision for the retroactivity of the exemption, established by Republic Act
No. 3079, from the compensating tax; that the favorable provisions, which are referred to in section
20 thereof, cannot include the exemption from compensating tax; and, that Congress could not have
intended any retroactive exemption, considering that the result thereof would be prejudicial to the
Government.

The inherent weakness of the last ground becomes manifest when we consider that, if true, there
could be no tax exemption of any kind whatsoever, even if Congress should wish to create one,
because every such exemption implies a waiver of the right to collect what otherwise would be due
to the Government, and, in this sense, is prejudicial thereto. In fact, however, tax exemptions may
and do exist, such as the one prescribed in section 14 of Republic Act No. 1789, as amended by
Republic Act No. 3079, which, by the way, is "clear and explicit," thus, meeting the first ground of
appellant's contention. It may not be amiss to add that no tax exemption — like any other legal
exemption or exception — is given without any reason therefor. In much the same way as other
statutory commands, its avowed purpose is some public benefit or interest, which the law-making
body considers sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed,
section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its
favorable provisions, namely, the voluntary assumption, by the end-user who bought reparations
goods prior to June 17, 1961 of "all the new obligations provided for in" said Act.
The argument adduced in support of the third ground is that the view adopted by the Tax Court
would operate to grant exemption to particular persons, the Buyers herein. It should be noted,
however, that there is no constitutional injunction against granting tax exemptions to particular
persons. In fact, it is not unusual to grant legislative franchises to specific individuals or entities,
conferring tax exemptions thereto. What the fundamental law forbids is the denial of equal
protection, such as through unreasonable discrimination or classification. 1äwphï1.ñët

Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating
tax, not particular persons, but persons belonging to a particular class. Indeed, appellants do not
assail the constitutionality of said section 14, insofar as it grants exemptions to end-users
who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased reparations goods
procured by the Commission. From the viewpoint of Constitutional Law, especially the equal
protection clause, there is no difference between the grant of exemption to said end-users, and the
extension of the grant to those whose contracts of purchase and sale mere made before said date,
under Republic Act No. 1789.

It is true that Republic Act No. 3079 does not explicitly declare that those who purchased reparations
goods prior to June 17, 1961, are exempt from the compensating tax. It does not say so, because
they do not really enjoy such exemption, unless they comply with the proviso in Section 20 of said
Act, by applying for the renovation of their respective utilization contracts, "in order to avail
of any provision of the Amendatory Act which is more favorable" to the applicant. In other words, it is
manifest, from the language of said section 20, that the same intended to give such buyers the
opportunity to be treated "in like manner and to the same extent as an end-user filing his application
after this approval of this Amendatory Act." Like the "most-favored-nation-clause" in international
agreements, the aforementioned section 20 thus seeks, not to discriminate or to create an
exemption or exception, but to abolish the discrimination, exemption or exception that would
otherwise result, in favor of the end-user who bought after June 17, 1961 and against one who
bought prior thereto. Indeed, it is difficult to find a substantial justification for the distinction between
the one and the other. As correctly held by the Tax Court in Philippine Ace Lines, Inc. v.
Commissioner of Internal Revenue (C.T.A. Nos. 964 and 984, January 25, 1963), and reiterated in
the cases under consideration:

x x x In providing that the favorable provision of Republic Act No. 3079 shall be available to
applicants for renovation of their utilization contracts, on condition that said applicants shall
voluntarily assume all the new obligations provided in the new law, the law intends to place
persons who acquired reparations goods before the enactment of the amendatory Act on the
same footing as those who acquire reparations goods after its enactment. This is so because
of the provision that once an application for renovation of a utilization contract has been
approved, the favorable provisions of said Act shall be available to the applicant "in like
manner and to the same extent, as an end-user filing his application alter the approval of this
amendatory Act." To deny exemption from compensating tax to one whose utilization
contract has been renovated, while granting the exemption to one who files an application for
acquisition of reparations goods after the approval of the new law, would be contrary to the
express mandate of the new law, that they both be subject to the same privileges in like
manner and to the same extent. It would be manifest distortion of the literal meaning and
purpose of the new law.

Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed in toto, without any
pronouncement as to costs. It is so ordered.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only
one subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due

process of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for
the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections
21 and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:
Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. — A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-
employed or practices his profession herein, determined in accordance with the
following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to

the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
 For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having
still retained the net income, taxation scheme. The allowance for deductible items, it is true, may
have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the
new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually made, of the subjects
of legislation. The above objectives of the fundamental law appear to us to have been sufficiently
1

met. Anything else would be to require a virtual compendium of the law which could not have been
the intendment of the constitutional mandate.

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

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to
the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach in the income taxation of
2

individual taxpayers and to maintain, by and large, the present global treatment on taxable
3

corporations. We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.

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

G.R. No. 109446

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

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership

(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and
therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?

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

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

version of the SNITS, it is categorically stated, thus:
 This bill, Mr. President, is not applicable to business corporations or
to partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective professions
and partners in general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is treated as a corporation
for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on
the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act
7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each
partner —

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless

he declares his distributive share of the gross income undiminished
by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view
can easily become myopic, however, when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in
levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income tax on their
income from Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such
as in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example. Here, the partners themselves, not the
4

partnership (although it is still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so
as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a
flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the
President, HON. VICENTE JAYME, ETC., ET AL., respondents.

Just like lightning which does strike the same place twice in some instances, this matter of indirect
tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a
second time. Unfazed by the Decision We promulgated on May 31, 1991 petitioner Ernesto Maceda
1

asks this Court to reconsider said Decision. Lest We be criticized for denying due process to the
petitioner. We have decided to take a second look at the issues. In the process, a hearing was held
on July 9, 1992 where all parties presented their respective arguments. Etched in this Court's mind
are the paradoxical claims by both petitioner and private respondents that their respective positions
are for the benefit of the Filipino people.
 I

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption
provisions, at the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power
Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the
Philippines. The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury
2

for the purpose of organizing the NPC and conducting its preliminary work. The main source of
3

funds for the NPC was the flotation of bonds in the capital markets and these bonds
4

. . . issued under the authority of this Act shall be exempt from the payment of all
taxes by the Commonwealth of the Philippines, or by any authority, branch, division
or political subdivision thereof and subject to the provisions of the Act of Congress,
approved March 24, 1934, otherwise known as the Tydings McDuffle Law, which
facts shall be stated upon the face of said bonds. . . . .5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the
initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first
construction of any hydraulic power project was to be decided by the NPC Board. The provision on
6

tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the
bond's principal and interest in "gold coins" but adding that payment could be made in United States
dollars. The provision on tax exemption in relation to the issuance of the NPC bonds was neither
7

amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to
guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC
loans. He was also authorized to contract on behalf of the NPC with the International Bank for
8

Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's corporate
objectives and for the reconstruction and development of the economy of the country. It was
9 10

expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to
incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds. As to the 12

pertinent tax exemption provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be

exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic
of the Philippines, its provinces, cities and municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD,
the President of the Philippines was authorized to negotiate, contract and guarantee loans with the
Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial
institution. The tax provision for repayment of these loans, as stated in R.A. No. 357, was not
14

amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real
estate taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be

exempt from all taxes, except real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its provinces, cities, and
municipalities. 15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by
the increased indebtedness should bear the National Economic Council's stamp of approval. The
16

tax exemption provision related to the payment of this total indebtedness was not amended nor
deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. The 17

tax provision related to the repayment of these loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,
2000. All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were
18

expressly repealed. 19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a
stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares
having a par value of P100.00 each, with said capital stock wholly subscribed to by the
Government. No tax exemption was incorporated in said Act.
20

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital
stock to P250,000,000.00 with the increase to be wholly subscribed by the Government. No tax 21

provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120,
as amended. Declared as primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive

development, utilization and conservation of Philippine water resources for all
beneficial uses, including power generation, and (2) the total electrification of the
Philippines through the development of power from all sources to meet the needs of
industrial development and dispersal and the needs of rural electrification are primary
objectives of the nation which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including the financial
institutions. 23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority
to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:
 The bonds issued under the authority of this subsection shall be exempt from the
payment of all taxes by the Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall be stated upon the face of
said bonds. . . .
24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as
follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedeness incurred under this Act, shall
also be exempt from all taxes, fees, imposts, other charges and restrictions, including
import restrictions, by the Republic of the Philippines, or any of its agencies and
political subdivisions.
25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares
the non-profit character and tax exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns 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 declared 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, and 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 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.26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country.
And in connection with this, it was specifically stated that:

The setting up of transmission line grids and the construction of associated

generation facilities in Luzon, Mindanao and major islands of the country, including
the Visayas, shall be the responsibility of the National Power Corporation (NPC) as
the authorized implementing agency of the State. 27
 xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single
integrated system all generating facilities supplying electric power to the entire area
embraced by any grid set up by the NPC. 28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill
its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to
P2,000,000,000.00, its total domestic indebtedness was pegged at a maximum of
29

P3,000,000,000.00 at any one time, and the NPC was authorized to borrow a total of
30

US$1,000,000,000.00 in foreign loans.

31

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials, supplies and services, by the
Corporation, paid from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its agencies
and political subdivisions. (Emphasis supplied)
32

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities including the taxes, duties, fees, imposts
and other charges provided for under the Tariff and Customs Code of the Philippines,
Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended, and as further
amended by Presidential Decree No. 34 dated October 27, 1972, and Presidential
Decree No. 69, dated November 24, 1972, and costs and service fees in any court or
administrative proceedings in which it may be a party;

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly 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. (Emphasis supplied)
33

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of
electricity to its different customers. No tax exemption provision was amended, deleted or added.
34

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock,
which amount would be taken from taxes accruing to the General Funds of the Government,
proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of
Finance for this particular purpose.35
On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission
facilities which includes nuclear power generation, the present capitalization of
National Power Corporation (NPC) and the ceilings for domestic and foreign
borrowings are deemed insufficient; 36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-
profit character of NPC has not been fully utilized because of restrictive interpretation
of the taxing agencies of the government on said provisions; 37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared
objective of total electrification of the country, further amendments of certain sections
of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380, 395 and
758, have become imperative; 38

Thus NPC's capital stock was raised to P8,000,000,000.00, the total domestic indebtedness ceiling
39

was increased to P12,000,000,000.00, the total foreign loan ceiling was raised to
40

US$4,000,000,000.00 and Section 13 of R.A. No. 6395, was amended to read as follows:
41

The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay to its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared exempt from the payment
of all forms of taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. 42

II

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931
and Executive Order No. 93 (S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to
imports as follows:

WHEREAS, importations by certain government agencies, including government-

owned or controlled corporation, are exempt from the payment of customs duties and
compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic

industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by

virtue of the powers vested in me by the Constitution, and do hereby decree and
order the following:
 Sec. 1. All importations of any government agency, including government-owned or
controlled corporations which are exempt from the payment of customs duties and
internal revenue taxes, shall be subject to the prior approval of an Inter-Agency
Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used
exclusively by the grantee of the exemption for its operations and projects or in the
conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee
to whom the goods shall be delivered directly by customs authorities.

xxx xxx xxx

Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in
Section 1 hereof and the regulations to be promulgated to implement the provisions
of this Decree. Provided, however, That any government agency or government-
owned or controlled corporation, or any local manufacturer or business firm
adversely affected by any decision or ruling of the Inter-Agency Committee may file
an appeal with the Office of the President within ten days from the date of notice
thereof. . . . .

xxx xxx xxx

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all
general and special laws and decrees are hereby amended accordingly.

xxx xxx xxx

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget
that is an instrument of national development, reflective of national objectives,
strategies and plans. The budget shall be supportive of and consistent with the socio-
economic development plan and shall be oriented towards the achievement of
explicit objectives and expected results, to ensure that funds are utilized and
operations are conducted effectively, economically and efficiently. The national
budget shall be formulated within a context of a regionalized government structure
and of the totality of revenues and other receipts, expenditures and borrowings of all
levels of government-owned or controlled corporations. The budget shall likewise be
prepared within the context of the national long-term plan and of a long-term budget
program. 43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay income
taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that
organizations otherwise exempted by law from the payment of such taxes/duties may ask for a
subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a
procedure shall be established by the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as both revenue and expenditure of the
General Fund. 44

The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are
inconsistent with the provisions of the Decree are hereby repealed and/or modified
accordingly. 45

On July 11, 1984, most likely due to the economic morass the Government found itself in after the
Aquino assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant
of tax privileges to any government-owned or controlled corporation and all other
units of government; 46

and since there was a

. . . need for government-owned or controlled corporations and all other units of

government enjoying tax privileges to share in the requirements of development,
fiscal or otherwise, by paying the duties, taxes and other charges due from them. 47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or controlled corporations including
their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above, any applicable tax and duty, taking into account,
among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

3) The nature of the activity in which the corporation is engaged in; or

4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative orders, rules, regulations or parts thereof
 which are inconsistent with this Decree are hereby repealed, amended or modified
accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration
or grant of tax exemption to other government and private entities without benefit of review by the
Fiscal Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges,
including the preferential tax treatment, of government and private entities with
certain exceptions, in order that the requirements of national economic development,
in terms of fiscals and other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored by
the Fiscal Incentives Review Board (FIRB), a number of affected entities,
government and private, had their tax and duty exemption privileges restored or
granted by Presidential action without benefit or review by the Fiscal Incentives
Review Board (FIRB);

xxx xxx xxx

Since it was decided that:

[A]ssistance to government and private entities may be better provided where

necessary by explicit subsidy and budgetary support rather than tax and duty
exemption privileges if only to improve the fiscal monitoring aspects of government
operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding,
all tax and duty incentives granted to government and private entities are hereby
withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of the

Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789,

as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential

Decree No. 66 as amended;
 (iii) the Philippine Veterans Investment Development Corporation
Industrial Authority pursuant to Presidential Decree No. 538, was
amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the

Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No.
776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of period of effectivity of the restoration of tax and/or duty
exemption;

e) formulate and submit to the President for approval, a complete system for the
grant of subsidies to deserving beneficiaries, in lieu of or in combination with the
restoration of tax and duty exemptions or preferential treatment in taxation, indicating
the source of funding therefor, eligible beneficiaries and the terms and conditions for
the grant thereof taking into consideration the international commitment of the
Philippines and the necessary precautions such that the grant of subsidies does not
become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review
Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

 xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent
with this Executive Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective upon the promulgation of the rules and regulations,
48

to be issued by the Ministry of Finance. Said rules and regulations were promulgated and
49

published in the Official Gazette

on February 23, 1987. These became effective on the 15th day after promulgation in the Official
50

Gasetter, which 15th day was March 10, 1987.

51

III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in
their TAXATION I course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT)
and the tariff and customs indirect taxes (import duties, special import tax and other
dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to
the following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all
forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No.
380, does not expressly include "indirect taxes."
His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the
NPC was to be completely tax exempt from all forms of taxes — direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations
upon its creation by virtue of C.A. No. 120.

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained
were to be completely tax exempt.

After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it
was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness."
Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax
exemption privileges of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No.
987, as above stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions
allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For
easy reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

(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.

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly 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.
(Emphasis supplied)

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph
as follows:

The Corporation shall be non-profit and shall devote all its returns 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, including its subsidiaries, is hereby declared exempt from the payment
of ALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees
 including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. (Emphasis supplied)

Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380

and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been
very easy for him to retain the same or similar language used in P.D. No. 380 P.D.
No. 938 if his intention were to preserve the indirect tax exemption of NPC.54

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his
fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the
following items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,",
included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax
exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of
enactment or issuance as narrated above in part I hereof. President Marcos must have considered
all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and
P.D. No. 759, AND came up with a very simple Section 13, R.A. No. 6395, as amended by P.D. No.
55

938.

One common theme in all these laws is that the NPC must be enable to pay its
indebtedness which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one
56

time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt
from all forms of taxes if this goal is to be achieved.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to
pay the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million
would be appropriated annually to cover the said unpaid subscription of the Government in NPC's
authorized capital stock. And significantly one of the sources of this annual appropriation of P200
million is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason
then that former President Marcos would order P200 Million to be taken partially or totally from tax
money to be used to pay the Government subscription in the NPC, on one hand, and then order the
NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the
phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption
provision for the foreign loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all taxes, fees, imposts, other charges and restrictions, including
import restrictions, by the Republic of the Philippines, or any of its agencies and
political subdivisions.
57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services, by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all direct and indirect taxes, fees, imposts, other charges and
restrictions, including import restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions. (Emphasis supplied)
58

P.D. No. 938 did not amend the same and so the tax exemption provision in Section 8 (b), R.A. No.
59

6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8
(b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign
loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax
exemption stood as is — with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to
"taxes, fees, imposts, other charges . . . to be imposed" in the future — surely, an indication that the
lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize
government receipts and expenditures by formulating and implementing a National Budget. The 60

NPC, being a government owned and controlled corporation had to be shed off its tax exemption
status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the General
Fund in the exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It
allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free
importation privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the
State, was allowed to continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of
NPC's tax exemption privileges by P.D. No. 1177 only in his Common Reply/Comment to private
61

Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER
the motion for Reconsideration had been filed. During oral arguments heard on July 9, 1992, he
proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice
Vicente Abad Santos in opinion No. 133 (S '77). A careful perusal of petitioner's senate Blue
62

Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said
P.D. No. 1177's effect on NPC's tax exemption privileges. Applying by analogy Pulido vs.
63

Pablo, the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption
64

privileges was not seasonably invoked by the petitioner.

65

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption
privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax
privileges of any government-owned or controlled corporation (GOCC). NPC included, was
reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in
Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed
as the Fiscal Incentives Revenue Board was tasked with recommending the partial or total
restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in
Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had
to submit to the Office of the President its request for the P200 million mandated by P.D. No. 758 to
be appropriated annually by the Government to cover its unpaid subscription to the NPC authorized
capital stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to the
Office of the President its internal operating budget for review due to capital inputs of the
government (P.D. No. 758) and to the national government's guarantee of the domestic and foreign
indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly
found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that
the Secretary of Finance and the Commissioner of the Budget had to establish the necessary
procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC, did
not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay
different revenue collectors for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty
and tax exemptions, whether direct or indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D. No. 1931, which reads:

"Section 1. The provisions of special or general law to the contrary

notwithstanding, all exemptions from the payment of duties, taxes,
fees, imports and other charges heretofore granted in favor of
government-owned or controlled corporations including their
subsidiaries are hereby withdrawn."

Sec. 2. The President of the Philippines and/or the Minister of

Finance, upon the recommendation of the Fiscal Incentives Review
Board created under P.D. No. 776, is hereby empowered to restore
partially or totally, the exemptions withdrawn by section 1 above. . . .
 Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it
had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977, there were no tax exemptions to be
withdrawn by section 1 which could later be restored by the Minister of Finance upon
the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently,
FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB
acted beyond their statutory authority by creating and not merely restoring the tax
exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored
NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and tax
exemptions but allowed the President upon recommendation of the FIRB to restore
those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same
terms the provisions of the act or acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the former act or acts, although
the former act or acts may be expressly repealed by the revised and consolidated
act; and all rights
and liabilities under the former act or acts are preserved and may be enforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section
23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No.
1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the
second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had
been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax
exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy
for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax
exemption privileges, which, it did, and the same were granted under FIRB Resolutions Nos. 10-
85 and 1-86 as approved by the Minister of Finance.
67 68

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both
legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax
exemption status but merely restored it. 69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather
infamous Amendment No. 6 as there was no showing that President Marcos' encroachment on
70

legislative prerogatives was justified under the then prevailing condition that he could legislate "only
if the Batasang Pambansa 'failed or was unable to act inadequately on any matter that in his
judgment required immediate action' to meet the 'exigency'. 71

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the
Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason
that in his (Marcos') judgment required immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that said Presidential Decree was issued
only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign
debt payments as a result of the economic crisis triggered by loss of confidence in the government
72
brought about by the Aquino assassination. The Philippines was then trying to reschedule its debt
payments. One of the big borrowers was the NPC which had a US$ 2.1 billion white elephant of a
73 74

Bataan Nuclear Power Plant on its back. From all indications, it must have been this grave
75

emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his
Amendment 6 power. 76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be
passed without the concurrence of a majority of all the members of the Batasang Pambansa" does 77

not apply as said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then
President Marcos under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6
authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President
Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The
same was granted under FIRB Resolution No. 17-87 dated June 24, 1987 which restored NPC's
78

tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93
(S'86).

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. There is no79

indication, however, from the records of the case whether or not similar approvals were given by
then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to
believe that a "travesty of justice" might have occurred when the Minister of Finance approved his
own recommendation as Chairman of the Fiscal Incentives Review Board as what happened
in Zambales Chromate vs. Court of Appeals when the Secretary of Agriculture and Natural
80

Resources approved a decision earlier rendered by him when he was the Director of Mines, and 81

in Anzaldo vs. Clave where Presidential Executive Assistant Clave affirmed, on appeal to
82

Malacañang, his own decision as Chairman of the Civil Service Commission. 83

Upon deeper analysis, the question arises as to whether one can talk about "due process" being
violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance
when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives
Review Board. 84

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and
scientist-doctors, respectively. Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even
a single public or private corporation — whose rights would be violated if NPC's tax exemption
privileges were to be restored. While there might have been a MERALCO before Martial Law, it is of
public knowledge that the MERALCO generating plants were sold to the NPC in line with the State
policy that NPC was to be the State implementing arm for the electrification of the entire country.
Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more
MERALCO — as a producer of electricity — which could have objected to the restoration of NPC's
tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time.
It was just asking that its tax exemption privileges be restored. It is for these reasons that, at least in
NPC's case, the recommendation and approval of NPC's tax exemption privileges under FIRB
Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as Chairman
of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not violate
procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on
October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O. 93
(S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the
legislature, the power delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and
Legislative powers. Thus, there was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a
delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be
carried out and it fixed the standard to which the delegate had to conform in the performance of his
85

functions, both qualities having been enunciated by this Court in Pelaez vs. Auditor General.
86 87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from
June 11, 1984 up to the present.

VII

The next question that projects itself is — who pays the tax?

The answer to the question could be gleamed from the manner by which the Commissaries of the
Armed Forces of the Philippines sell their goods.

By virtue of P.D. No. 83, veterans, members of the Armed of the Philippines, and their defendants
88

but groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and
other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and
distribute it over the total units of goods sold as it would any other cost. Thus, even the ordinary
supermarket buyer probably pays for the specific, ad valorem and other taxes which theses
suppliers do not charge the AFP Commissaries. 89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb
the taxes they add to the bunker fuel oil they sell to NPC.

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders
an opinion, wherein he stated and We quote:
90

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties,
fees, imposts, charges, and restrictions of the Republic of the Philippines and its
provinces, cities, and municipalities." This exemption is broad enough to include all
taxes, whether direct or indirect, which the National Power Corporation may be
required to pay, such as the specific tax on petroleum products. That it is indirect or is
 of no amount [should be of no moment], for it is the corporation that ultimately pays
it. The view which refuses to accord the exemption because the tax is first paid by
the seller disregards realities and gives more importance to form than to substance.
Equity and law always exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as

knowledge that many impositions taxpayers have to pay are in the nature of indirect
taxes. To limit the exemption granted the National Power Corporation to direct taxes
notwithstanding the general and broad language of the statue will be to thwrat the
legislative intention in giving exemption from all forms of taxes and impositions
without distinguishing between those that are direct and those that are not.
(Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very
nature of indirect taxation, the economic burden of such taxation is expected to be passed on
through the channels of commerce to the user or consumer of the goods sold. Because, however,
the NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted
from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect
taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "normal"
purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil
companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do
so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling
and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the
buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to
the BIR.

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes
HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of
which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said
E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.

xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as
amended, is hereby amended to read as follows:

Par. (b) — For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

 1. . . .

2. . . .

3. . . .

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or
less the same generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis supplied)

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going
to bear the economic burden of the ad valorem taxes. What this Court will now dispose of are
petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau of
Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed for
payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC
last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes
during the period from October 31, 1984 to April 27, 1985. Petitioner asks Us to declare this Tax
91

Credit Memo illegal as the PNC did not have indirect tax exemptions with the enactment of P.D. No.
938. As We have already ruled otherwise, the only questions left are whether NPC Is entitled to a tax
refund for the tax component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc.
and whether the Bureau of Internal Revenue properly refunded the amount to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues its
letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies
pursuant to FIRB Resolution No. 10-85. Since the tax exemption restoration was retroactive to
92

June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had
already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the
period above indicated and had billed NPC correspondingly. It should be noted that the NPC, in its
93

letter-claim dated September 11, 1985 to the Commissioner of the Bureau of Internal Revenue DID
NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part
of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National
Internal Revenue Code of 1977, as amended which reads as follows:

Sec. 230. Recover of tax erroneously or illegally collected. — No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any Manner wrongfully collected. until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding may
 be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment; Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears clearly, to have
been erroneously paid.

xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, the Commissioner
95

correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for
P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the
BIR from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when
the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of
the Deed of Assignment executed by and between NPC and Caltex (Phils.) Inc., as follows:
97

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to
Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR
from refunding said amount because of Our ruling that NPC has both direct and indirect tax
exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no
pending petition for review on certiorari of a suit for its collection before Us. At any rate, at this point
in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a claim
with the BIR because it is time-barred under Section 230 of the National Internal Revenue Code of
1977. as amended, which states:

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty REGARDLESS of any
supervening cause that may arise after payment. . . . (Emphasis supplied)

The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by
NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than two
(2) years had already elapsed from said date. At the same time, We should note that there is no
legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by
NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered
had actually been paid previously by the oil companies to the BIR.

WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby
DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby
AFFIRMED.

SO ORDERED.
G.R. No. L-14264 April 30, 1963

RAYMUNDO B. TAN, JOSE ESGUERRA, ROMAN ABASTILLAS, ANTONIO QUEBRADO,

ROMAN AGNES, ELISEO AMANDY, NICOLAS SOTOMAYOR, INESTORIO TORRENUEVA and
FELIPE TIOSAN, plaintiffs-appellees,
vs.
THE MUNICIPALITY OF PAGBILAO, ELIAS PORNOBI as Municipal Mayor of Pagbilao and
CEFERINO CAPARROS as Municipal Treasurer of Pagbilao, defendants-appellants.

Defendant municipal corporation was the owner and operator of a wharf (Exhs. E & F). On May 31,
1956, the municipal council of defendant municipality enacted Ordinance No. 11, series of 1956,
imposing certain charges and/or fees on articles or merchandises landed upon, or loaded from the
said wharf and on the strip of shoreline adjacent thereto, measuring 300 meters. The plaintiffs, who
were fishermen, merchants and proprietors of Padre Burgos, Quezon, had to pass Pagbilao in order
to bring their goods consisting of fish, charcoal, copra, firewood and other merchandise to Lucena.
The merchandise were transported in bancas or motor boats from Padre Burgos and unloaded on
the Pagbilao wharf or on the shoreline, from where they were brought to Lucena by trucks.

Pursuant to the Ordinance, defendant municipality required plaintiffs to pay the charges and fees,
which they did under protest. On January 7, 1957, alleging that the Ordinance was ultra vires, in that
the fees prescribed therein partake of the nature of import or export taxes, in the guise of wharfage
or rental fees, the plaintiffs, instituted an action, with the CFI of Quezon Province, praying:

(1) That the said Municipal ordinance be declared null and void and of no legal effect; and

(2) Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of P1,800.00
for fees collected and paid under protest.

Defendants answering the complaint, interposed the following special defenses:

1) that the fees collected at the wharf are intended for and actually being exclusively utilized
in the repair, improvement, and maintenance of the same;

2) that the municipality has made material and additional construction to date, and if the
revenues raised from these fees are sufficient, the wharf is intended to be lengthened along
the 300 meters distance by the river;

3) the presence, day and night, of a municipal employee or of a policeman at the wharf, has
resulted in the prevailing peace, order, and security of cargoes, vessels, and of the operators
therein;

4) the municipality also maintains a 300 candle power kerosene lantern at the wharf.

As counterclaim, defendants asked the payment of P6.00, for twelve truckloads of full-length
bamboos, loaded on a vessel at the wharf for which no payment had been made, in spite of
repeated demands. The court a quo rendered the following judgment:

xxx xxx xxx

 In the light of the foregoing, the Court is therefore of the opinion that Ordinance No. 11,
Series of 1956, of defendant Municipality of Pagbilao, Quezon, is null and void for having
been enacted without lawful authority ....

xxx xxx xxx

WHEREFORE, judgment is hereby rendered ordering defendant municipality of PagbiIao,

Quezon, to pay to plaintiff Raymundo B. Tan the amount of P774.25, with legal interest
thereon from the filing of the complaint, that is, from 4 February 1957, and dismissing
defendants' counterclaim against plaintiffs, with the parties bearing their own costs.

The above judgment is now before Us on appeal by the defendants, urging a reversal thereof on
seven counts, which converge on the following legal issues:

1) whether the defendant municipality can validly enact the ordinance in question and collect
the charges contained therein; and

2) whether plaintiff Tan is entitled to a refund of the fees paid to the defendant municipality.

Appellants contend that aside from the general powers of the council to enact ordinances and make
regulations (Sec. 2238 of the Administrative Code),certain provisions of said Code authorizes a
municipality to establish a wharf and collect wharfage fees, as compensation for its use, to wit —

SEC. 2242. Certain legislative powers of mandatory character.— It shall be the duty of the
municipal council, conformably with law:

xxx xxx xxx

(e) To regulate the construction, care, and use of streets, sidewalks, canals, wharves and
piers of the municipality, and prevent and remove obstacles and encroachment on the same.

SEC. 2318. Municipal ferries, wharves, markets, etc. — A municipal council shall have
authority to acquire or establish municipal ferries, wharves, markets, slaughterhouses,
pounds, and cemeteries. Public utilities thus owned by the municipality may be conducted by
the municipal authorities upon stipulated return to private parties.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without prejudice to the parties adducing other
evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët

SEC. 2320. Establishment of certain public utilities by private parties under license.— Where
provision is not made by a municipal council, pursuant to the provisions of the next two
preceding sections hereof, for maintaining or conducting ferries, wharves, markets, or
slaughterhouses requisite for the needs of the municipality, the council shall have authority,
in its discretion, to let the privilege of establishing and maintaining such utilities to private
parties by license granted upon such terms as shall be fixed by the council ....

Aside from the above provisions, Executive Order No. 255, dated April 1, 1940, states:

(6) Collection of berthing fees at municipal ports.-Municipalities may collect berthing fees at
municipal ports, pursuant to the provisions of section two thousand three hundred eighteen (2318) of
the Revised Administrative Code, not to exceed those specified in paragraph (3) hereof, provided
that such collection shall be credited to a special fund and used only for the maintenance and
improvement of the port at which the collections are made.

Appellants further contended that the wharfage fees which section 3(t), of Commonwealth Act No.
472, prohibits a municipality from collecting, are customs charges levied in connection with the
exportation or importation of goods abroad, through ports of entry, as contemplated in the Tariff and
Customs Code, but not the ordinary wharfage rentals which a municipality may collect for the use of
its wharf, in relation to local trade and local products.

On the other hand, the appellees maintain that the appellant municipality was devoid one right to
pass the ordinance in question, since the Revised Administrative Code also prohibits the imposition
of tax on any goods or merchandise carried into or out of the municipality. Section 2287 thereof,
provides —

SEC. 2287. Fundamental principles governing municipal taxation. — ... It shall not be in the
power of the council to impose a tax in any form whatever upon goods and merchandise
carried into the municipality, or out of the same, and any attempt to impose an import or
export tax upon such goods in the guise of an unreasonable charge for wharfage, use of
bridges or otherwise shall be void.

Moreover, any power granted by the Administrative Code to municipalities had been
impliedly repealed or withdrawn by Commonwealth Act No. 472, the pertinent portions of
which read —

SEC. 3. It shall be beyond the power of the municipal council and municipal district council to
impose the following taxes, charges and fees:

xxx xxx xxx

Customs duties, registration, wharfage, tonnage and other kinds of customs fees, charges
and duties.

In the light of the legal provisions applicable, We are of the opinion that the ordinance in question, is
ultra vires, and hence, null and void. The ordinance calls for a specific tax. It charges a specific sum,
ranging from one centavo and up, by the head or number, and requires no assessment beyond a
listing and classification of the objects to be charged..

A tax which imposes a specific sum by the head or number, or some standard weight or
measurement, and which requires no assessment beyond a listing and classification of the
objects to be taxed is specific tax. (We Wa Yu v. City of Lipa, G.R. No. L-9167, Sept. 27,
1956)

Aside from being a specific tax, its nature as wharfage fee is also clear from the import of the
ordinance, specifically paragraph 1, which recites -.

PANGKAT 1.— Ang lahat na mayari o tagapangasiwa ng mga sasakyan sa pantalang bayan, ay
dapat magbigay-alam sa kinauukulang katiwala ng pamahalaan, upang maisaayos ang pagdaung,
pagbaba at pagsakay ng mga kargamentos at iba pa.
The phraseology of the above paragraph points to the fact that the charges collected pursuant
thereto, correspond to the words "berthing, unloading and loading of cargoes or merchandise" which
fall under the category of wharfage fees. The change or the designation of the said fees as "rental of
municipal property" did not change their basic character as "wharfage fees". Being a specific tax, the
municipality has no right to impose the same, for taxation is an attribute of sovereignty which
municipal corporation do not enjoy (Santo Lumber Co., et al v. City of Cebu, et al., L-10196, Jan. 22,
1958; 54 O.G. 5327; Saldana v. City of Iloilo, L-10470, June 26, 1958). It shall not be in the power of
the council to impose a tax in any form whatever upon goods and merchandise carried into the
municipality or out of the same, and any attempt to impose such tax in the guise of wharfage fee or
charge is void (Sec. 2287, Rev. Adm. Code). And being wharfage fee (Phil. Sugar Central v. Coll. of
Customs, 51 Phil. 131), it is likewise beyond the power of the municipal council and municipal district
council to impose (Sec. 3, Comm. Act No. 472, supra).

In the case at bar, aside from the fact that the right of the municipality to collect wharfage fees is
doubtful for, at most, its claim is based merely by inference, implications and deductions, which have
no place in the interpretation of the power to tax of a municipal corporation (Icard v. City Council of
Baguio, et al., 46 Off. Gaz., Suppl. No. 11, p. 320; Medina, et al. v. City of Baguio, 48 Off. Gaz., 11,
p. 4729) no less than two Secretaries of the Department of Justice, (Secretaries Jose Abad Santos &
Bengzon) expressed the opinion that, "in view of section 3, paragraph (t), Commonwealth Act No.
472, which expressly forbids municipalities from imposing wharfage fees, a municipal ordinance
levying wharfage or berthing fees is illegal and void, ... (Opinion No. 373, series of 1940 and No.
165, series of 1951). Opinions and rulings of officials of the government called upon to execute or
implement administrative laws command much respect and weight (Regalado v. Yulo, 61 Phil. 173;
Grapilon v. Mun. Council of Carigara, L-12347, May 30, 1961)

It should be noted that previous to the ordinance in question (No. 11), ordinance No. 9 was enacted
by the same municipal council, providing for "wharfage fees" for goods and merchandise only. But
because the Provincial Board ruled the to be null and void, because the prescribed fees were
unreasonable and were obviously export or import taxes in the guise of wharfage fees which are
contrary to the provisions of section 2287 of the Administrative Code, the municipal council of
Pagbilao enacted Ordinance No. 11, providing for the wharfage of boats and vessels and of goods
and merchandise; and while it fixed the fees or charges for loading and unloading goods and
merchandise, it did not state the berthing fees for boats and vessels carrying the goods, all of which
go to show that the council wanted only to impose specific tax on the goods and merchandise, which
was the same objective it had, when the annulled Ordinance No. 9 was promulgated.

The question as to whether or not the charges paid should be returned, must be answered in the
affirmative. Not only were the payments made under protest, but they were also collected under an
invalid ordinance. In a number of cases, We have ruled that monies collected under invalid acts or
tax laws are refundable, even if the payments were voluntary (East Asiatic Co., Ltd. v. City of Davao,
L-16253, Aug. 21, 1962).

It is insinuated that invalidating the ordinance would leave the municipality with no means to defray
the expenses for operation, repair and maintenance of the wharf in question. It would seem,
however, that the municipality will not be absolutely helpless and hopeless, for there is always some
remedy somewhere, and those indicated in sections 2318 and 2320 of the Adm. Code, (supra) may
be availed of.

IN VIEW OF ALL THE FOREGOING, we find that the decision appealed from is in conformity with
the law and jurisprudence on the matter. The same should be, as it is hereby affirmed, in all
respects. No costs.
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a
re-examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the
payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring
all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner
Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil.
212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come
within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the
Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while
Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on
the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by
the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at
bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks
of "registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
with a categorical statement "No fees shall be charged." (lbid.,Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law,
It is not held liable for a tax but for a registration fee. It therefore cannot make use of
a backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition
of additional tax on privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30,
1969.) A special science fund was thereby created and its title expressly sets forth
that a tax on privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly specifies
the" Philippine tax."(Cooley to be paid as distinguished from the registration fee
under the Motor Vehicle Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation could by
subdivision the point be susceptible of the interpretation that a tax rather than a fee
was levied. What is thus most apparent is that where the legislative body relies on its
 authority to tax it expressly so states, and where it is enacting a regulatory measure,
it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand,
held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional. for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)

From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portion—about 5 per centum—of the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides that
all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
principal functions—the construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act
shall be imposed," thus implying that the charges therein imposed—though called
fees—are of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which
reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other
competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
 of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law
(Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.—Twenty per centum of the money

collected under the provisions of this Act shall accrue to the road and bridge funds of
the different provinces and chartered cities in proportion to the centum shall during
the next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and Communications
for projects recommended by the Director of Public Works in the different provinces
and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of

this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).

It appears clear from the above provisions 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. On the other hand, the Philippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.—No original registration of motor

vehicles subject to payment of taxes, customs s duties or other charges shall be
accepted unless proof of payment of the taxes due thereon has been presented to
the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of regulation,
As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of
taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees.
Isabela such case, the fees may properly be regarded as taxes even though they
also serve as an instrument of regulation. 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. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs.
4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954,
which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in
Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).

Indeed, 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 (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). 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." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an
"additional" tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act
41383. 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. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for
rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular
traffic exploded in number and motor vehicles became absolute necessities without which modem
life as we know it would stand still, Congress found the registration of vehicles a very convenient
way of raising much needed revenues. Without changing the earlier deputy. of registration payments
as "fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant
to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of
government even if one fifth or less of the amount collected is set aside for the operating expenses
of the agency administering the program.
May the respondent administrative agency be required to refund the amounts stated in the complaint
of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448
dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative
franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July
11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%)
of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature,
or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby expressly
exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed
by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary

notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this
section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable
net income as are imposed by this section upon associations or
corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the
law intended all corporate taxpayers to pay income tax as provided by the statute.
There can be no doubt as to the power of Congress to repeal the earlier exemption it
granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of
the Constitution as amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and unambiguous.
There is a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the petition for
lack of merit. The decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
 In consideration of the franchise and rights hereby granted, the grantee shall pay to
the Philippine Government during the lifetime of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail,
and freight revenues. from its outgoing flights shall be subject to this
law.

The tax paid by the grantee under either of the above alternatives shall be in lieu of
all other taxes, duties, royalties, registration, license and other fees and charges of
any kind, nature or description imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government, agency, now or
in the future, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees
paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is
enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

G.R. Nos. L-28508-9 July 7, 1989

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its
ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the
amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to
April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York
head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of
P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the
additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as
overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have
been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of
the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the
overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the
margin fees were deductible from gross income either as a tax or as an ordinary and necessary
business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same
reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally
deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for
1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was
appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA
decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92
for 1960. That is the issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police
measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to
the Central Bank on its profit remittances to its New York head office should be deductible from
ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all
taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade,
business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative history
of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax
on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-
1960. It was enacted by Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating expenditures of the government. It was,
moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed
out that —

We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the
legislature, steps taken in the enactment of a law, or the history of the passage of the law through
the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or
of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with,
and in any way connected with, the passage of the act, in order that they may properly interpret the
legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a matter of
fact, there may be no resort to the legislative history of the enactment of a statute, the language of
which is plain and unambiguous, since such legislative history may only be resorted to for the
purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held that a margin
fee is not a tax but an exaction designed to curb the excessive demands upon our international
reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, the Court stated through Justice Jose P.
2

Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, 'curtail any
excessive demand upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures, exchange restrictions
have come to serve various purposes, such as limiting non-essential imports,
protecting domestic industry and when combined with the use of multiple currency
rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic
development programs. The different measures of exchange control or restriction
cover different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the case of
the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part of the
rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence
should not form part of the exchange rate, suffice it to state that We have already held the contrary
for the reason that a tax is levied to provide revenue for government operations, while the proceeds
of the margin fee are applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, the3

same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes:
 Neither do we find merit in the argument that the 20% retention of exporter's foreign
exchange constitutes an export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds of the 20% retention, as we
have seen, are applied to strengthen the Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its police power
and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered
necessary and ordinary business expenses and therefore still deductible from its gross income. The
fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the conduct of its corporate
affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:

SEC. 30. Deductions from gross income in computing net income there shall be
allowed as deductions

(a) Expenses:

(1) In general. — All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; traveling
expenses while away from home in the pursuit of a trade or business; and rentals or
other payments required to be made as a condition to the continued use or
possession, for the purpose of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations. —

In the case of a non-resident alien individual or a foreign corporation, the expenses
deductible are the necessary expenses paid or incurred in carrying on any business
or trade conducted within the Philippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, the Court laid down the rules on the deductibility of business expenses, thus:
4

The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must
be able to prove that he is entitled to the deduction which the law allows. As
previously adverted to, the law allowing expenses as deduction from gross income
for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue
which allows a deduction of 'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the statute, must fall
squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
 addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense
is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States delving on the
interpretation of the terms 'ordinary and necessary' as used in the federal tax laws,
no adequate or satisfactory definition of those terms is possible. Similarly, this Court
has never attempted to define with precision the terms 'ordinary and necessary.'
There are however, certain guiding principles worthy of serious consideration in the
proper adjudication of conflicting claims. Ordinarily, an expense will be considered
'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal
in relation to the business of the taxpayer and the surrounding circumstances. The
term 'ordinary' does not require that the payments be habitual or normal in the sense
that the same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in
each case on the particular facts and the relation of the payment to the type of
business in which the taxpayer is engaged. The intention of the taxpayer often may
be the controlling fact in making the determination. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn
depends on the extent and permanency of the work accomplished by the
expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held
on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary

deductible expense, it may be asked: Were the margin fees paid by petitioner on its
profit remittance to its Head Office in New York appropriate and helpful in the
taxpayer's business in the Philippines? Were the margin fees incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were
the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in
the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not
expenses in connection with the production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of said incomes;
expenses for the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income taxpayer.

xxx

Since the margin fees in question were incurred for the remittance of funds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never be
said therefore that the margin fees were appropriate and helpful in the development
of petitioner's business in the Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively
 or for the purpose of realizing a profit or of minimizing a loss in the Philippines
exclusively. If at all, the margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly
not in the Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses
are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is
error. The public respondent is correct when it asserts that "the paramount rule is that claims for
deductions are a matter of legislative grace and do not turn on mere equitable considerations ... .
The taxpayer in every instance has the burden of justifying the allowance of any deduction
claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or
business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of
P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.

SO ORDERED.

Lozano vs. Energy Regulatory Board

GR 95119-21, December 18,1990

In G.R. No. 96266, petitioner Maceda seeks nullification of the Energy Regulatory Board (ERB)
Orders dated December 5 and 6, 1990 on the ground that the hearings conducted on the second
provisional increase in oil prices did not allow him substantial cross-examination, in effect, allegedly,
a denial of due process.

The facts of the case are as follows:

Upon the outbreak of the Persian Gulf conflict on August 2, 1990, private respondents oil companies
filed with the ERB their respective applications on oil price increases (docketed as ERB Case Nos.
90-106, 90-382 and 90-384, respectively).

On September 21, 1990, the ERB issued an order granting a provisional increase of P1.42 per liter.
Petitioner Maceda filed a petition for Prohibition on September 26, 1990 (E. Maceda v. ERB, et al.,
G.R. No. 95203), seeking to nullify the provisional increase. We dismissed the petition on December
18, 1990, reaffirming ERB's authority to grant provisional increase even without prior hearing,
pursuant to Sec. 8 of E.O. No. 172, clarifying as follows:

What must be stressed is that while under Executive Order No. 172, a hearing is
indispensable, it does not preclude the Board from ordering, ex-parte, a provisional increase,
as it did here, subject to its final disposition of whether or not: (1) to make it permanent; (2) to
reduce or increase it further; or (3) to deny the application. Section 3, paragraph (e) is akin to
a temporary restraining order or a writ of preliminary attachment issued by the courts, which
are given ex-parte and which are subject to the resolution of the main case.
 Section 3, paragraph (e) and Section 8 do not negate each other, or otherwise, operate
exclusively of the other, in that the Board may resort to one but not to both at the same time.
Section 3(e) outlines the jurisdiction of the Board and the grounds for which it may decree a
price adjustment, subject to the requirements of notice and hearing. Pending that, however, it
may order, under Section 8, an authority to increase provisionally, without need of a hearing,
subject to the final outcome of the proceeding. The Board, of course, is not prevented from
conducting a hearing on the grant of provisional authority-which is of course, the better
procedure — however, it cannot be stigmatized later if it failed to conduct one. (pp. 129-
130, Rollo) (Emphasis supplied)

In the same order of September 21, 1990, authorizing provisional increase, the ERB set the
applications for hearing with due notice to all interested parties on October 16, 1990. Petitioner
Maceda failed to appear at said hearing as well as on the second hearing on October 17, 1990.

To afford registered oppositors the opportunity to cross-examine the witnesses, the ERB set the
continuation of the hearing to October 24, 1990. This was postponed to November 5, 1990, on
written notice of petitioner Maceda.

On November 5, 1990, the three oil companies filed their respective motions for leave to file or admit
amended/supplemental applications to further increase the prices of petroleum products.

The ERB admitted the respective supplemental/amended petitions on November 6, 1990 at the
same time requiring applicants to publish the corresponding Notices of Public Hearing in two
newspapers of general circulation (p. 4, Rollo and Annexes "F" and "G," pp. 60 and 62, Rollo).

Hearing for the presentation of the evidence-in-chief commenced on November 21, 1990 with ERB
ruling that testimonies of witnesses were to be in the form of Affidavits (p. 6, Rollo). ERB
subsequently outlined the procedure to be observed in the reception of evidence, as follows:

CHAIRMAN FERNANDO:

Well, at the last hearing, applicant Caltex presented its evidence-in-chief and there is an
understanding or it is the Board's wish that for purposes of good order in the presentation of
the evidence considering that these are being heard together, we will defer the cross-
examination of applicant Caltex's witness and ask the other applicants to present their
evidence-in-chief so that the oppositors win have a better Idea of what an of these will lead
to because as I mentioned earlier, it has been traditional and it is the intention of the Board to
act on these applications on an industry-wide basis, whether to accept, reject, modify or
whatever, the Board win do it on an industry wide basis, so, the best way to have (sic) the
oppositors and the Board a clear picture of what the applicants are asking for is to have all
the evidence-in-chief to be placed on record first and then the examination will come later,
the cross-examination will come later. . . . (pp. 5-6, tsn., November 23, 1990, ERB Cases
Nos. 90-106, 90382 and 90-384). (p. 162, Rollo)

Petitioner Maceda maintains that this order of proof deprived him of his right to finish his cross-
examination of Petron's witnesses and denied him his right to cross-examine each of the witnesses
of Caltex and Shell. He points out that this relaxed procedure resulted in the denial of due process.

We disagree. The Solicitor General has pointed out:

 . . . The order of testimony both with respect to the examination of the particular witness and
to the general course of the trial is within the discretion of the court and the exercise of this
discretion in permitting to be introduced out of the order prescribed by the rules is not
improper (88 C.J.S. 206-207).

Such a relaxed procedure is especially true in administrative bodies, such as the ERB
which in matters of rate or price fixing is considered as exercising a quasi-legislative, not
quasi-judicial, function As such administrative agency, it is not bound by the strict or technical
rules of evidence governing court proceedings (Sec. 29, Public Service Act; Dickenson v.
United States, 346, U.S. 389, 98 L. ed. 132, 74 S. St. 152). (Emphasis supplied)

In fact, Section 2, Rule I of the Rules of Practice and Procedure Governing Hearings Before
the ERB provides that —

These Rules shall govern pleadings, practice and procedure before the Energy Regulatory
Board in all matters of inquiry, study, hearing, investigation and/or any other proceedings
within the jurisdiction of the Board. However, in the broader interest of justice, the Board
may, in any particular matter, except itself from these rules and apply such suitable
procedure as shall promote the objectives of the Order.

(pp. 163-164, Rollo)

Petitioner Maceda also claims that there is no substantial evidence on record to support the
provisional relief.

We have, in G.R. Nos. 95203-05, previously taken judicial notice of matters and events related to the
oil industry, as follows:

. . . (1) as of June 30, 1990, the OPSF has incurred a deficit of P6.1 Billion; (2) the exchange
rate has fallen to P28.00 to $1.00; (3) the country's balance of payments is expected to
reach $1 Billion; (4) our trade deficit is at P2.855 Billion as of the first nine months of the
year.

. . . (p. 150, Rollo)

The Solicitor General likewise commented:

Among the pieces of evidence considered by ERB in the grant of the contested provisional
relief were: (1) certified copies of bins of lading issued by crude oil suppliers to the private
respondents; (2) reports of the Bankers Association of the Philippines on the peso-dollar
exchange rate at the BAP oil pit; and (3) OPSF status reports of the Office of Energy Affairs.
The ERB was likewise guided in the determination of international crude oil prices by
traditional authoritative sources of information on crude oil and petroleum products, such as
Platt's Oilgram and Petroleum Intelligence Weekly. (p. 158, Rollo)

Thus, We concede ERB's authority to grant the provisional increase in oil price, as We note that the
Order of December 5, 1990 explicitly stated:

in the light, therefore, of the rise in crude oil importation costs, which as earlier mentioned,
reached an average of $30.3318 per barrel at $25.551/US $ in September-October 1990; the
huge OPSF deficit which, as reported by the Office of Energy Affairs, has amounted to P5.7
 Billion (based on filed claims only and net of the P5 Billion OPSF) as of September 30, 1990,
and is estimated to further increase to over P10 Billion by end December 1990; the decision
of the government to discontinue subsidizing oil prices in view of inflationary pressures; the
apparent inadequacy of the proposed additional P5.1 Billion government appropriation for
the OPSF and the sharp drop in the value of the peso in relation to the US dollar to P28/US
$, this Board is left with no other recourse but to grant applicants oil companies further relief
by increasing the prices of petroleum products sold by them. (p. 161, Rollo)

Petitioner Maceda together with petitioner Original (G.R. No. 96349) also claim that the provisional
increase involved amounts over and above that sought by the petitioning oil companies.

The Solicitor General has pointed out that aside from the increase in crude oil prices, all the
applications of the respondent oil companies filed with the ERB covered claims from the OPSF.

We shall thus respect the ERB's Order of December 5, 1990 granting a provisional price increase on
petroleum products premised on the oil companies' OPSF claims, crude cost peso differentials, forex
risk for a subsidy on sale to NPC (p. 167, Rollo), since the oil companies are "entitled to as much
relief as the fact alleged constituting the course of action may warrant," (Javellana v. D.O. Plaza
Enterprises, Inc., G.R. No. L-28297, March 30, 1970, 32 SCRA 261 citing Rosales v. Reyes, 25 Phil.
495; Aguilar v. Rubiato, 40 Phil. 470) as follows:

Per Liter

Weighted

Petron Shell Caltex Average

Crude Cost P3.11 P3.6047 P2.9248 P3.1523

Peso Cost

Diffn'l 2.1747 1.5203 1.5669 1.8123

Forex Risk

Fee -0.1089 -0,0719 -0.0790 -0.0896

Subsidy on

Sales to NPC 0.1955 0.0685 0.0590 0.1203

Total Price

Increase

Applied for P59.3713 P5.1216 P4.4717 P4.9954

Less: September 21 Price

Relief
 Actual Price Increase P1.42

Actual Tax Reduction:

Ad Valorem Tax

(per Sept. 1, 1990

price build-up) P1.3333

Specific Tax (per

Oct. 5, 1990 price

build-up) .6264 .7069 2.1269

Net Price Increase

Applied for 2.8685

Nonetheless, it is relevant to point out that on December 10, 1990, the ERB, in response to the
President's appeal, brought back the increases in Premium and Regular gasoline to the levels
mandated by the December 5, 1990 Order (P6.9600 and P6.3900, respectively), as follows:

Product In Pesos Per Liter

OPSF

Premium Gasoline 6.9600

Regular Gasoline 6.3900

Avturbo 4.9950

Kerosene 1.4100

Diesel Oil 1.4100

Fuel Oil/Feedstock 0.2405

LPG 1.2200

Asphalt 2.5000

Thinner 2.5000

In G.R. No. 96349, petitioner Original additionally claims that if the price increase will be used to
augment the OPSF this will constitute illegal taxation. In the Maceda case, (G.R. Nos. 95203-
05, supra) this Court has already ruled that "the Board Order authorizing the proceeds generated by
the increase to be deposited to the OPSF is not an act of taxation but is authorized by Presidential
Decree No. 1956, as amended by Executive Order No. 137.

The petitions of E.O. Original et al. (G.R. No. 96349) and C.S. Povedas, Jr. (G.R. No. 96284),
insofar as they question the ERB's authority under Sec. 8 of E.O. 172, have become moot and
academic.

We lament Our helplessness over this second provisional increase in oil price. We have stated that
this "is a question best judged by the political leadership" (G.R. Nos. 95203-05, G.R. Nos. 95119-
21, supra). We wish to reiterate Our previous pronouncements therein that while the government is
able to justify a provisional increase, these findings "are not final, and it is up to petitioners to
demonstrate that the present economic picture does not warrant a permanent increase."

In this regard, We also note the Solicitor General's comments that "the ERB is not averse to the idea
of a presidential review of its decision," except that there is no law at present authorizing the same.
Perhaps, as pointed out by Justice Padilla, our lawmakers may see the wisdom of allowing
presidential review of the decisions of the ERB since, despite its being a quasi-judicial body, it is still
"an administrative body under the Office of the President whose decisions should be appealed to the
President under the established principle of exhaustion of administrative remedies," especially on a
matter as transcendental as oil price increases which affect the lives of almost an Filipinos.

ACCORDINGLY, the petitions are hereby DISMISSED.

SO ORDERED.

G.R. No. L-46245 May 31, 1982

MERALCO SECURITIES INDUSTRIAL CORPORATION, petitioner,
vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF
LAGUNA and PROVINCIAL ASSESSOR OF LAGUNA, respondents.

In this special civil action of certiorari, Meralco Securities Industrial Corporation assails the decision
of the Central Board of Assessment Appeals (composed of the Secretary of Finance as chairman
and the Secretaries of Justice and Local Government and Community Development as members)
dated May 6, 1976, holding that Meralco Securities' oil pipeline is subject to realty tax.

The record reveals that pursuant to a pipeline concession issued under the Petroleum Act of 1949,
Republic Act No. 387, Meralco Securities installed from Batangas to Manila a pipeline system
consisting of cylindrical steel pipes joined together and buried not less than one meter below the
surface along the shoulder of the public highway. The portion passing through Laguna is about thirty
kilometers long.

The pipes for white oil products measure fourteen inches in diameter by thirty-six feet with a
maximum capacity of 75,000 barrels daily. The pipes for fuel and black oil measure sixteen inches by
forty-eight feet with a maximum capacity of 100,000 barrels daily.

The pipes are embedded in the soil and are firmly and solidly welded together so as to preclude
breakage or damage thereto and prevent leakage or seepage of the oil. The valves are welded to
the pipes so as to make the pipeline system one single piece of property from end to end.
In order to repair, replace, remove or transfer segments of the pipeline, the pipes have to be cold-cut
by means of a rotary hard-metal pipe-cutter after digging or excavating them out of the ground where
they are buried. In points where the pipeline traversed rivers or creeks, the pipes were laid beneath
the bed thereof. Hence, the pipes are permanently attached to the land.

However, Meralco Securities notes that segments of the pipeline can be moved from one place to
another as shown in the permit issued by the Secretary of Public Works and Communications which
permit provides that the government reserves the right to require the removal or transfer of the pipes
by and at the concessionaire's expense should they be affected by any road repair or improvement.

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial assessor of Laguna
treated the pipeline as real property and issued Tax Declarations Nos. 6535-6537, San Pedro; 7473-
7478, Cabuyao; 7967-7971, Sta. Rosa; 9882-9885, Biñan and 15806-15810, Calamba, containing
the assessed values of portions of the pipeline.

Meralco Securities appealed the assessments to the Board of Assessment Appeals of Laguna
composed of the register of deeds as chairman and the provincial auditor as member. That board in
its decision of June 18, 1975 upheld the assessments (pp. 47-49, Rollo).

Meralco Securities brought the case to the Central Board of Assessment Appeals. As already stated,
that Board, composed of Acting Secretary of Finance Pedro M. Almanzor as chairman and Secretary
of Justice Vicente Abad Santos and Secretary of Local Government and Community Development
Jose Roño as members, ruled that the pipeline is subject to realty tax (p. 40, Rollo).

A copy of that decision was served on Meralco Securities' counsel on August 27, 1976. Section 36 of
the Real Property Tax Code, Presidential Decree No. 464, which took effect on June 1, 1974,
provides that the Board's decision becomes final and executory after the lapse of fifteen days from
the date of receipt of a copy of the decision by the appellant.

Under Rule III of the amended rules of procedure of the Central Board of Assessment Appeals (70
O.G. 10085), a party may ask for the reconsideration of the Board's decision within fifteen days after
receipt. On September 7, 1976 (the eleventh day), Meralco Securities filed its motion for
reconsideration.

Secretary of Finance Cesar Virata and Secretary Roño (Secretary Abad Santos abstained) denied
the motion in a resolution dated December 2, 1976, a copy of which was received by appellant's
counsel on May 24, 1977 (p. 4, Rollo). On June 6, 1977, Meralco Securities filed the instant petition
for certiorari.

The Solicitor General contends that certiorari is not proper in this case because the Board acted
within its jurisdiction and did not gravely abuse its discretion and Meralco Securities was not denied
due process of law.

Meralco Securities explains that because the Court of Tax Appeals has no jurisdiction to review the
decision of the Central Board of Assessment Appeals and because no judicial review of the Board's
decision is provided for in the Real Property Tax Code, Meralco Securities' recourse is to file a
petition for certiorari.

We hold that certiorari was properly availed of in this case. It is a writ issued by a superior court to an
inferior court, board or officer exercising judicial or quasi-judicial functions whereby the record of a
particular case is ordered to be elevated for review and correction in matters of law (14 C.J.S. 121-
122; 14 Am Jur. 2nd 777).

The rule is that as to administrative agencies exercising quasi-judicial power there is an underlying
power in the courts to scrutinize the acts of such agencies on questions of law and jurisdiction even
though no right of review is given by the statute (73 C.J.S. 506, note 56).

"The purpose of judicial review is to keep the administrative agency within its jurisdiction and protect
substantial rights of parties affected by its decisions" (73 C.J.S. 507, See. 165). The review is a part
of the system of checks and balances which is a limitation on the separation of powers and which
forestalls arbitrary and unjust adjudications.

Judicial review of the decision of an official or administrative agency exercising quasi-judicial

functions is proper in cases of lack of jurisdiction, error of law, grave abuse of discretion, fraud or
collusion or in case the administrative decision is corrupt, arbitrary or capricious (Mafinco Trading
Corporation vs. Ople, L-37790, March 25, 1976, 70 SCRA 139, 158; San Miguel Corporation vs.
Secretary of Labor, L-39195, May 16, 1975, 64 SCRA 56, 60, Mun. Council of Lemery vs. Prov.
Board of Batangas, 56 Phil. 260, 268).

The Central Board of Assessment Appeals, in confirming the ruling of the provincial assessor and
the provincial board of assessment appeals that Meralco Securities' pipeline is subject to realty tax,
reasoned out that the pipes are machinery or improvements, as contemplated in the Assessment
Law and the Real Property Tax Code; that they do not fall within the category of property exempt
from realty tax under those laws; that articles 415 and 416 of the Civil Code, defining real and
personal property, have no application to this case; that even under article 415, the steel pipes can
be regarded as realty because they are constructions adhered to the soil and things attached to the
land in a fixed manner and that Meralco Securities is not exempt from realty tax under the Petroleum
Law (pp. 36-40).

Meralco Securities insists that its pipeline is not subject to realty tax because it is not real property
within the meaning of article 415. This contention is not sustainable under the provisions of the
Assessment Law, the Real Property Tax Code and the Civil Code.

Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land,
buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This
provision is reproduced with some modification in the Real Property Tax Code which provides:

SEC. 38. Incidence of Real Property Tax.— There shall be levied, assessed and
collected in all provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements affixed or
attached to real property not hereinafter specifically exempted. *

It is incontestable that the pipeline of Meralco Securities does not fall within any of the classes of
exempt real property enumerated in section 3 of the Assessment Law and section 40 of the Real
Property Tax Code.

Pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids,
gases or finely divided solids. It is a line of pipe running upon or in the earth, carrying with it the right
to the use of the soil in which it is placed (Note 21[10],54 C.J.S. 561).
Article 415[l] and [3] provides that real property may consist of constructions of all kinds adhered to
the soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be
separated therefrom without breaking the material or deterioration of the object.

The pipeline system in question is indubitably a construction adhering to the soil (Exh. B, p. 39,
Rollo). It is attached to the land in such a way that it cannot be separated therefrom without
dismantling the steel pipes which were welded to form the pipeline.

Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it is in a
sense machinery within the meaning of the Real Property Tax Code.

It should be borne in mind that what are being characterized as real property are not the steel pipes
but the pipeline system as a whole. Meralco Securities has apparently two pipeline systems.

A pipeline for conveying petroleum has been regarded as real property for tax purposes (Miller
County Highway, etc., Dist. vs. Standard Pipe Line Co., 19 Fed. 2nd 3; Board of Directors of Red
River Levee Dist. No. 1 of Lafayette County, Ark vs. R. F. C., 170 Fed. 2nd 430; 50 C. J. 750, note
86).

The other contention of Meralco Securities is that the Petroleum Law exempts it from the payment of
realty taxes. The alleged exemption is predicated on the following provisions of that law which
exempt Meralco Securities from local taxes and make it liable for taxes of general application:

ART. 102. Work obligations, taxes, royalties not to be changed.— Work obligations,
special taxes and royalties which are fixed by the provisions of this Act or by the
concession for any of the kinds of concessions to which this Act relates, are
considered as inherent on such concessions after they are granted, and shall not be
increased or decreased during the life of the concession to which they apply; nor
shall any other special taxes or levies be applied to such concessions, nor shall
0concessionaires under this Act be subject to any provincial, municipal or other local
taxes or levies; nor shall any sales tax be charged on any petroleum produced from
the concession or portion thereof, manufactured by the concessionaire and used in
the working of his concession. All such concessionaires, however, shall be subject
to such taxes as are of general application in addition to taxes and other levies
specifically provided in this Act.

Meralco Securities argues that the realty tax is a local tax or levy and not a tax of general
application. This argument is untenable because the realty tax has always been imposed by the
lawmaking body and later by the President of the Philippines in the exercise of his lawmaking
powers, as shown in section 342 et seq. of the Revised Administrative Code, Act No. 3995,
Commonwealth Act No. 470 and Presidential Decree No. 464.

The realty tax is enforced throughout the Philippines and not merely in a particular municipality or
city but the proceeds of the tax accrue to the province, city, municipality and barrio where the realty
taxed is situated (Sec. 86, P.D. No. 464). In contrast, a local tax is imposed by the municipal or city
council by virtue of the Local Tax Code, Presidential Decree No. 231, which took effect on July 1,
1973 (69 O.G. 6197).

We hold that the Central Board of Assessment Appeals did not act with grave abuse of discretion,
did not commit any error of law and acted within its jurisdiction in sustaining the holding of the
provincial assessor and the local board of assessment appeals that Meralco Securities' pipeline
system in Laguna is subject to realty tax.
WHEREFORE, the questioned decision and resolution are affirmed. The petition is dismissed. No
costs.

SO ORDERED.

G.R. No. L-24265 December 28, 1979

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION, plaintiff-appellant,
vs.
THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL, defendant-appellee.

A direct appeal by plaintiff company from the judgment of the Court of First Instance of Manila,
Branch VI, upholding the validity of Ordinance No. 4, Series of 1957, enacted by defendant
Municipality, which imposed "storage fees on all exportable copra deposited in the bodega within the
jurisdiction of the Municipality of Jagna Bohol.

Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated

corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which
later became Procter & Gamble Trading Company, Philippines. It is engaged in the manufacture of
soap, edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in
defendant Municipality where it stores copra purchased in the municipality and therefrom ships the
same for its manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series
of 1957, quoted hereinbelow:

AN ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA

DEPOSITED IN THE BODEGA WITHIN THE JURISDlCTI0N OF THE
MUNICIPALITY OF JAGNA BOHOL.

Be it ordained by the Municipal Council of Jagna Bohol, that:

SECTION 1. Any person, firm or corporation having a deposit of exportable copra in

the bodega, within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the
Municipal Treasury a storage fee of TEN (P0.10) CENTAVOS FOR EVERY
HUNDRED (100) kilos;

SECTION 2. All exportable copra deposited in the bodega within the Municipality of
Jagna Bohol, is part of the surveillance and lookout of the Municipal Authorities;

SECTION 3. Any person, firm or corporation found violating the provision of the
preceding section of this Ordinance shall be punished by a fine of not less than TWO
HUNDRED (P 200.00) PESOS, nor more than FOUR HUNDRED (P400.00) PESOS,
or an imprisonment of hot less than ONE MONTH, nor more than THREE MONTHS,
or both fines and imprisonment at the discretion of the court.

SECTION 4. This Ordinance shall take effect on January 1, 1958.

APPROVED December 13,1957.

(Sgd.) TEODORO B. GALACAR Municipal Mayor 1

For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under
protest, storage fees in the total sum of 1142,265.13, broken down as follows:

Procter & Gamble Trading Co. Procter & Gamble Philippine Manufacturing Corp.

5
19
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8 , __
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7 __
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19 7 __
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19 3 P
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 6 27
4 9.
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19 _ P
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P P
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, 9.
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T P
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2

On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it
prayed that 1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be
pronounced ultra-vires and void for being beyond the power of the Municipality to enact; and 2) that
defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid under
protest; and costs.
For its part, defendant Municipality upheld its power to enact the Ordinance in question; questioned
the jurisdiction of the trial Court to take cognizance of the action under section 44(h) of the Judiciary
Act in that it seeks to enjoin the enforcement of a Municipal Ordinance; and pleaded prescription and
laches for plaintiff's failure to timely question the validity of the said Ordinance.

After the parties had agreed to submit the case for judgment on the pleadings, the trial Court upheld
its jurisdiction as well as defendant Municipality's power to enact the Ordinance in question under
section 2238 of the Revised Administrative Code, otherwise known as the general welfare clause,
and declared that plaintiff's right of action had prescribed under the 5-year period provided for by
Article 1149 of the Civil Code.

In this appeal, plaintiff interposes the following Assignments of Error:

THE TRIAL COURT ERRED IN HOLDING THAT ORDINANCE NO. 4, SERIES OF

1957, ENACTED BY THE DEFENDANT MUNICIPALITY OF JAGNA BOHOL, IS A
VALID, LEGAL AND ENFORCEABLE ORDINANCE AGAINST THE PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT PAYMENT OF THE TAX UNDER
ORDINANCE NO. 4, SERIES OF 1957 WAS NOT DONE UNDER PROTEST.

III

THE TRIAL COURT ERRED IN HOLDING THAT THE ACTION OF THE PLAINTIFF
TO ANNUL AND TO DECLARE ORDINANCE NO. 4, SERIES OF 1957 OF THE
DEFENDANT HAS ALREADY PRESCRIBED.

IV

AND, FINALLY, THE TRIAL COURT ERRED IN NOT HOLDING ORDINANCE NO. 4.
SERIES OF 1957 ULTRA-VIRES AND VOID AND IN NOT ORDERING THE
REFUND OF TAXES PAID THEREUNDER. 3

It is plaintiff's submission that the subject Ordinance is inapplicable to it as it is not engaged in the
business or trade of storing copra for others for compensation or profit and that the only copra it
stores is for its exclusive use in connection with its business as manufacturer of soap, edible oil,
margarine and other similar products; that the levy is intended as an "export tax" as it is collected on
"exportable copra' , and, therefore, beyond the power of the Municipality to enact; and that the fee of
P0.10 for every 100 kilos of copra stored in the bodega is excessive, unreasonable and oppressive
and is imposed more for revenue than as a regulatory fee.

The main question to determine is whether defendant Municipality was authorized to impose and
collect the storage fee provided for in the challenged Ordinance under the laws then prevailing.

The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon
municipalities by Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing
law when the Ordinance was enacted (Procter & Gamble Trading Co. vs. Municipality of Medina, 43
SCRA 130 11972]). Section 1 thereof reads:
 Section 1. A municipal council or municipal district council shall have the authority to
impose municipal license taxes upon persons engaged in any occupation or
business, or exercising privileges in the municipality or municipal district, by requiring
them to secure licenses at rates fixed by the municipal council, or municipal district
council, and to collect fees and charges for services rendered by the municipality or
municipal district and shall otherwise have power to levy for public local purposes,
and for school purposes, including teachers' salaries, just and uniform taxes other
than percentage taxes and taxes on specified articles.

Under the foregoing provision, a municipality is authorized to impose three kinds of licenses: (1) a
license for regulation of useful occupation or enterprises; (2) license for restriction or regulation of
non-useful occupations or enterprises; and (3) license for revenue. It is thus unnecessary, as
4

plaintiff would have us do, to determine whether the subject storage fee is a tax for revenue
purposes or a license fee to reimburse defendant Municipality for service of supervision because
defendant Municipality is authorized not only to impose a license fee but also to tax for revenue
purposes.

The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on
persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega
within the Municipality's territorial jurisdiction. For the term "license tax" has not acquired a fixed
meaning. It is often used indiseriminately to designate impositions exacted for the exercise of
various privileges. In many instances, it refers to revenue-raising exactions on privileges or
activities. 5

Not only is the imposition of the storage fee authorized by the general grant of authority under
section 1 of CA No. 472. Neither is the storage fee in question prohibited nor beyond the power of
the municipal councils and municipal district councils to impose, as listed in section 3 of said CA No.
472. 6

Moreover, the business of buying and selling and storing copra is property the subject of regulation
within the police power granted to municipalities under section 2238 of the Revised Administrative
Code or the "general welfare clause", which we quote hereunder:

Section 2238. General power of council to enact ordinances and make regulations.
— The municipal council shall enact such ordinances and make such regulations, not
repugnant to law, as may be necessary to carry into effect and discharge the powers
and duties conferred upon it by law and such as shall seem necessary and proper to
provide for the health and safety, promote the prosperity, improve the morals, peace,
good order, comfort, and convenience of the municipality and the inhabitants thereof,
and for the protection of property therein.

For it has been held that a warehouse used for keeping or storing copra is an establishment likely to
endanger the public safety or likely to give rise to conflagration because the oil content of the copra
when ignited is difficult to put under control by water and the use of chemicals is necessary to put out
the fire. And as the Ordinance itself states, all exportable copra deposited within the municipality is
7

"part of the surveillance and lookout of municipal authorities.

Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within
defendant's territory is beyond the cost of regulation and surveillance is not well taken. As
enunciated in the case of Victorias Milling Co. vs. Municipality of Victorias, supra.
 The cost of regulation cannot be taken as a gauge, if the municipality really intended
to enact a revenue ordinance. For, 'if the charge exceeds the expense of issuance of
a license and costs of regulation, it is a tax'. And if it is, and it is validly imposed, 'the
rule that license fees for regulation must bear a reasonable relation to the expense of
the regulation has no application'.

Municipal corporations are allowed wide discretion in determining the rates of imposable license fees
even in cases of purely police power measures. In the absence of proof as to municipal conditions
and the nature of the business being taxed as well as other factors relevant to the issue of
arbitrariness or unreasonableness of the questioned rates, Courts will go slow in writing off an
Ordinance. In the case at bar, appellant has not sufficiently shown that the rate imposed by the
8

questioned Ordinance is oppressive, excessive and prohibitive.

Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not
engaged in the business or occupation of buying or selling of copra but is only storing copra in
connection with its main business of manufacturing soap and other similar products, and that to be
compelled to pay the storage fees would amount to double taxation, does not inspire assent. The
question of whether appellant is engaged in that business or not is irrelevant because the storage
fee, as previously mentioned, is an imposition on the privilege of storing copra in a bodega within
defendant municipality by persons, firms or corporations. Section 1 of the Ordinance in question
does not state that said persons, firms or corporations should be engaged in the business or
occupation of buying or selling copra. Moreover, by plaintiff's own admission that it is a consolidated
corporation with its trading company, it will be hard to segregate the copra it uses for trading from
that it utilizes for manufacturing.

Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question
does not amount to double taxation. For double taxation to exist, the same property must be taxed
twice, when it should be taxed but once. Double taxation has also been defined as taxing the same
person twice by the same jurisdiction for the same thing. Surely, a tax on plaintiff's products is
9

different from a tax on the privilege of storing copra in a bodega situated within the territorial
boundary of defendant municipality.

Plaintiff's further contention that the storage fee imposed by the Ordinance is actually intended to be
an export tax, which is expressly prohibited by section 2287 of the Revised Administrative Code, is
without merit. Said provision reads as follows:

Section 2287 ...

It shall not be in the power of the municipal council to impose a tax in any form
whatever upon goods and merchandise carried into the municipality, or out of the
same, and any attempt to impose an import or export tax upon such goods in the
guise of an unreasonable charge for wharfage use of bridges or otherwise, shall be
void.

xxx xxx xxx

We have held that only where there is a clear showing that what is being taxed is an export to any
foreign country would the prohibition come into play. When the Ordinance itself speaks of
10

"exportable" copra, the meaning conveyed is not exclusively export to a foreign country but shipment
out of the municipality. The storage fee impugned is not a tax on export because it is imposed not
only upon copra to be exported but also upon copra sold and to be used for domestic purposes if
stored in any warehouse in the Municipality and the weight thereof is 100 kilos or more. 11
Thus finding the Ordinance in question to be valid, legal and enforceable, we find it unnecessary to
discuss the ascribed error that the Court a quo erred in declaring that appellant had not paid the
taxes under protest.

However, we find merit in plaintiff's contention that the lower Court erred in ruling that its action has
prescribed under Article 1149 of the Civil Code, which provides for a period of five years for all
actions whose periods are not fixed in that Code. The case of Municipality of Opon vs. Caltex
Phil., is authority for the view that the period for prescription of actions to recover municipal license
12

taxes is six years under Article 1145(2) of the Civil Code. Thus, plaintiff's action brought within six
years from the time the right of action first accrued in 1958 has not yet prescribed.

WHEREFORE, affirming the judgment appealed, from, we sustain the validity of Ordinance No. 4,
Series of 1957, of defendant Municipality of Jagna Bohol, under the laws then prevailing.

Costs against plaintiff-appellant.

SO ORDERED.

GOLDEN RIBBON LUMBER COMPANY, INC., plaintiff-appellee,

vs.
THE CITY OF BUTUAN and FRANCISCO MAGNO, in his capacity as City Treasurer of the City
of Butuan, defendants-appellants.

Appeal taken by the City of Butuan and Francisco Magno, as City Treasurer of the City of Butuan,
from the decision of the Court of First Instance of Agusan in Civil Case No. 624 declaring void
Ordinance No. 5, as amended, of said City, and ordering them to refund to appellee, Golden Ribbon
Lumber Company, Inc., the sum of P1,190.92 paid by the latter as tax, under protest, with legal
interests thereon from the filing of the complaint until fully paid, and to pay the costs.

Appellee, a duly organized domestic corporation, operated a lumber mill and lumber yard in Butuan
City. Pursuant to the provisions of Section 1 of Ordinance No. 5, as amended by Ordinance Nos. 9,
10, 47 and 49 of said city, appellee paid to appellants the taxes provided for therein amounting to the
total sum P2,069.26. Claiming that said ordinance, as amended, was void, it later brought the
present action to have it so declared; to recover the amount mentioned heretofore, and to have
appellants permanently enjoined from enforcing said ordinance, as amended.

After the denial of their motion to dismiss the complaint on the ground that it did not state a cause of
action, appellants filed their answer in which, after making some denials and admissions, they
alleged, as affirmative defenses, (a) that the tax assessed under Ordinance No. 5, as amended. is a
privilege tax on business and is therefore legal under paragraph p, section 15, Article III of Republic
Act No. 523, otherwise known as the Charter of the City of Butuan, and (b) that since the payments
were not made under protest, appellee could not ask for their refund. As counterclaim they also
alleged that appellee had incurred tax delinquencies and surcharges as of July, 1957 in the amount
of P16,978.44 and additional undetermined taxes from August, 1957 up to and including January
1958 exclusive of interests under Ordinance No. 5, as amended by Ordinance No. 49, Series of
1954.

In its answer to the counterclaim appellee denied the alleged unpaid taxes and interests.
On March 7, 1959 the Court admitted appellants' amended answer and counterclaim in which they
alleged, inter alia, that after deducting the taxes paid (P2,981.81), there still remained a balance of
P33,000.74 representing appellee's tax delinquencies, surcharges and interests as of March, 1958.
The latter, answering the amended counterclaim, denied such delinquencies etc., amounting to
P33,000.74, and further averred that Ordinance No. 5, as amended, being null and void, it cannot be
compelled to pay them.

On April 25, 1959, the Court below admitted appellee's amended complaint which merely included
for recovery the taxes paid by it under the same ordinance subsequent to the filing of the original
complaint.

On February 16, 1960, both parties submitted the following stipulation of facts:

COMES NOW the plaintiff, assisted by counsel, and the defendants, through its counsel, and
to this Honorable Court respectfully submit the following stipulation of facts:

1. The plaintiff is a corporation duly organized and existing under the laws of the Philippines,
with principal office in the City of Butuan; that the defendant City of Butuan is public
corporation created and existing under the law of the Philippines; and that the other
defendant, Francisco Magno, is the City Treasurer of the City of Butuan and has been sued
in that capacity only;

2. That plaintiff pursuant to the purposes for which it was organized and as a necessary
incident to its business, established and operated a lumber yard and/or lumber mill situated
within the territorial jurisdiction of the City of Butuan;

3. That sometime in September, 1950, the defendant City of Butuan enacted and approved,
through its Municipal Board, Ordinance No. 5, copy of, which is hereto attached as Exhibit
"A" and made part of this Stipulation of Facts; that said Ordinance No. 5 was subsequently
amended by the following ordinances: Ordinance No. 9, Ordinance No. 10, Ordinance No.
47 and Ordinance No. 49, copies whereof are likewise hereto attached as Exhibit "B", Exhibit
"C", Exhibit "D" and Exhibit "E", as integral parts hereof; that the dates of enactment or
approval as well as the effectivity of each of the foregoing ordinances are indicated by the
provisions thereof;

4. That defendants maintain that the aforementioned Ordinance No. 5, and all amendments
thereto, were enacted by the defendant City of Butuan pursuant to and under the provisions
of Republic Act No. 523, as amended, otherwise known as the Charter of the City of Butuan,
more particularly Section 15, paragraph (p) thereof;

5. That the plaintiff Golden Ribbon Lumber Company, Inc., as a corporation operating a
lumber mill and/or lumber yard within the territorial jurisdiction of the defendant City of
Butuan, has sawn manufactured and/or produced a total of 7,310,567 board feet of sawn
lumber, irrespective of class, within the period from September, 1956 to March, 1958,
inclusive;

6. That plaintiff corporation has been assessed by the defendants under and pursuant to the
provision of the aforesaid Ordinance No. 5, as amended, and was found delinquent in the
payment of its tax liabilities including surcharges in the total sum of P36,552.84 for the period
from September, 1956 to March, 1958, inclusive;
7. That out of the aforestated tax liabilities and surcharges assessed against the plaintiff
corporation by the defendants pursuant to the provisions of Ordinance No. 5, as amended,
said plaintiff has paid to the defendant City of Butuan through its co-defendant, the City
Treasurer, the total sum of P2,982.11 only, broken down as follows —

Date of Payment Receipt Amount Paid

Number

Oct. 24, 1957 E-0385101 P1,000.00

Nov. 25, 1957 E-038703 180.89

Feb. 10, 1958 E-0394669 110.30

Mar. 11, 1958 H-6606335 500.00

May 14, 1958 E-2941534 1,190.92

TOTAL P2,982.11

thereby leaving still unpaid the amount of P33,570.73, pursuant to assessment;

8. That among the payments stated in the next preceding paragraph, only the last payment
— that made on May 14, 1958 in the amount of P1,190.92 was made under protest;

9. That defendants have repeatedly demanded from plaintiff payment of the aforesaid taxes,
claiming that such have been long due and payable under the provisions of Ordinance No. 5,
as amended, but plaintiff refused and still refuses to make payments up to the present,
except those mentioned in paragraph 7 of this Stipulation of Facts;

10. That, on the other hand, plaintiff since May 1958 has demanded that defendants cease
and desist from enforcing the provisions of Ordinance No. 5, as amended, but defendants
refused to comply with said plaintiff's demand;

11. That there is no question of fact involved in this case and that the only legal question for
this Court to decide and resolve is: (1) whether or not Ordinance No. 5, as amended is valid
and legal and that whether or not the plaintiff's corporation is legally bound to pay the taxes
 provided for in said ordinance in question; and (2) whether or not payments made without
protest in case of a decision in favor of the plaintiff is subject to reimbursement.

PRAYER

WHEREFORE, the parties herein respectfully pray this Honorable Court to approve the
aforegoing Stipulation of Facts and to make it the basis for a decision on the issues raised by
the pleadings.

It is further respectfully prayed that both parties be granted thirty (30) days from receipt of
notice of approval of the foregoing Stipulation of Facts within which to file simultaneously
their respective memoranda, and fifteen (15) days from receipt of the other party's
memorandum within which to file a reply thereto, and thereafter, the case shall be deemed
submitted for decision.

On February 28, 1961, the lower court rendered the appealed judgment which appellants seeks to
have Us reverse, claiming that the lower court erred in holding (a) that the tax imposed by said
Ordinance No. 5, as amended, is a sales tax on the sawn manufactured or produced lumber, which
are forest products, and in further ruling (b) that said ordinance was ultra vires and, therefore, null
and void.

The principal issue to be resolved is whether Ordinance No. 5, as originally approved or as later
amended, the pertinent part of which reads as follows:

AN ORDINANCE IMPOSING A TAX ON LUMBER MILLS

SECTION 1. — Every person, association or corporation operating a lumber mill and/or

lumber yard within the territory of the City of Butuan shall pay to the City a tax of two fifths
(P.004) centavo for every board foot of lumber sawn manufactured and/or produced
(regardless of group). The tax shall be paid within the first twenty (20), days of the following
month. If the tax is not paid within the time herein prescribed, there shall be added to the
unpaid amount a surcharge of ten per centum (10%) every month of fractional part thereof,
but in no case shall the total surcharge exceed twenty-five per centum (25%).

SECTION 2. — It shall be the duty of every person, association or corporation operating a

lumber mill to submit to the City Treasurer within the first fifteen (15) days of every month a
sworn statement of the number of board feet sawn manufactured or produced by it during
the preceding month.

falls within the provisions of paragraph 5, Section 15 of Republic Act No. 523, which empowers the
municipal board of the City of Butuan:

To tax, fix the license fee for, regulate the business and fix the location of, match factories,
blacksmith shops, foundries, steam boilers, lumber mills and lumber yards, shipyards, the
storage and sale of gunpowder, tar pitch, resin coal, oil, gasoline, benzine turpentine, hemp,
cotton, nitroglycerine, petroleum, or any of the products thereof, and of all other highly
combustible or explosive materials and other establishments likely to endanger the public
safety or give rise to conflagrations or explosions, and subject to the rules and regulations
incured by the Director of Health in accordance with law, tanneries renderies, tallow
chandeleries, embalmers, and funeral parlors, bone factories and soap factories.
Appellee contends that the questioned ordinance imposes a tax, not on lumber mills and lumber
yards, but on the sawn-manufactured and/or produced lumber, which are forest products and not
found among the taxable items enumerated in the law above quoted, thus rendering said ordinance
null and void. It argues further that, even under the latest amendment — Ordinance No. 49, series of
1954, which purports to impose the tax not on lumber sold but on lumber sawn manufactured and/or
produced — the ordinance is ultra vires because par. (p) Section 15 of the Charter of the City of
Butuan (quoted above), authorizes a tax only on lumber mills and lumber yards, which obviously
does not include the power to impose a tax on sawn manufactured or produced lumber.

Upon the other hand, appellants maintain that the tax in question is a license or privilege tax on the
business of lumber mills or lumber yards imposed by appellant city in the exercise of its police power
under Section 15 of its Charter.

The title given to the original ordinance in question was "An ordinance imposing a tax on the sales of
lumber". Section 1 thereof made the tax collectible on "every board foot of lumber sold" by every
person, association or corporation operating a lumber mill within the territory of the City of Butuan,
while Section 4 expressly exempted lumber mills from the payment of the quarterly sales tax
provided for in Section 3, Article 11 of Ordinance No. 47, Series of 1949.

The above would seem to be sufficient to show that the tax imposed is and was really intended to be
on lumber sold and not a tax on, or, license fee for the privilege of operating a lumber mill and/or a
lumber yard.

The amendatory ordinances did not change the nature of the tax imposed by the original. Ordinance
No. 9 simply changed the title of the latter so as to make it read as an ordinance imposing a tax on
the "produce of lumber mills"; Ordinance No. 10, while entitled as one imposing a tax on lumber mills
made the tax collectible on "every board foot of lumber, regardless of group, sawn manufactured or
produced, etc."; Ordinance No. 47, in turn, made the tax collectible on "every board foot of lumber
sold and/or shipped"; Ordinance No. 49, while changing again the title of the original ordinance so as
to make it read as "An ordinance imposing a tax on lumber mills", also required the tax to be paid
"for every board foot of lumber sawn manufactured and/or produced, etc."

The clear implication from the original as well as the amendatory ordinances is that the tax imposed
is one on lumber sold, manufactured, sawn or produced by parties duly licensed to engage in said
trade or business. As the lower court said — and this we quote with approval. —

The intent of Ordinance No. 5 to tax the sale of lumber is clear and unmistakable. The
subsequent ordinances Nos. 9, 10, 47 and 49, Exhs. B, C, D, and E respectively, being all
amendatory, naturally did not alter the essence or spirit of the basic ordinance. This is
evident, if we consider that section 4 of the original ordinance which exempts lumber mills
from the of quarterly sales tax, as provided in an earlier ordinance was never repealed and
instead was carried over and continued to be in force until the latest amendment.

Moreover, the tax thus levied is virtually one on "forest products" since manufactured or sawn lumber
is so considered under the provisions of Section 263, National Internal Revenue Code, which is
embraced in Chapter V thereof entitled "Charges on Forest Products", as construed by Section VI,
Regulation No. 85, Department of Finance. Municipal corporations are prohibited from imposing
charges of taxes of such nature (Commonwealth Act No. 472, Section 3; Republic Act No. 2264).

Appellants' claim that the questioned tax is one on business or a privilege tax for the operation of a
lumber mill or a lumber yard is without merit.
The character or nature of a tax is determined not by the title of the act or ordinance imposing it but
by its operation, practical results and incidents (Dawson vs. Distilleries, etc., 255 U.S. 288, 65 L. Ed.
638; Association of Customs Brokers, Inc., et al. vs. The Municipal Board, et al., G.R. No. L-4376,
May 22, 1953).

Neither the original ordinance in question nor the amendatory ones show that the tax provided for
therein is imposed by reason of the enjoyment of the privilege to engage in a particular trade or
business. Neither do they provide that payment thereof is a condition precedent to the enjoyment of
such privilege or that its non-payment would result in the cancellation of any previous license
granted. The only consequence of its non-payment appears to be the imposition of a surcharge or
liability to suffer the penal sanctions prescribed in Section 3 of the original ordinance. These
circumstances lead Us to the conclusion that the questioned tax cannot be considered as one
imposed upon a party for engaging in the business of operating a lumber mill or a lumber yard.

We likewise find to be unmeritorious appellants' contention that the power of the City of Butuan to
tax lumber mills and lumber yards includes the power to tax the sale, production, sawing and/or
manufacture of lumber by them. The rule is well-settled that municipal corporations, unlike sovereign
states, are clothed with no power of taxation; that its charter or a statute must clearly show an intent
to confer that power or the municipal corporation cannot assume and exercise it, and that any such
power granted must be construed strictly, any doubt or ambiguity arising out from the terms of the
grant to be resolved against the municipality. (Cu Unjieng vs. Patstone 42 Phil. 818; Vega, et al. vs.
Municipal Board, etc., 50 O.G. No. 6,p. 2456)

Lastly, appellants' contention that appellee had no cause of action because it does not appear that
the taxes sought to be recovered were paid under protest is also untenable. The present action
involves only the recovery of the sum of Pl,190.92 which was paid under protest (paragraph 8,
Stipulation of Facts, p. 53, Record on Appeal).

IN VIEW OF ALL THE FOREGOING, the appealed decision is hereby affirmed, with costs.

THE CITY OF OZAMIZ, Represented by THE CITY MAYOR, MUNICIPAL BOARD, CITY
TREASURER, and CITY AUDITOR, petitioner-appellant,
vs.
SERAPIO S. LUMAPAS and HONORABLE GERONIMO R. MARAVE, respondents-appellees.

Appeal by certiorari from the decision, dated March 18, 1969, of respondent Judge Geronimo R.
Marave, of the Court of First Instance of Misamis Occidental, Branch II, Ozamiz City, declaring
Ordinance No. 466, series of 1964, of the Municipal Board of the City of Ozamiz, null and void (Civil
Case No. OZ-159), and ordering petitioner to return to respondent Serapio S. Lumapas the sum of
P1,243.00, representing the amount collected as parking fees, by virtue of the ordinance, without
costs.

The facts of this case, which are not disputed, are as follows:

Respondent Serapio S. Lumapas is an operator of transportation buses for passengers and cargoes,
under the name of Romar Line, with Ozamiz City and Pagadian, Zamboanga del Sur, as terminal
points, by virtue of a certificate of public convenience issued to him by the Public Service
Commission. On September 15, 1964, the Municipal Board of Ozamiz City enacted the following:
ORDINANCE NO. 466

AN ORDINANCE IMPOSING PARKING FEES FOR EVERY MOTOR VEHICLE

PARKED ON ANY PORTION OF THE EXISTING PARKING SPACE IN THE CITY
OF OZAMIZ. Be it ordained by the Municipal Board of the City of Ozamiz, that:

SECTION 1 — There is hereby imposed parking fees for all motor vehicles parked
on any portion of the duly designated parking areas in the City of Ozamiz;

SECTION 2. — Motor Vechicles' as used in this ordinance shall be construed to

mean all vehicles run by engine whether the same is offered for passengers or for
cargoes of whatever kind or nature;

SECTION 3. — The word "Parking" as used in this ordinance shall be construed to

mean, when a motor vehicle of whatever kind is stopped on any portion of the
existing parking areas for the purpose of loading and unloading passengers or
cargoes;

SECTION 4. — For purposes of the fee hereinabove provided, the following

schedule of rates collectible daily from the conductor, driver, operator and/or owner
must be observed:

For Passenger

(a) Passenger Bus ........................................................................ P1.00

(b) Weapon Carrier, Baby Bus & others of similar nature ..... .70

(c) Pick Up, Jeepneys, PU Cars and others of similar

nature ....................................................................................................................... .
50

For Cargoes

(a) Cargo Trucks .......................................................................... 1.00

(b) Pick Up, Jeeps, Jeepneys, Weapon Carriers & Others of similar
nature ...................................................................................................................... .70

SECTION 5. — That the City Treasurer or his authorized representative is hereby

empowered to collect the herein parking fees using any form of official receipt he
may devise, from the conductor, driver, operator and/or owner of the motor vehicles
parked in said designated parking areas;

SECTION 6. — Any person or persons, violating any provision of this ordinance

shall, upon conviction thereof, be punished by an imprisonment of not less than two
(2) months nor more than six (6) months, or by a fine in the sum of not less than
P100.00 but not more than P400.00 or both such fine and imprisonment at the
discretion of the Court;

SECTION 7. — This ordinance shall take effect immediately upon its approval.
 Enacted, September 15, 1964,

Approved, October 7, 1964. 1

After approval of the above-quoted ordinance, the City of Ozamiz began collecting the prescribed
parking' fees and collected from respondent-appellee Serapio S. Lumapas, who had paid under
protest, the parking fees at One Peso (P1.00) for each of his buses, from October 1964 to January
1967, or an aggregate amount of P1,259.00 for which official receipts were issued by petitioner.
2

About four (4) years later, or on January 11, 1968, respondent Serapio S. Lumapas filed a complaint,
dated August 3, 1967 against the City of Ozamiz, represented by the City Mayor, Municipal Board,
3

City Treasurer, and City Auditor, with the Court of First instance of Misamis Occidental, Branch II
(Civil Case No. OZ-159), for recovery of parking fees, alleging, among others, that said Ordinance
No. 466 is ulta vires, and praying that judgment be issued (1) nullifying Ordinance No. 466, series of
1964, and (2) ordering the Municipal Board to appropriate the amount of P1,459.00 for the
reimbursement of P1,259.00 he had paid as parking fees, plus P200.00 as attorney's fees.

On January 25, 1968, petitioner filed its answer, with affirmative defenses to which respondent-
4

appellee Serapio S. Lumapas filed his reply, dated January 30, 1968. 5

On January 3, 1969, the parties, through their respective counsel, filed the following:

STIPULATION OF FACTS

COME NOW the plaintiff and the defendants, through their respective counsel, and
unto this Honorable Court respectfully submit this stipulation of facts, to wit:

(1) That the area enclosed in red pencil in the sketch is a market site of the City of
Ozamiz which holds the same in its proprietary character as evidenced by Tax
Declaration No. 51234. This area is for public use.

(2) That the Zulueta Street is now extended up to the end of the market site passing
a row of tiendas up to the end marked "toilet" in the sketch plan of market site when
the market building was constructed in 1969;

(3) That on the right side near the row of tiendas and near the toilet and marked with
series of x's and where the buses of plaintiff were parking waiting for passengers
going to the south;

(4) That this space marked "rig parking" in the sketch plan marked "x" has been
designated by City Ordinance No. 233 as a parking place marked Exhibit "2";

(5) That the defendant City Government has been collecting parking fees and issued
corresponding official receipts to the plaintiff for each unit belonging to the plaintiff
every time it left Ozamiz City from said parking place but once a day at one peso per
unit;

(6) That the total amount of parking fees collected from the plaintiff by the defendant
is P1,243.00 as per official receipts actually counted in the presence of both parties;
 (7) That the plaintiff made a demand for the reimbursement of the total amount
collected from 1964 to 1967 and this demand was received on September 1, 1967,
by the City Treasurer and that the City Treasurer replied by first indorsement dated
September 11, 1967, asking for reference and verification; and

(8) That in reply to said first indorsement, the plaintiff sent a letter to the City
Treasurer dated January 18, 1967, citing cases in support of the demand, and in
answer to that letter, the City Treasurer in his communication dated January 11,
1968, flatly denied payment of the demand.

(9) That the parties will file their respective memoranda within twenty days from
today.

WHEREFORE, it is respectfully prayed of this Honorable Court that judgment be

rendered based upon this stipulation of facts after the parties shall have submitted
their respective memoranda or after the lapse of twenty days from today.

Ozamiz City, December 27, 1968. 6

On the basis of the foregoing Stipulation of Facts, and of the court's finding, after an ocular
inspection of the parking area designated by Ordinance No. 286, series of 1956, superseding 7

Ordinance No. 234, series of 1953, that it is a municipal street, although part of the public market,
said court rendered judgment on March 18, 1969 declaring that such parking fee is in the nature of
toll fees for the use of public road and made in violation of Section 59[b] of Republic Act No. 4136
(Land Transportation and Traffic Code), there being no prior approval therefor by the President of the
Philippines upon recommendation of the Secretary of Public Works and Communications (now
Public Works). Hence, the present appeal by certiorari.

Petitioner now contends that the lower court erred: (1) in declaring Ordinance No. 466, series of
1964, of Ozamiz City, null and void; (2) in considering parking fees as road tolls under Section 59[b]
of Republic Act No. 4136; (3) in declaring the parking area as a public street and not the patrimonial
property of the city; and (4) in ordering the reimbursement of parking fees paid by respondent-
appellee.

Decisive of this controversy is whether the Municipal Board of the City of Ozamiz, herein petitioner-
appellant, had the power to enact said Ordinance No. 466.

Petitioner-appellant, in maintaining the affirmative view, contends: (1)that the ordinance is valid for
the fees collected thereunder are in the nature of property rentals for the use of parking spaces
belonging to the City in its proprietary character, as evidenced by Tax Declaration No. 51234, and
are authorized by Section 2308 (f) of the Revised Administrative Code, 8(2) that Section 15 (y) of the
Charter of Ozamiz City (Republic Act No. 321) 9 also authorizes the Municipal Board to regulate the use of streets which
carries with it the power to impose fees for its implementation; (3) that, pursuant to such power, the Municipal Board passed said Ordinance
No. 234, the purpose of which is to minimize accidents, to avoid congestion of traffic, to enable the passengers to know the exact time of the
departure of trucks and, for this purpose, the Municipal Board provided for parking areas for which the City has to have funds for the
implementation of the purposes abovestated; (4) that Section 2 of the Local Autonomy Law (Republic Act No. 2264)likewise empowers the
local governments to impose taxes and fees, except those that are enumerated therein, and parking fee is not among the exceptions: and (5)
that the word "toll" connotes the act of passing along the road and the collection of toll fees may not be imposed unless approved by the
President of the Philippines upon the recommendation of the Secretary of Public Works, pursuant to Section 59[b] of Republic Act No. 4136;
whereas the word "parking" implies a stationary condition and the parking fees provided for in Ordinance No. 466 is for the privilege of using
the designated parking area, which is owned by the City of Ozamiz, as its patrimonial property.

On the other hand, respondent-appellee insists (1) that Ozamiz City has no power to impose parking
fees on motor vehicles parked on Zulueta Street, which is property for public use and, as such,
Ordinance No. 466 imposing such fees is null and void; (2) that granting arguendo that Zulueta
Street is part of the City's public market site, its conversion into a street removes it from its category
as patrimonial property to one for public use; 10 (3) that the use of Zulueta Street as a parking place
is only incidental to the free passage of motor vehicles for, as soon as the buses are loaded with
passengers, the vehicles start their journey to their respective destinations and pay the toll clerk at a
station about one hundred; (100) feet ahead along Zulueta Street before they are allowed to get out
of the City and as such, the prohibition to impose taxes or fees embodied in Section 59[b] of
Republic. Act No. 4136 applies to this case; (4) that Section 2308[f] of the Revised Administrative
Code providing that the "proceeds on income from the ... use or management of property lawfully
held by the municipality" accrue to the municipality, does not grant, either expressly or by implication,
to the municipality, the power to impose such tax, (5) that Section 15[y] of the Charter of Ozamiz City
(Republic Act No. 321) which authorizes the City, among others, "to regulate the use of a street,"
does not empower the City to impose parking fees; besides, said section contains a proviso, i.e.,
"except as otherwise provided by law", which, in this case, is Republic Act No. 4136; and (6) that,
since the power to impose parking fees is not among those conferred by the Local Autonomy Act on
local government, said City cannot, therefore, impose such parking fees.

After the filing of its brief, or on December 10, 1969, the petitioner- appellant, through its counsel,
First Assistant City Fiscal Artemio C. Engracia, filed the following Manifestation, dated November 27,
1969, praying that the decision of the lower court be reversed in view of the approval by the
President of the Philippines upon the recommendation of the Secretary of Public Works of the
ordinance in question that validates the same, to wit:

1. That the decision of the lower court, marked Annex "E" of the petition, declaring
Ordinance No. 466, series of 1964, of Ozamiz City, marked Annex "G" of the petition,
null and void is based on the non-compliance with the provisions of Section 59[b] of
Republic Act No. 4136, otherwise known as The Land Transportation Law, which
requires the approval by the President of the Philippines upon the recommendation
of the Secretary of Public Works of such kind of ordinance..

2. That the President of the Philippines has now approved the Ordinance in question.
A certified copy of said approval is hereunder quoted.

xxx xxx xxx

4th Indorsement
Manila, September 26, 1969

Respectfully returned to the Mayor, City of Ozamiz, hereby approving, as

recommended in the 3rd indorsement hereon of the Secretary of Public Works and
Communications, Ordinance No. 466, series of 1964, of that city, entitled: "AN
ORDINANCE IMPOSING PARKING FEES FOR EVERY MOTOR VEHICLE
PARKED ON ANY PORTION OF THE EXISTING PARKING SPACE IN THE
OZAMIZ."

By Authority of the President:

(Sgd.) FLORES BAYOT
Assistant Executive Secretary

3. That the approval by the President of the Philippines is based upon the
recommendation of the Secretary of Public Works. A certified copy of said
recommendation is hereunder reproduced:
3rd Indorsement
June 3, 1969

Respectfully forwarded to His Excellency, the President of the Philippines,

Malacañang, recommending favorable action, in view of the representations herein
made, on the within letter dated March 21, 1969 of Mayor Hilarion A. Ramiro, Ozamiz
City, requesting approval No. 466, series of 1964, passed by the Municipal Board,
same city regarding the collection of fees for the privilege of parking vehicles in the
lots privately-owned by said City.

(Sgd.) ANTONIO V. RAQUIZA

Secretary

4. That the action of the Secretary of Public Works is based upon the findings of the
Commissioner of the Land Transportation Commission. A certified copy of the same
is herein reproduced:

xxx xxx xxx

2nd Indorsement
May 16, 1969

Respectfully returned to the Honorable Secretary, Department of Public Works and

Communications, Manila, with the statement that this Commission interposes no
objection on the approval of Ordinance No. 466, series of 1964, of Ozamiz City,
considering that the schedule of rate collectible from the conductor, driver, operator
and/or owner as stated under Section 4 thereof appears to be reasonable.

It may be stated in this connection that on the Decision of the CFI of Misamis
Occidental, Branch II, dated March 18, 1969 under Civil Case No. OZ(159), the said
Ordinance was declared null and void for failure to comply with the provisions of
Section 59[b] of R. A. 4136, regarding the required "approval by the President of the
Philippines upon recommendation of the Secretary of Public Works and
Communications."

(Sgd.) ROMEO F. EDU

Commissioner

The rule is well-settled that municipal corporations, being mere creatures of the law, have only such
powers as are expressly granted to them and those which are necessarily implied or incidental to the
exercise thereof, and the power to tax is inherent upon the State and it can only be exercised by
Congress, unless delegated or conferred by it to a municipal corporation. As such, said corporation
has only such powers as the legislative department may have deemed fit to grant. By reason of the
limited powers of local governments and the nature thereof, said powers are to be
construed strictissimi juris and any doubt or ambiguity arising out of the terms used in granting said
powers must be construed against the municipality. 11

The implied powers which a municipal corporation possesses and can exercise are only those
necessarily incident to the powers expressly conferred. Inasmuch as a city has no power, except by
delegation from Congress, in order to enable it to impose a tax or license fee, the power must be
expressly granted or be necessarily implied in, or incident to, the powers expressly conferred upon
the city.

Under Sec. 15[Y] of the Ozamiz City Charter (Rep. Act No. 321), the municipal board has the power
"... to regulate the use of streets, avenues, alleys, sidewalks, wharves, piers, parks, cemeteries and
other public places; ...", and in subsection [nn] of the same section 15, the authority "To enact all
ordinances it may deem necessary and proper for the sanitation and safety, the furtherance of
prosperity and the promotion of the morality, peace, good order, comfort, convenience, and general
welfare of the city and its inhabitants, and such others as may be necessary to carry into effect and
discharge the powers and duties conferred by this Charter ..." By this express legislative grant of
authority, police power is delegated to the municipal corporation to be exercised as a governmental
function for municipal purposes.

It is, therefore, patent that the City of Ozamiz has been clothed with full power to control and
regulate its streets for the purpose of promoting the public health, safety and welfare. Indeed,
municipal power to regulate the use of streets is a delegation of the police power of the national
government, and in the exercise of such power, a municipal corporation can make all necessary and
desirable regulations which are reasonable and manifestly in the interest of public safety and
convenience.

By virtue of the aforecited statutory grant of authority, the City of Ozamiz can regulate the time,
place, manner of parking in the streets and public places. It is, however, insisted that the ordinance
did not charge a parking fee but a toll fee for the use of the street. It is true that the term " parking"
ordinarily implies "something more than a mere temporary and momentary stoppage at a curb for the
purpose of loading or unloading passengers or merchandize; it involves the idea of using a portion of
the street as storage space for an automobile." 12

In the case at bar, the TPU buses of respondent-appellee Sergio S. Lumapas stopped on the
extended portion of Zulueta Street beside the public market (Exhibit "X-1" of Exhibit "X",
Development Plan for Ozamiz Market Site),and that as soon as the buses were loaded, they
proceeded to the station, about one hundred (100) feet away from the parking area, where a toll
clerk of the City collected the "Parking" fee of P1.00 per bus once a day, before said buses were
allowed to proceed to their destination.

Section 3 of the questioned Ordinance No. 466 defines the word "'parking' to mean the stoppage of
a motor vehicle of whatever kind on any portion of the existing parking areas for the purpose of
loading and unloading passengers or cargoes." (Emphasis supplied.)
13

The word "toll" when used in connection with highways has been defined as a duty imposed on
goods and passengers travelling public roads. The toll for use of a toll road is for its use in
14

travelling thereon, not for its use as a parking place for vehicles.15

It is not pretended, however, that the public utility vehicles are subject to the payment, if they pass
without stopping thru the aforesaid sections of Zulueta Street. Considering that the public utility
vehicles are only charged the fee when said vehicles stop on "any portion of the existing parking
areas for the purpose of loading or unloading passengers or cargoes", the fees collected are actually
in the nature of parking fees and not toll fees for the use of Zulueta Street. This is clear from the
Stipulation of Facts which shows that fees were not exacted for mere passage thru the street but for
stopping in the designated parking areas therein to unload or load passengers or cargoes. It was
not, therefore a toll fee for the use of public roads, within the context of Section 59[b] of Republic Act
No. 4136, which requires the authorization of the President of the Philippines.
As adverted to above, the Municipal Board of Ozamiz City is expressly granted by its Charter the
power to regulate the use of its streets. The ordinance in question appears to have been enacted in
pursuance of this grant. The parking fee imposed is minimal in amount, the maximum being only
P1.00 a day for each passenger bus and P1.00 for each cargo truck, the rates being lower for
smaller types of vehicles. This indicates that its purpose is not for revenue but for regulation.
Moreover, it is undeniable that by designating a specific place wherein passenger and freight
vehicles may load and unload passengers and cargoes, benefits are accorded to the city's residents
in the form of increased safety and convenience arising from the decongestion of traffic.

Undoubtedly the city may impose a fee sufficient in amount to include the expense of issuing the
license and the cost of necessary inspection or police surveillance connected with the business or
calling licensed.

The fees charged in the case at bar are undeniably to cover the expenses for supervision, inspection
and control, to ensure the smooth flow of traffic in the environs of the public market, and for the
safety and convenience of the public.

WHEREFORE, the appealed decision is hereby reversed and Ordinance No. 466, series of 1964
declared valid. No pronouncement as to costs.

G.R. No. L-47252 April 18, 1941

THE APOSTOLIC PREFECT OF THE MOUNTAIN PROVINCE, demandante-apelante,
vs.
EL TESORERO DE LA CIUDAD DE BAGUIO, demandado-apelado.

The accused Pedro R. Exconde was convicted in the Court of First Instance of Manila of violating
Central Bank Circular No. 37, approved September 25,1952, limiting to P100 the amount of
Philippine currency that an outgoing passenger could have on his person. The court below meted
upon him a sentence four (4) months of imprisonment and fine of P100 and costs.

The facts are not disputed. On May 5, 1954, the appellant Pedro R. Exconde was on board the s.s.
President Wilson, as one of its passengers bound for Japan Supervising agent Jose A. Fojas of the
Department of Finance, found in Exconde's possession P5,090 in Philippine currency, plus U.S. $50
in cash; travelers' checks for $100; and a Bank of America remitter's receipt for $350. Admittedly
Exconde's possession of the P5,000 was not licensed, and was in violation of Central Bank Circular
No. 37 (48 Off. Gaz. 3823) providing as follows:

SECTION 1. Pursuant to section 34 of Republic Act No. 265 the Monetary Board is hereby
promulgating this circular. Violation of any of its provisions shall subject the offender to the
penal provisions of said Act.

SEC. 2. The import and export of Philippine coins and notes without the necessary license
issued by the Central Bank is prohibited except in the following cases:

(a) Travellers entering the Philippines may bring in Philippine coins and notes in an amount
not exceeding P100, provided the coins do not exceed P50. In case of travelers arriving on
ships, the coins they bring in, shall not exceed P50 for first class passengers, P20 for second
class passengers and P10 for third class passengers.
 (b) Travelers leaving the Philippines may take with them Philippine coins and notes in an
amount not exceeding P100, provided the coins do not exceed P5.

SEC. 3. The following shall also be held liable within the meaning of this circular:

(a) Any outgoing passengers already booked and ready to leave the country found having in
his person or among his luggage, at the airport or piers, an amount exceeding P100 or
Philippine coins exceeding P5 when no license has been previously obtained for the excess
amount.

(b) The sender of any mail matter, envelope, or package already deposited in the mails,
manifested or put on board an outgoing international carrier found to contain an amount
exceeding P100 when no license has been previously obtained for the excess amount.

SEC. 4. All circulars, notifications or regulations previously promulgated by the Monetary

Board inconsistent herewith are hereby repealed.

SEC. 5. This circular shall take effect immediately.

The aforesaid circular was promulgated in connection with sec. 34 of Republic Act 265 (Central Bank
Act) providing that:

SEC. 34. Proceedings upon violation of laws and regulations. — Whenever any person or
entity willfully violates this Act or any order, instruction, rule or regulation legally issued by the
Monetary Board, the person or persons responsible for such violation shall be punished by a
fine of not more than twenty thousand pesos and by imprisonment of not more than five
years.

Whenever a banking institution persists in violating its chartered or by-laws or any law, or
orders, instructions, rules or regulations legally issued by the Monetary Board, or whenever a
banking institution persist in carrying on its business in as unlawful or unsafe manner, the
Board shall, by the Solicitor General, and without prejudice to the penalties provided in the
preceding paragraph of this section, file a petition in the Court of First Instance praying the
assistance of the court to compel the banking institution to discontinue the violations or
practices objected to in the petition of the Board. The Monetary Board may, with the approval
of the court, take such action as the court may deem necessary to compel the banking
institution complained against to discontinue the violations or practices set forth in the
Board's petition, and, if necessary, the Board may, under order of the court, direct the
Superintendent of Banks to liquidate the business of the institution.

Two appeals were taken from the decision of the trial court and are submitted to us for decision. One
is the appeal perfected by Exconde, who alleges that Circular No. 37 is invalid, and the other is the
appeal taken by the Government from the lower court's refusal to order the confiscation of the
P5,000.00 unauthorizedly held by Exconde and found in his possession by agent Fojas.

The first argument of appellant Exconde is that sec. 34 of the Central Bank can not validate the
issuance of Circular No. 37 because sec. 34 refers solely to regulations under Art. IV, Chapter B of
the Act, concerning activities of the "Department of Supervision and Examination" of banking
institutions.
We see no merit in this contention. The first paragraph of sec. 34, heretofore quoted, is so broad in
terms that it was evidently designed to establish penal sanctions for any and all violations of the Act
as well as of the regulations legally issued by the Monetary Board; and there being no other
sanctioning provision elsewhere in the Act itself, appellant's stand, if upheld, would lead to the result
that, with the exception of Art. IV, Chapter B, all other provisions of the Central Bank Act could be
violated with impunity. That effect the law could not have intended.

It is next argued that sec. 14 of the Central Bank Law does not grant authority to the Monetary Board
to prohibit the exportation of Philippine currency, and that if any such authority was in fact granted,
the same is void as an, invalid delegation of legislative power. Section 14 is as follows:

SEC. 14. Exercise of authority — In order to exercise the authority granted to it under this
Act, the Monetary Board shall:

(a) Prepare and issue such rules and regulations as it considers necessary for the effective
discharge of the responsibilities and exercise of the powers assigned to the Monetary Board
and to the Central Bank under this Act;

(b) Direct the management, operations and administration of the Central Bank and prepare
such rules and regulations as it may deem necessary or convenient for this purpose;

(c) On the recommendation of the Governor, appoint, fix the renumerations, and remove all
officers and employees of the Central Bank, with the exception of the Governor; and

(d) Authorize such expenditures by the Central Bank as are in the interest of the effective
administration and operation of the Bank.

It is well established in this jurisdiction that, while the making of laws is a non-delegable activity that
corresponds exclusively to Congress, nevertheless the latter may constitutionally delegate authority
to promulgate rules and regulations to implement a given legislation and effectuate its policies, for
the reason that the legislature often finds it impracticable (if not impossible) to anticipate and provide
for the multifarious and complex situations that may be met in carrying the law into effect. All that is
required is that the regulation should be germane to the objects and purposes of the law; that the
regulation be not in contradiction with it, but conform to the standards that the law prescribes
(Calalang vs. Williams, 70 Phil. 727; Pangasinan Transportation vs. Public Service Commission, 70
Phil. 22; Peo. vs. Rosenthal, 68 Phil. 328; Peo. vs. Vera, 39 Phil. 660; Rubi vs. Prov. Board of
Mindoro, 39 Phil. 660).

In the case of People vs. Rosenthal and Osmeña, G.R. Nos. 46076 and 46077, promulgated
June 12, 1939,1and in Pangasinan Transportation vs. The Public Service Commission, G.R.
No. 47065, promulgated June 26, 1940,2 this Court had occasion to observe that the
principle of separation of powers has been made to adapt itself to the complexities of
modern governments, giving rise to the adoption, within certain limits, of the principle of
subordinate legislation, not only in the United States and England but in practically all
modern governments. Accordingly, with the growing complexity of modern life, the
multiplication of the subjects of governmental regulations, and the increased difficulty of
administering the laws, the rigidity of the theory of separation of governmental powers has, to
a large extent, been relaxed by permitting the delegation of greater powers by the legislative
and vesting a larger amount of discretion in administrative and executive officials, not only in
the execution of the laws, but also in the promulgation of certain rules and regulations
calculated to promote public interest.
Considering that the "responsibilities and — powers" assigned to the Bank and its Monetary Board,
mentioned in sec 14 (a), are those specified in sec. 2 of the Act:

SEC. 2. Responsibilities and objectives. — It shall be the responsibility of the Central Bank of
the Philippines to administer the monetary and banking system of the Republic.

It shall be the duty of the Central Bank to use powers granted to it under this Act to achieve
the following objectives:

(a) To maintain monetary stability in the Philippines;

(b) To preserve the international value of the peso and the convertibility of the peso into other
freely convertible currencies; and

(c) To promote a rising level of production, employment and real income in the Philippines.

as well as those prescribed in sec. 64 of same law, to wit:

SEC. 64. Guiding principle. — The Monetary Board shall endeavor to control any expansion
or contraction in the supply, or any rise or fall in prices, which, in the opinion of the Board, is
prejudicial to the attainment or maintenance of a high level of production, employment, and
real income. In adopting policies and measures in accordance with this principle the
Monetary Board shall have due regard for their effects on the availability and cost of money
to particular sectors of the economy as well as to the economy as a whole, and their effects
on the relationship of domestic prices and costs to world prices and costs,

we experience no difficulty in concluding that Circular No. 37 here in question was a valid exercise of
the regulatory power delegated by the Central Bank Act, and that said Circular is in harmony with the
objectives sought to be achieved by that law, particularly the control of any prejudicial "expansion
and contraction of the money supply" (sec. 64) and "the preservation of the international value of the
peso" (sec. 2, par. b). It requires no effort to understand that unless the exportation of currency is
curtailed, the value of the peso in terms of other currencies can not be maintained, for the increase
of the peso supply in foreign countries would tend to depress its value therein. How far the limitation
should go may give rise to honest differences of opinion, but the power to restrict the export of
Philippine currency is undoubtedly there, and courts are only concerned with the question of
authority, not the wisdom of the measure involved.

Appellants does not dispute that the objectives set forth in secs. 2 and 64 of the Central Bank Act
constitute adequate standards to guide the Bank and the Monetary Board; nor may doubt be
entertained on that score, specially when compared to those criteria upon which this Court has
previously affixed the stamp of its approval, like "public welfare" (Cardoña vs. Binangonan, 37 Phil.
547); "necessary in the interest of law and order" (Rubi vs. Provincial Board, 39 Phil, 660) public
interest" (People vs. Rosenthal, 68 Phil. 328);"justice and equity and the substantial merits of the
case" (Int. Hardwood vs. Pañgil Fed. of Labor, 70 Phil. 602).

Having reached these conclusions, we must likewise assent to the proposition that the violation of
Circular No. 37 comes within the penal sanctions of the Central Bank Act; because a violation or
infringement of a rule or regulation validly issued can constitute a misdemeanor or a crime
punishable as provided in the authorizing statute, and by virtue of the latter.
 . . ., the regulations adopted under legislative authority by a particular department must be in
harmony with the provisions of the law, and for the sole purpose of carrying into effect its
general provisions. By such regulations, of course, the law itself can not be extended. So
long, however, as the regulations relate solely to carrying into effect the provisions of the law,
they are valid. A violation of a regulation prescribed by an executive officer of the
Government in conformity with and based upon a statute authorizing such regulation,
constitutes an offense and renders the offender liable to punishment in accordance with the
provisions of law. (United States vs. Bailey, 9 Pet., 238, 252, 254, 256; Caha vs. United
States, 152 U. S., 211, 218, United States vs. Eaton, 144 U.S., 677), (U.S. vs. Tupasi,
Molina, 29 Phil. 124)

The legislature cannot delegate to a board or to an executive officer the power to declare
what acts shall constitute a criminal offense. It is competent for it, however, to authorize a
commission to prescribe duties on which the law may operate in imposing a penalty and in
effectuating the purpose designed in enacting the law. There are numerous cases in which
the courts have sustained statutes authorizing administrative officers to promulgate rules on
a specified subject and providing that a violation of such rules or orders should constitute a
misdemeanor, punishable as provided in the statute. (11 Am. Jur. pp. 965-966)

Where statutes provide that violation of a rule or regulation of an administrative agency shall
be a misdemeanor, if the rule or regulation is reasonable, the enforcement of the penalty for
its violation is sustained by the courts, for the legislature and not the administrative agency
made the action penal. (Vol. 1, Sutherland Statutory Construction, p. 92).

Turning now to the State's appeal, it is apparent that the refusal of the court below to order the
confiscation of the unlicensed found in the possession of the accused Exconde is contrary to the
provisions of Art. 10 of the Revised Penal Code, that read as follows:

ART. 10. Offenses not subject to the provisions of the Code. — Offenses which are or in the
future may be punishable under special laws are not subject to the provisions of this Code.
This Code shall be supplementary to such laws, unless the latter should specially provide the
contrary.

Pursuant to this rule, Art. 45 of the Penal Code (providing for the confiscation or forfeiture of the
instruments or tools employed in the commission of a crime) has repeatedly been applied to crimes
penalized by special laws, in default of a contrary mandate therein. Such a course was adopted in
U.S. vs. Bruhez, 28 Phil. 305, involving a violation of the Opium Law; U.S. vs. Filart, 30 Phil. 80
(infraction of the lottery act, No. 1757); Villaruz vs. Court of First Instance, 71 Phil. 72 (usury);
Commissioner of Customs vs. Sadia, 95 Phil., 439, 50 Off. Gaz. 3560 (violation of the Revised
Administrative Code).

In the case of U.S. Bruhez, supra, this Court affirmed the confiscation of seven P500-peso bills
delivered to a customs official in consideration of his allowing an illegal importation of opium, and
considered the money as an instrument for the commission of the crime. Similarly, in Commissioner
of Customs vs. Encarnacion, we held that dutiable articles imported without having been declared as
required by law should be declared forfeited to the Government under Art. 45 of the Revised Penal
Code.

If in People vs. Paet, 53 Off. Gaz. 668, and People vs. Sanchez, supra, 745, this Court refused to
entertain the Government's appeal from the refusal of the Court of First Instance to decree such a
forfeiture, it did so, not because Article 45 of the Penal Code did not apply, but exclusively on the
ground that in a criminal case wherein the accused had not appealed, no appeal can be interposed
by the Government with a view to increasing the penalty imposed by the court below; and
confiscation being an additional penalty, the accused would be placed twice in jeopardy of
punishment for the same offense, should the Government's appeal be entertained. But in the present
case of accused Exconde, his own appeal has removed all bars to the review and correction of the
penalty imposed by the court below, even if an increase thereof should be the result. (Rule 120, sec.
11)

Summing up, we hold: (1) that Circular No. 37, issued by the Monetary Board of the Central Bank, is
valid exercise of the regulatory power constitutionally delegated to the same under the terms of the
Central Bank Act (Rep. Act No. 265); (2) that violations of said circular are punishable as criminal
offenses under the provisions of the first paragraph of section 34 of said Act; and (3) that, pursuant
to Article 10 of the Revised Penal Code, Art. 45 of the said code applies to criminal proceedings for
violations of the Central Bank Act or of the regulations validly issued in accordance with the same.

Wherefore the judgment appealed from is therefore modified by ordering that the unlicensed money
found in the possession of the appellant Exconde be declared forfeited to the Government. In all
other respects, the appealed judgment is affirmed. Costs against the accused appellant Pedro R.
Exconde. So ordered.

VICTORIAS MILLING CO., INC., petitioner,

vs.
OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and PHILIPPINE PORTS
AUTHORITY, respondents.

On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short)
wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor
formalities and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA,
likewise, requiring petitioner to secure a permit for cargo handling operations at its Da-an Banua
wharf and remit 10% of its gross income for said operations as the government's share.

To these demands, petitioner sent two (2) letters, both dated June 2, 1981, wherein it maintained
that it is exempt from paying PPA any fee or charge because: (1) the wharf and an its facilities were
built and installed in its land; (2) repair and maintenance thereof were and solely paid by it; (3) even
the dredging and maintenance of the Malijao River Channel from Guimaras Strait up to said private
wharf are being done by petitioner's equipment and personnel; and (4) at no time has the
government ever spent a single centavo for such activities. Petitioner further added that the wharf
was being used mainly to handle sugar purchased from district planters pursuant to existing milling
agreements.

In reply, on November 3, 1981, PPA Iloilo sent petitioner a memorandum of PPA's Executive Officer,
Maximo Dumlao, which justified the PPA's demands. Further request for reconsideration was denied
on January 14, 1982.

On March 29, 1982, petitioner served notice to PPA that it is appealing the case to the Court of Tax
Appeals; and accordingly, on March 31, 1982, petitioner filed a Petition for Review with the said
Court, entitled "Victorias Milling Co., Inc. v. Philippine Ports Authority," and docketed therein as CTA
Case No. 3466.

On January 10, 1984, the Court of Tax Appeals dismissed petitioner's action on the ground that it
has no jurisdiction. It recommended that the appeal be addressed to the Office of the President.
On January 23, 1984, petitioner filed a Petition for Review with this Court, docketed as G.R. No.
66381, but the same was denied in a Resolution dated February 29, 1984.

On April 2, 1984, petitioner filed an appeal with the Office of the President, but in a Decision dated
July 27, 1984 (Record, p. 22), the same was denied on the sole ground that it was filed beyond the
reglementary period. A motion for Reconsideration was filed, but in an Order dated December 16,
1985, the same was denied (ibid., pp. 3-21): Hence, the instant petition.

The Second Division of this Court, in a Resolution dated June 2, 1986, resolved to require the
respondents to comment (ibid., p. 45); and in compliance therewith, the Solicitor General filed his
Comment on June 4, 1986 (Ibid., pp. 50-59).

In a Resolution of July 2, 1986, petitioner was required to file a reply (Ibid., p. 61) but before receipt
of said resolution, the latter filed a motion on July 1, 1986 praying that it be granted leave to file a
reply to respondents' Comment, and an extension of time up to June 30, 1986 within which to file the
same. (Ibid., p. 62).

On July 18, 1986, petitioner filed its reply to respondents' Comment (Ibid., pp. 68-76).

The Second Division of this Court, in a Resolution dated August 25, 1986, resolved to give due
course to the petition and to require the parties to file their respective simultaneous memoranda
(Ibid., p. 78).

On October 8, 1986, the Solicitor General filed a Manifestation and Rejoinder, stating, among others,
that respondents are adopting in toto their Comment of June 3, 1986 as their memorandum; with the
clarification that the assailed PPA Administrative Order No. 13-77 was duly published in full in the
nationwide circulated newspaper, "The Times Journal", on November 9,1977 (ibid., pp. 79-81).

The sole legal issue raised by the petitioner is —

WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNIDER SECTION 131 OF PPA
ADMINISTRATIVE ORDER NO. 13-77 WAS TOLLED BY THE PENDENCY OF THE PETITIONS
FILED FIRST WITH THE COURT OF TAX APPEALS, AND THEN WITH THIS HONORABLE
TRIBUNAL.

The instant petition is devoid of merit.

Petitioner, in holding that the recourse first to the Court of Tax Appeals and then to this Court tolled
the period to appeal, submits that it was guided, in good faith, by considerations which lead to the
assumption that procedural rules of appeal then enforced still hold true. It contends that when
Republic Act No. 1125 (creating the Court of Tax Appeals) was passed in 1955, PPA was not yet in
existence; and under the said law, the Court of Tax Appeals had exclusive appellate jurisdiction over
appeals from decisions of the Commissioner of Customs regarding, among others, customs duties,
fees and other money charges imposed by the Bureau under the Tariff and Customs Code. On the
other hand, neither in Presidential Decree No. 505, creating the PPA on July 11, 1974 nor in
Presidential Decree No. 857, revising its charter (said decrees, among others, merely transferred to
the PPA the powers of the Bureau of Customs to impose and collect customs duties, fees and other
money charges concerning the use of ports and facilities thereat) is there any provision governing
appeals from decisions of the PPA on such matters, so that it is but reasonable to seek recourse with
the Court of Tax Appeals. Petitioner, likewise, contends that an analysis of Presidential Decree No.
857, shows that the PPA is vested merely with corporate powers and duties (Sec. 6), which do not
and can not include the power to legislate on procedural matters, much less to effectively take away
from the Court of Tax Appeals the latter's appellate jurisdiction.

These contentions are untenable for while it is true that neither Presidential Decree No. 505 nor
Presidential Decree No. 857 provides for the remedy of appeal to the Office of the President,
nevertheless, Presidential Decree No. 857 empowers the PPA to promulgate such rules as would aid
it in accomplishing its purpose. Section 6 of the said Decree provides —

Sec. 6. Corporate Powers and Duties —

a. The corporate duties of the Authority shall be:

xxx xxx xxx

(III) To prescribe rules and regulations, procedures, and guidelines

governing the establishment, construction, maintenance, and
operation of all other ports, including private ports in the country.

xxx xxx xxx

Pursuant to the aforequoted provision, PPA enacted Administrative Order No. 13-77 precisely to
govern, among others, appeals from PPA decisions. It is now finally settled that administrative rules
and regulations issued in accordance with law, like PPA Administrative Order No. 13-77, have the
force and effect of law (Valerio vs. Secretary of Agriculture and Natural Resources, 7 SCRA 719;
Antique Sawmills, Inc. vs. Zayco, et al., 17 SCRA 316; and Macailing vs. Andrada, 31 SCRA 126),
and are binding on all persons dealing with that body.

As to petitioner's contention that Administrative Order No. 13-77, specifically its Section 131, only
provides for appeal when the decision is adverse to the government, worth mentioning is the
observation of the Solicitor General that petitioner misleads the Court. Said Section 131 provides —

Sec. 131. Supervisory Authority of General Manager and PPA Board. — If in any
case involving assessment of port charges, the Port Manager/OIC renders a decision
adverse to the government, such decision shall automatically be elevated to, and
reviewed by, the General Manager of the authority; and if the Port Manager's
decision would be affirmed by the General Manager, such decision shall be subject
to further affirmation by the PPA Board before it shall become effective; Provided,
however, that if within thirty (30) days from receipt of the record of the case by the
General Manager, no decision is rendered, the decision under review shall become
final and executory; Provided further, that any party aggrieved by the decision of the
General Manager as affirmed by the PPA Board may appeal said decision to the
Office of the President within thirty (30) days from receipt of a copy thereof.
(Emphasis supplied).

From a cursory reading of the aforequoted provision, it is evident that the above contention has no
basis.

As to petitioner's allegation that to its recollection there had been no prior publication of said PPA
Administrative Order No. 13-77, the Solicitor General correctly pointed out that said Administrative
Order was duly published in full in the nationwide newspaper, "The Times Journal", on November
9,1977.
Moreover, it must be stated that as correctly observed by the Solicitor General, the facts of this case
show that petitioner's failure to appeal to the Office of the President on time stems entirely from its
own negligence and not from a purported ignorance of the proper procedural steps to take.
Petitioner had been aware of the rules governing PPA procedures. In fact, as embodied in the
December 16, 1985 Order of the Office of the President, petitioner even assailed the PPA's rule
making powers at the hearing before the Court of Tax Appeals.

It is axiomatic that the right to appeal is merely a statutory privilege and may be exercised only in the
manner and in accordance with the provision of law (United CMC Textile Workers Union vs. Clave,
137 SCRA 346, citing the cases of Bello vs. Fernando, 4 SCRA 138; Aguila vs. Navarro, 55 Phil.
898; and Santiago vs. Valenzuela, 78 Phil. 397).

Furthermore, even if petitioner's appeal were to be given due course, the result would still be the
same as it does not present a substantially meritorious case against the PPA.

Petitioner maintains and submits that there is no basis for the PPA to assess and impose the dues
and charges it is collecting since the wharf is private, constructed and maintained at no expense to
the government, and that it exists primarily so that its tugboats and barges may ferry the sugarcane
of its Panay planters.

As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the use of
the wharf that petitioner owns but for the privilege of navigating in public waters, of entering and
leaving public harbors and berthing on public streams or waters. (Rollo, pp. 056-057).

In Compañia General de Tabacos de Filipinas vs. Actg. Commissioner of Customs (23 SCRA 600),
this Court laid down the rule that berthing charges against a vessel are collectible regardless of the
fact that mooring or berthing is made from a private pier or wharf. This is because the government
maintains bodies of water in navigable condition and it is to support its operations in this regard that
dues and charges are imposed for the use of piers and wharves regardless of their ownership.

As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential
Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises,
works, appliances, facilities, or for services provided by or belonging to the Authority, or any
organization concerned with port operations." This 10% government share of earnings of arrastre
and stevedoring operators is in the nature of contractual compensation to which a person desiring to
operate arrastre service must agree as a condition to the grant of the permit to operate.

PREMISES CONSIDERED, the instant petition is hereby DISMISSED.

G.R. No. 159647 April 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.

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

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the
1

August 29, 2002 Decision and the August 11, 2003 Resolution of the Court of Appeals (CA) in CA-
2 3

GR SP No. 67439. The assailed Decision reads as follows:

"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No

costs."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

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

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

"From January to December 1996, respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly representing
the 20% sales discount granted by respondent to qualified senior citizens totaled ₱904,769.00.

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

"On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of
₱904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior
citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner,
respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for
Review.

"On February 12, 2001, the Tax Court rendered a Decision dismissing respondent’s Petition for lack
5

of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

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

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax credit is premised on the
existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is
not available.’
"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, granted6

respondent’s motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA] in
CA G.R. SP No. 60057 entitled ‘Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue’ promulgated on May 31, 2001, to wit:

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

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue
a tax credit certificate in favor of respondent in the reduced amount of ₱903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of private property for
public use.

Hence this Petition. 8

The Issues

Petitioner raises the following issues for our consideration:

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

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

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

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:

Claim of 20 Percent Sales Discount

 as Tax Credit Despite Net Loss

Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on
10

their purchase of medicine from any private establishment in the country. The latter may then claim
11

the cost of the discount as a tax credit. But can such credit be claimed, even though an
12

establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code, tax credit generally refers to an
13

amount that is "subtracted directly from one’s total tax liability." It is an "allowance against the tax
14

itself" or "a deduction from what is owed" by a taxpayer to the government. Examples of tax
15 16

credits are withheld taxes, payments of estimated tax, and investment tax credits. 17

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction --
defined as a subtraction "from income for tax purposes," or an amount that is "allowed by law to
18

reduce income prior to [the] application of the tax rate to compute the amount of tax which is
due." An example of a tax deduction is any of the allowable deductions enumerated in Section
19

34 of the Tax Code.

20

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including
-- whenever applicable -- the income tax that is determined after applying the corresponding tax
rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in
21 22

order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely
23

confuse, the issue. A tax credit is used only after the tax has been computed; a tax
deduction, before.

Tax Liability Required

for Tax Credit

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

If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax credit can be applied. For the
24

establishment to choose the immediate availment of a tax credit will be premature and impracticable.
Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments.

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

Prior Tax Payments Not

Required for Tax Credit

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

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

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether
or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax
not directly attributable to either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-
registered person in the course of trade or business; or the transitional input tax determined in
accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight
percent of the value of a VAT-registered person’s beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said
items. Clearly from this provision, the tax credit refers to an input tax that is either due only or given
25

a value by mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid
prior to the availment of such credit.

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

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable
input taxes merely due -- again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output taxes. Where a
26

taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned --
shows that the prior payment of taxes is not a requisite.

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

imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is
not our government but the domiciliary country that credits against the income tax payable to the
latter by the foreign corporation, the tax to be foregone or spared. 28

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

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

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

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income
that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the
former is merely allowed as a credit against the tax levied in the latter. Apparently, payment is made
29

to the state of source, not the state of residence. No tax, therefore, has been previously paid to the
latter.

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

credits under the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned. However, we do not agree with its
31

finding that the carry-over of tax credits under the said special law to succeeding taxable periods,
32

and even their application against internal revenue taxes, did not necessitate the existence of a tax
liability.

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

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
33

procedures for its availment. To deny such credit, despite the plain mandate of the law and the
34

regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing
the 20 percent discount that "shall be deducted by the said establishments from their gross
income for income tax purposes and from their gross sales for value-added tax or other percentage
tax purposes." In ordinary business language, the tax credit represents the amount of such
35

discount. However, the manner by which the discount shall be credited against taxes has not been
clarified by the revenue regulations.

By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or
value of anything." To be more precise, it is in business parlance "a deduction or lowering of an
36

amount of money;" or "a reduction from the full amount or value of something, especially a price." In
37 38

business there are many kinds of discount, the most common of which is that affecting the income
statement or financial report upon which the income tax is based.
39

Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment. It is a "reduction in price offered to the purchaser if payment is made within a
40

shorter period of time than the maximum time specified." Also referred to as a sales discount on the
41

part of the seller and a purchase discounton the part of the buyer, it may be expressed in such
terms as "5/10, n/30." 42

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

discount.44

A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers" is known as a trade discount. No entry for it need be made in the manual or
45

computerized books of accounts, since the purchase or sale is already valued at the net price
actually charged the buyer. The purpose for the discount is to encourage trading or increase sales,
46

and the prices at which the purchased goods may be resold are also suggested. Even a chain
47

discount -- a series of discounts from one list price -- is recorded at net.

48

Finally, akin to a trade discount is a functional discount. It is "a supplier’s price discount given to a
purchaser based on the [latter’s] role in the [former’s] distribution system." This role usually involves
49

warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in the income
statement as a line item deducted -- along with returns, allowances, rebates and other similar
50

expenses -- from gross sales to arrive at net sales. This type of presentation is resorted to, because
51

the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity,
volume or bulk discounts -- are recorded in the manual and computerized books of accounts and
reflected in the financial statements at the gross amounts of the invoices. This manner of recording
52

credit sales -- known as the gross method -- is most widely used, because it is simple, more
convenient to apply than the net method, and produces no material errors over time. 53

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

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold -- is deducted
56

from gross sales to come up with the gross income, profit or margin derived from business. In
57 58

another provision therein, sales discounts that are granted and indicated in the invoices at the time
of sale -- and that do not depend upon the happening of any future event -- may be excluded from
the gross sales within the same quarter they were given. While determinative only of the VAT, the
59

latter provision also appears as a suitable reference point for income tax purposes already
embraced in the former. After all, these two provisions affirm that sales discounts are amounts that
are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishment’s outright
deduction of the discount from the invoice price of the medicine sold to the senior citizen. It is,
60

therefore, expected that for each retail sale made under this law, the discount period lasts no more
than a day, because such discount is given -- and the net amount thereof collected -- immediately
upon perfection of the sale. Although prompt payment is made for an arm’s-length transaction by
61

the senior citizen, the real and compelling reason for the private establishment giving the discount is
that the law itself makes it mandatory.

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

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

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

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statementand cannot be
deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The
option to avail of the tax creditbenefit depends upon the existence of a tax liability, but to limit the
benefit to a sales discount -- which is not even identical to the discount privilege that is granted by
law -- does not define it at all and serves no useful purpose. The definition must, therefore, be
stricken down.

Laws Not Amended

by Regulations

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

It is a cardinal rule that courts "will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial
63

tax administration, the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or
64

competence to provide." The regulations these authorities issue are relied upon by taxpayers, who
65

are certain that these will be followed by the courts. Courts, however, will not uphold these
66

authorities’ interpretations when clearly absurd, erroneous or improper.

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

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a
68 69

regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor
the effect of law. 70

Availment of Tax

Credit Voluntary

Third, the word may in the text of the statute implies that the
71

availability of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right
72

conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever
it chooses; "neither does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the taxpayer." For the tax
73

authorities to compel respondent to deduct the 20 percent discount from either its gross income or
its gross sales is, therefore, not only to make an imposition without basis in law, but also to blatantly
74

contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as an
act of beneficence, an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated accordingly. If, however, the business continues to operate at a loss
75

and no other taxes are due, thus compelling it to close shop, the credit can never be applied and will
be lost altogether.

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

Tax Credit Benefit

Deemed Just Compensation

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

The concept of public use is no longer confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and public convenience. The
78

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

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

Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain. Tax measures are but "enforced contributions exacted on pain of penal
80

sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed
81 82

become a most effective tool to realize social justice, public welfare, and the equitable distribution of
wealth.83

While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights
from a person and give them to another who is not entitled thereto." For this reason, a just
84

compensation for income that is taken away from respondent becomes necessary. It is in the tax
credit that our legislators find support to realize social justice, and no administrative body can alter
that fact.

To put it differently, a private establishment that merely breaks even -- without the discounts yet --
85

will surely start to incur losses because of such discounts. The same effect is expected if its mark-up
is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from
the observation we have already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its gross sales.
Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-
94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they
avail themselves of tax credits denied those that are losing, because no taxes are due from the
latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them. These objectives are
86

consonant with the constitutional policy of making "health x x x services available to all the people at
affordable cost" and of giving "priority for the needs of the x x x elderly." Sections 2.i and 4 of RR 2-
87 88

94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In
fact, no cash outlay is required from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income.
I think we incorporated there a provision na - on the responsibility of the private hospitals and
drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back
to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". 89

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. "x x x
[T]he rule is that on a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former." In addition, "[w]here there are two statutes,
90

the earlier special and the later general -- the terms of the general broad enough to include the
matter provided for in the special -- the fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining an exception to the general, one as a
91
general law of the land, the other as the law of a particular case." "It is a canon of statutory
92

construction that a later statute, general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier statute."
93

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax
Code -- a later law. When the former states that a tax credit may be claimed, then the requirement of
prior tax payments under certain provisions of the latter, as discussed above, cannot be made to
apply. Neither can the instances of or references to a tax deduction under the Tax Code be made to
94

restrict RA 7432. No provision of any revenue regulation can supplant or modify the acts of
Congress.

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

SO ORDERED.

G.R. No. 107135 February 23, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, CENTRAL VEGETABLE MANUFACTURING CO., INC., and THE
COURT OF TAX APPEALS, respondents.

Before the Court is a Petition for Review on Certiorari from the judgment of the Court of Appeals
affirming in toto the decision of the Court of Tax Appeals which required the Commissioner of Internal
Revenue to credit the sales taxes paid by Central Vegetable Oil Manufacturing Co., Inc.
(CENVOCO) on containers and packaging materials of its milled products, against the deficiency
miller's tax due thereon for the year 1986.

As culled in the decision of the Court of Tax Appeals, the undisputed facts are, as follows:

Petitioner (private respondent CENVOCO herein) is a manufacturer of edible and

coconut/coprameal cake and such other coconut related oil subject to the miller's tax
of 3%. Petitioner also manufactures lard, detergent and laundry soap subject to the
sales tax of 10%.

In 1986, petitioner purchased a specified number of containers and packaging

materials for its edible oil from its suppliers and paid the sales tax due thereon.

After an investigation conducted by respondent's Revenue Examiner, Assessment

Notice No. FAS-B-86-88-001661-001664 dated April 22, 1988 was issued against
petitioner for deficiency miller's tax in the total amount of P1,575,514.70 . . . .

On June 29, 1988, petitioner filed with respondent a letter dated June 27, 1988
requesting for reconsideration of the above deficiency miller's tax assessments,
contending that the final provision of Section 168 of the Tax Code does not a apply to
sales tax paid on containers and packaging materials, hence, the amount paid
therefor should have been credited against the miller's tax assessed against it.
Again, thru letter dated September 28, 1988, petitioner reiterated its request for
reconsideration.
On November 17, 1988, respondent wrote CENVOCO, the full text of which letter
reads:

November 17, 1988

Central Vegetable Oil

Manufacturing Co. Inc.

P.O. Box 2816

Manila

Attention: Mr. James Chua

President

Gentlemen:

We have received your letter of September 28,1988, relative to our

assessment against your company in the amount of P1,575,514.75,
as deficiency miller's tax for the year 1986.

Sec. 188 of the Tax Code provides that sales, miller's or excise taxes
paid on raw materials or supplies used in the milling process shall not
be allowed against the miller's tax due. You contend that since
packaging materials are not used in the milling process then, the
sales taxes paid thereon should be allowed as a credit against the
miller's tax due because they do not fall within the scope of the
prohibition.

It is our position, however, that since the law specifically does not
allow taxes paid on the raw materials or supplies used in the milling
process as a credit against the miller's tax due, with more reasons
should the sales taxes paid on materials not used in the milling
process be allowed as a credit against the miller's tax due. There is
no provision of law which allows such a credit-to-be made.

In view of the above, we are reiterating the assessment referred to

above. We request that you make payment immediately so that this
case may be considered closed and terminated.

Very truly yours,

(SGD) EUFRACIO D. SANTOS

Deputy Commissioner

(CA Decision, pp. 31-33 Rollo)

Dissatisfied with the adverse action taken by the BIR, CENVOCO filed a petition for review with the
Court of Tax Appeals, which came out with a decision, dated December 3, 1990, in favor of
CENVOCO, disposing, thus:

WHEREFORE, in view of the foregoing, petitioner Central Vegetable Oil

Manufacturing Co., Inc., is not liable for deficiency miller's tax for the year 1986 in the
amount of P1,575,514.70.

No pronouncement as to costs.

SO ORDERED. (Rollo, p. 53)

Appealed to the Court of Appeals, the said decision was affirmed in toto. (Rollo, p. 38)

The Court of Appeals adopted the reasons cited and ratiocination by the Court of Tax Appeals for
allowing the sales tax paid by CENVOCO on the containers and packaging materials of its milled
products to be credited against the miller's tax due thereon, viz —

The main issuein this case is whether or not respondent CENVOCO is liable for
deficiency miller's tax for the year 1986 in the amount of P1,575,514.70. This in turn
hinges on whether or not containers and packaging materials are raw materials used
in the milling process within the contemplation of the final proviso of Section 168 of
the National Internal Revenue Code, which reads:

Provided, finally, that credit for any sales, miller's or excise taxes paid on raw
materials or supplies used in the milling process shall not be allowed against the
miller's tax due, except in the case of a proprietor or operator of a refined sugar
factory as provided hereunder.

xxx xxx xxx

. . . We agree with respondent Court that containers and packages cannot be

considered "raw materials" utilized in the milling process. In arriving at the
conclusion, respondent Court quoted with approval the reasons cited by CENVOCO,
as follows:

FIRST; The raw materials used by Cenvoco in manufacturing edible

oil are copra and/or coconut oil. In other words, the term "used" in the
final proviso of Section 168 of the NIRC refers or is strictly confined to
"raw materials" or supplies fed, supplied or put into the apparatus,
equipment, machinery or its adjuncts that cause or execute the
milling process. On the other hand, the containers, such as tin cans,
and/or packages are not used or fed into the milling machinery nor
were ever intended for conversion to form part of the finished
product, i.e., refined coconut/edible oil. Consequently, it would be
absurd to say that said containers and packages are "used in the
milling process", for the process. involves "grinding, crushing,
stamping, cutting, shaping or polishing". (See THE DICTIONARY, by
TIME, COPYRIGHT 1974, p. 444) . . .
 SECOND; Petitioner's interpretation of the term raw materials is
contrary to law and jurisprudence. Thus, raw materials as used in the
definition of " manufacture", denotes materials from which final
product is made (Black's Law Dictionary, 4th ed. citing State vs.
Hennessy Co., 71 Mont. 301, 230, p. 64, 65). And consistent with
said definition, Revenue Regulations Nos. 2-86 and 11-86 [effective
January 1, 1986 and August 11 1986, respectively] which govern the
filing of quarterly percentage tax returns and payment thereof under
the provisions, inter alia, of Section 168 of the NIRC, define raw
materials or material, to wit:

Any article which when used in the MANUFACTURE of another

article becomes a homogenous part thereof, such that it can no
longer be identified in its original state nor may be removed therefrom
without destroying or rendering useless the finished article to which it
has been merged, mixed or dissolved. . . .

Tested in the light of the foregoing statutory definition, it is evident that containers
and packages used by Cenvoco are not "raw materials" and do not fall within the
purview of the final proviso of Section 168 of the NIRC. . . . As a coup de grace, it is
pertinent to note the case of Caltex (Phils.) Inc. vs. Manila Port Service (17 SCRA
1075) where the Supreme Court aptly defined containers and/or packages.

. . . a package or a bundle made up for transportation; a packet; a bale; a parcel; or

that in which anything is packed: box, case, barrel, crate , etc. in which goods are
packed; a container. (Emphasis Ours)

The definition is an emphatic rejection of petitioner's construction that Cenvoco's

containers and packages are raw materials used in the milling process. . . .

. . . Moreover, Section 168 of the Revenue Code expressly limits the articles subject
to percentage tax (miller's tax) to: "rope, sugar, coconut oil, palm oil, cassava flour or
starch, desiccated coconuts, manufactured, processed or milled by them, including
the by-product of the raw materials, from which said articles are produced, processed
or manufactured". . . .

(CR Decision, Rollo pp. 34-36)

Hence, the petition under consideration, posing the issue:

WHETHER OR NOT THE SALES TAX PAID BY CENVOCO WHEN IT PURCHASED

CONTAINERS AND PACKAGING MATERIALS FOR ITS MILLED PRODUCTS CAN
BE CREDITED AGAINST THE DEFICIENCY MILLER'S TAX DUE THEREON.

Resolution of the issue posited by the petitioner hinges on. the proper application of Section 168 of
the then applicable National Internal Revenue Code, particularly the last proviso of said section,
which reads:

Sec. 168. Percentage tax upon proprietors or operators of rope factories, sugar
centrals and mills, coconut oil mills, palm oil mills, cassava mills and desiccated
coconut factories. Proprietors or operators of rope factories, sugar centrals and mills,
 coconut oil mills, palm oil mills, cassava mills, and desiccated coconut factories, shall
pay a tax equivalent to three (3) percent of the gross value of money of all the rope,
sugar, coconut, oil, palm oil, cassava flour or starch, desiccated coconut,
manufactured, processed or milled by them, including the by-product of the raw
materials, from which said articles are produced, processed or manufactured, such
tax to be based on the actual selling price or market value of these articles at the
time they leave the factory or mill warehouse: Provided, however, that this tax shall
not apply to rope, coconut oil, palm oil and the by-product of copra from which it is
produced or manufactured, and dessiccated coconuts, if such rope, coconut oil, palm
oil, copra by-products and dessiccated coconuts, shall be removed for exportation by
the proprietor of operator or the factory or mill himself, and are actually exported
without returning to the Philippines, whether in their original state or as an ingredient
or part of any manufactured article or product: Provided further, That where the
planter or the owner of the raw materials is the exporter of the aforementioned milled
or manufactured products, he shall be entitled to a tax credit of the miller's taxes
withheld by the proprietor or operator of the factory or mill, corresponding to the
quantity exported, which may be used against any internal revenue tax directly due
from him: and Provided, finally, That credit for any sales. miller's or excise taxes paid
on raw materials or supplies used in the milling process shall not be allowed against
the miller's tax due, except in the case of a proprietor or operator of a refined sugar
factory as provided hereunder. (emphasis supplied)

Notably, the law relied upon by the BIR Commissioner as the basis for not allowing Cenvoco's tax
credit is just a proviso of Section 168 of the old Tax Code. The restriction in the said proviso,
however, is limited only to sales, miller's or excise taxes paid "on raw materials used in the milling
process".

Under the rules of statutory construction, exceptions, as a general rule, should be strictly but
reasonably construed. They extend only so far as their language fairly warrants, and all doubts
should be resolved in favor of the general provisions rather than the exception. Where a general rule
is established by statute with exceptions, the court will not curtail the former nor add to the latter by
implication. . . . (Samson vs. Court of Appeals, 145 SCRA 659 [1986]).

The exception provided for in Section 168 of the old Tax Code should thus be strictly construed.
Conformably, the sales, miller's and excise taxes paid on all Other materials (except on raw
materials used in the milling process), such as the sales taxes paid on containers and packaging
materials of the milled products under consideration, may be credited against the miller's tax due
therefor.

It is a basic rule of interpretation that words and phrases used in the statute, in the absence of a
clear legislative intent to the contrary, should be given their plain, ordinary and common usage or
meaning. (Mustang Lumber Inc. v. CA, 257 SCRA 430 [1996] citing Ruben E. Agpalo, Statutory
Construction, second ed. [1990], 131).

From the disquisition and rationalization aforequoted, containers and packaging materials are
certainly not raw materials. Cans and tetrakpaks are not used in the manufacture of Cenvoco's
finished products which are coconut, edible oil or coprameal cake. Such finished products are
packed in cans and tetrapaks.

Petitioner laments the pronouncement by the Court of Appeals that Deputy Commissioner Eufracio
Santos' 1988 ruling may not reverse Commissioner Ruben Ancheta's favorable ruling on a similar
claim of CENVOCO of October, 1984, which reads in part:
 . . . This refers to your letter dated September 5, 1984 requesting that the 10% sales
tax paid on container cans purchased by you, be credited against the 2% (now 3%)
miller's tax due on the refined coconut edible oil.

It is represented that you process copra and/or coconut oil and sell the refined edible
oil in cans; that said cans are purchased from can manufacturers who in turn bill to
you the price of the cans and the 10% tax paid thereon which are separately shown
on the invoice; and that the cost of the cans, including the 2% miller's tax is
computed.

In reply, I have the honor to inform you that your request is hereby granted. . . .
(Pacific Oxygen & Acetylene Co. vs. Commissioner, GR No. L-17708, April 30, 1905).
(Rollo p. 36)

According to petitioner, to hold, as what the Court of Appeals did, that a reversal of the aforesaid
ruling would be violative of the rule on non-retroactivity of rulings of tax officials when prejudicial to
the taxpayer (Section 278 of the old Tax Code) would, in effect, create a perpetual exemption in
favor of CENVOCO although there may be subsequent changes in circumstances warranting a
reversal.

This Court is mindful of the well-entrenched principle that the government is never estopped from
collecting taxes because of mistakes or errors on the part of its agents, but this rule admits of
exceptions in the interest of justice and fairplay. (ABS CBN Broadcasting Corp. vs. Court of Tax
Appeals, 108 SCRA 151 [1951]) More so in the present case, where we discern no error in allowing
the sales taxes paid by CENVOCO on the containers and packages of its milled products, to be
credited against the deficiency miller's tax due thereon, for a proper application of the law.

It bears stressing that tax burdens are not to be imposed, nor presumed to be imposed beyond what
the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the
government. (The Province of Bulacan, et. al, vs. Hon. CA, et. al., GR No. 226232, November 27,
1998; Republic vs. IAC, 196 SCRA 335[1931]; CIR vs. Firemen's Fund Ins. Co., 148 SCRA 315
(1987); CIR vs. CA, 204 SCRA 182 [1991])

Then, too, it has been the long standing policy and practice of this Court to respect conclusions
arrived at by quasi-judicial agencies, especially the Court of Tax Appeals which: by the nature of its
functions, is dedicated exclusively to the study and consideration of tax problems, and which has
thus developed an expertise on the subject, unless an abuse or improvident exercise of its authority
is shown. Finding no such abuse or improvident exercise of authority or discretion under the
premises, the decision of the Court of Appeals, affirming that of the Court of Tax Appeals, should be
upheld. (Commissioner of Internal Revenue vs. Court of Appeals, 204 SCRA 189 [1991])

WHEREFORE, the petition is hereby DISMISSED and the decision of the Court of Appeals
AFFIRMED. No pronouncement as to costs.
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents-appellees.

This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring
Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal Revenue", denying the various claims for tax refund; and the February
20, 1969 Resolution of the same court denying the motion for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its tugboats,
imported various engine parts and other equipment for which it paid, under protest, the assessed
compensating tax. Unable to secure a tax refund from the Commissioner of Internal Revenue, on
January 2, 1964, it filed a Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals,
docketed therein as CTA Case No. 1484, praying among others, that it be granted the refund of the
amount of P33,442.13. The Court of Tax Appeals, however, in a Decision dated October 21, 1969
(Ibid., pp. 22-27), denied the various claims for tax refund. The decretal portion of the said decision
reads:

WHEREFORE, finding petitioner's various claims for refund amounting to

P33,442.13 without sufficient legal justification, the said claims have to be, as they
are hereby, denied. With costs against petitioner.

On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 28-34), but
the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
petition.

This Court, in a Resolution dated March 13, 1969, gave due course to the petition (Ibid., p. 40).
Petitioner-appellant raised three (3) assignments of error, to wit:

The lower court erred in holding that the petitioner-appellant is engaged in business
as stevedore, the work of unloading and loading of a vessel in port, contrary to the
evidence on record.

II

The lower court erred in not holding that the business in which petitioner-appellant is
engaged, is part and parcel of the shipping industry.

III

The lower court erred in not allowing the refund sought by petitioner-appellant.

The instant petition is without merit.

The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to be
included in the term "cargo vessels" for purposes of the tax exemption provided for in Section 190 of
the National Internal Revenue Code, as amended by Republic Act No. 3176.

Said law provides:

Sec. 190. Compensating tax. — ... And Provided further, That the tax imposed in this
section shall not apply to articles to be used by the importer himself in the
manufacture or preparation of articles subject to specific tax or those for consignment
abroad and are to form part thereof or to articles to be used by the importer himself
as passenger and/or cargo vessel, whether coastwise or oceangoing, including
engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax
exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176.
He argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former
towing the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly,
it concludes that the engines, spare parts and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23).

On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are not
"Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons
or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot
be claimed that the tugboats in question are used in carrying and transporting passengers or
cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not within the
purview of Section 190 of the Tax Code, as amended by Republic Act No. 3176 (Brief for
Respondents-Appellees, pp. 45).

This Court has laid down the rule that "as the power of taxation is a high prerogative of sovereignty,
the relinquishment is never presumed and any reduction or dimunition thereof with respect to its
mode or its rate, must be strictly construed, and the same must be coached in clear and
unmistakable terms in order that it may be applied." (84 C.J.S. pp. 659-800), More specifically
stated, the general rule is that any claim for exemption from the tax statute should be strictly
construed against the taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69
SCRA 469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142
[1975]).

As correctly analyzed by the Court of Tax Appeals, in order that the importations in question may be
declared exempt from the compensating tax, it is indispensable that the requirements of the
amendatory law be complied with, namely: (1) the engines and spare parts must be used by the
importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo
vessel must be used in coastwise or oceangoing navigation (Decision, CTA Case No. 1484; Rollo, p.
24).

As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No. 3176 limit
tax exemption from the compensating tax to imported items to be used by the importer himself as
operator of passenger and/or cargo vessel (Ibid., p. 25).

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing and,
now, also used for attendance on vessel. (Webster New International Dictionary, 2nd
Ed.)

A tugboat is a diesel or steam power vessel designed primarily for moving large
ships to and from piers for towing barges and lighters in harbors, rivers and canals.
(Encyclopedia International Grolier, Vol. 18, p. 256).

A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law
Dictionary.) (Rollo, p. 24).

Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of
passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a
provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense
being entertained to justify non-compliance. All that has to be done is to apply it in every case that
falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555
[1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).

And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved and the
evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it will
be noted that the legislature in amending Section 190 of the Tax Code by Republic Act 3176, as
appearing in the records, intended to provide incentives and inducements to bolster the shipping
industry and not the business of stevedoring, as manifested in the sponsorship speech of Senator
Gil Puyat (Rollo, p. 26).

On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no evidence
was adduced by petitioner-appellant that tugboats are passenger and/or cargo vessels used in the
shipping industry as an independent business. On the contrary, petitioner-appellant's own evidence
supports the view that it is engaged as a stevedore, that is, the work of unloading and loading of a
vessel in port; and towing of barges containing cargoes is a part of petitioner's undertaking as a
stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring
and lighterage, taxed under Section 191 of the National Internal Revenue Code as a contractor, and
not an entity which transports passengers or freight for hire which is taxed under Section 192 of the
same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).

Under the circumstances, there appears to be no plausible reason to disturb the findings and
conclusion of the Court of Tax Appeals.

As a matter of principle, this Court will not set aside the conclusion reached by an agency such as
the Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the
study and consideration of tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority (Reyes v. Commissioner of
Internal Revenue, 24 SCRA 199 [1981]), which is not present in the instant case.

PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of Tax
Appeals is AFFIRMED.

SO ORDERED.

G.R. No. L-31092 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay
the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the gross
receipts it realized from the construction of the World Health Organization office building in Manila.

The World Health Organization (WHO for short) is an international organization which has a regional
office in Manila. As an international organization, it enjoys privileges and immunities which are
defined more specifically in the Host Agreement entered into between the Republic of the Philippines
and the said Organization on July 22, 1951. Section 11 of that Agreement provides, inter alia, that
"the Organization, its assets, income and other properties shall be: (a) exempt from all direct and
indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes
which are, in fact, no more than charges for public utility services; . . .

When the WHO decided to construct a building to house its own offices, as well as the other United
Nations offices stationed in Manila, it entered into a further agreement with the Govermment of the
Republic of the Philippines on November 26, 1957. This agreement contained the following provision
(Article III, paragraph 2):

The Organization may import into the country materials and fixtures required for the
construction free from all duties and taxes and agrees not to utilize any portion of the
international reserves of the Government.

Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22,
1951 which granted the Organization exemption from all direct and indirect taxes.

In inviting bids for the construction of the building, the WHO informed the bidders that the building to
be constructed belonged to an international organization with diplomatic status and thus exempt
from the payment of all fees, licenses, and taxes, and that therefore their bids "must take this into
account and should not include items for such taxes, licenses and other payments to Government
agencies."

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for
short) on February 10, 1958 for the stipulated price of P370,000.00, but when the building was
completed the price reached a total of P452,544.00.

Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of
Internal Revenue stating that "as the 3% contractor's tax is an indirect tax on the assets and income
of the Organization, the gross receipts derived by contractors from their contracts with the WHO for
the construction of its new building, are exempt from tax in accordance with . . . the Host
Agreement." Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue
reversed his opinion and stated that "as the 3% contractor's tax is not a direct nor an indirect tax on
the WHO, but a tax that is primarily due from the contractor, the same is not covered by . . . the Host
Agreement."

On January 2, 1960, the WHO issued a certification state 91 inter alia,:

When the request for bids for the construction of the World Health Organization office
building was called for, contractors were informed that there would be no taxes or
fees levied upon them for their work in connection with the construction of the
building as this will be considered an indirect tax to the Organization caused by the
increase of the contractor's bid in order to cover these taxes. This was upheld by the
Bureau of Internal Revenue and it can be stated that the contractors submitted their
bids in good faith with the exemption in mind.

The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made
under the condition stated above, should be exempted from any taxes in connection
with the construction of the World Health Organization office building.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco
demanding payment of P 16,970.40, representing the 3% contractor's tax plus surcharges on the
gross receipts it received from the WHO in the construction of the latter's building.
Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which
after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's decision. The
Court of Tax Appeal's decision is now before us for review on certiorari.

In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption,
contending that the Host Agreement is null and void, not having been ratified by the Philippine
Senate as required by the Constitution. We find no merit in this contention. While treaties are
required to be ratified by the Senate under the Constitution, less formal types of international
agreements may be entered into by the Chief Executive and become binding without the
concurrence of the legislative body. The Host Agreement comes within the latter category; it is a
1

valid and binding international agreement even without the concurrence of the Philippine Senate.

The privileges and immunities granted to the WHO under the Host Agreement have been recognized
by this Court as legally binding on Philippine authorities.2

Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the
WHO is valid and enforceable, the 3% contractor's tax assessed on Gotamco is not an "indirect tax"
within its purview. Petitioner's position is that the contractor's tax "is in the nature of an excise tax
which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. . . It is a tax due primarily and directly on the contractor, not on the owner
of the building. Since this tax has no bearing upon the WHO, it cannot be deemed an indirect
taxation upon it."

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the
respondent court:

In context, direct taxes are those that are demanded from the very person who, it is
intended or desired, should pay them; while indirect taxes are those that are
demanded in the first instance from one person in the expectation and intention that
he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US
429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course payable by the
contractor but in the last analysis it is the owner of the building that shoulders the
burden of the tax because the same is shifted by the contractor to the owner as a
matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the
WHO because, although it is payable by the petitioner, the latter can shift its burden
on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through
the contractor and it certainly cannot be said that 'this tax has no bearing upon the
World Health Organization.

Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner
of Internal Revenue, et al., the 3% contractor's tax fans directly on Gotamco and cannot be shifted
3

to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this
case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We agree.
The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid
by the manufacturer or producer; the fact that the manufacturer or producer might have added the
amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser." The
Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made
to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government,
and to the Voice of America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes
which, although not imposed upon or paid by the Organization directly, form part of the price paid or
to be paid by it. This is made clear in Section 12 of the Host Agreement which provides:

While the Organization will not, as a general rule, in the case of minor purchases,
claim exemption from excise duties, and from taxes on the sale of movable and
immovable property which form part of the price to be paid, nevertheless, when the
Organization is making important purchases for official use of property on which such
duties and taxes have been charged or are chargeable the Government of the
Republic of the Philippines shall make appropriate administrative arrangements for
the remission or return of the amount of duty or tax. (Emphasis supplied).

The above-quoted provision, although referring only to purchases made by the WHO, elucidates the
clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor,
Gotamco, from any taxes in connection with the construction of the WHO office building. The 3%
contractor's tax would be within this category and should be viewed as a form of an "indirect tax" On
the Organization, as the payment thereof or its inclusion in the bid price would have meant an
increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the
appealed decision is hereby affirmed.

SO ORDERED.

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.

In conducting researches and studies of social organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue
Code levying a three percent contractor's tax? This question is answer by the Court in the negative
as it resolves this petition assailing the Decision of the Respondent Court of Appeals in CA-G.R.
1 2

SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being
largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary

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

On July 8, 1983, private respondent received from petitioner Commissioner of

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

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment

for deficiency income tax but modifying the assessment for deficiency contractor's
tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent
requested for a reconsideration or reinvestigation of the modified assessment. At the
same time, it filed in the respondent court a petition for review of the said letter-
decision of the petitioner. While the petition was pending before the respondent
court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which
dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET

ASIDE. The deficiency contractor's tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year
ended March 31, 1978 is hereby CANCELED. No pronouncement as
to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER

THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO

3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX
CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A

contractor's tax of threeper centum of the gross receipts is hereby imposed on the
following:

xxx xxx xxx

 (16) Business agents and other independent contractors except
persons, associations and corporations under contract for embroidery
and apparel for export, as well as their agents and contractors and
except gross receipts of or from a pioneer industry registered with the
Board of Investments under Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or

natural) not enumerated above (but not including individuals subject
to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for
the exercise or use of the physical or mental faculties of such
contractors or their employees.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent
is not an "independent contractor" within the purview of Section 205 of the Tax Code.
To petitioner, the term "independent contractor", as defined by the Code,
encompasses all kinds of services rendered for a fee and that the only exceptions
are the following:

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

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and

c. Regional or area headquarters established in the Philippines by multinational

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

Petitioner thus submits that since private respondent falls under the definition of an
"independent contractor" and is not among the aforementioned exceptions, private
respondent is therefore subject to the 3% contractor's tax imposed under the same
Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed
the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.

The Issues

Petitioner submits before us the following issues:

 1) Whether or not private respondent falls under the purview of independent
contractor pursuant to Section 205 of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section

205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary
unit or branch — the Institute of Philippine Culture — performing the work of an independent
contractor and, thus, subject to the three percent contractor's tax levied by then Section 205 of the
National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us
read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A

contractor's tax of threeper centum of the gross receipts is hereby imposed on the
following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons,

associations and corporations under contract for embroidery and apparel for export,
as well as their agents and contractors, and except gross receipts of or from a
pioneer industry registered with the Board of Investments under the provisions of
Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not

enumerated above (but not including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all
kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating centers
for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal
contractor as the total contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University "falls within the definition" of an independent contractor and "is not one of those
mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by
the foregoing provision of law. Petitioner states that the "term 'independent contractor' is not
6

specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders
physical and mental service for a fee, is now indubitably considered an independent contractor liable
to 3% contractor's tax." According to petitioner, Ateneo has the burden of proof to show its
7

exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The Commissioner should have determined
first if private respondent was covered by Section 205, applying the rule of strict interpretation of
laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax lawsand the provisions of a taxing act
are not to be extended by implication." Parenthetically, in answering the question of who is subject
8

to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the
three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently
proven that the private respondent is indeed selling its services for a fee in pursuit of an independent
business. And it is only after private respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption therefrom would arise. Only after such
coverage is shown does the rule of construction — that tax exemptions are to be strictly construed
against the taxpayer — come into play, contrary to petitioner's position. This is the main line of
reasoning of the Court of Tax Appeals in its decision, which was affirmed by the CA.
10

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting
researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the
contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is
imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is
made under a contract and the various contracts entered into between private respondent and its
clients are almost of the same terms, showing, among others, the compensation and terms of
payment." (Emphasis supplied.)
11
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show
that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by
the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the
established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed,
contracts for sale of services were ever entered into by the private respondent. As appropriately
pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court

of Tax Appeals shows that only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A.

Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between
private respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by
the Ateneo de Manila University are technically not a fee. They may however fall as gifts or
donations which are tax-exempt" as shown by private respondent's compliance with the requirement
of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an
educational institution.
13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent
contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is
not engaged in business. Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university status. In fact, the research
activities being carried out by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture. Since it can only finance a
limited number of IPC's research projects, private respondent occasionally accepts
sponsorship for unfunded IPC research projects from international organizations,
private foundations and governmental agencies. However, such sponsorships are
subject to private respondent's terms and conditions, among which are, that the
research is confined to topics consistent with the private respondent's academic
agenda; that no proprietary or commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but also the ownership of
the results of the research conducted by the IPC. Quite clearly, the aforementioned
terms and conditions belie the allegation that private respondent is a contractor or is
engaged in business.
 For another, it bears stressing that private respondent is a non-stock, non-profit
educational corporation. The fact that it accepted sponsorship for IPC's unfunded
projects is merely incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the private respondent. Moreover
the records do not show that in accepting sponsorship of research work, IPC realized
profits from such work. On the contrary, the evidence shows that for about 30 years,
IPC had continuously operated at a loss, which means that sponsored funds are less
than actual expenses for its research projects. That IPC has been operating at a loss
loudly bespeaks of the fact that education and not profit is the motive for undertaking
the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research
projects, the fact still remains that there is no proof that part of such earnings or
profits was ever distributed as dividends to any stockholder, as in fact none was so
distributed because they accrued to the benefit of the private respondent which is a
non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given
in the concept of a fee or price in exchange for the performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors
solely for the purpose of sponsoring or funding the research with no strings attached. As found by
the two courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or
commercial research is done, and IPC retains the ownership of the results of the research, including
the absolute right to publish the same. The copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. The 15

amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts
that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture
cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of
sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in money or its equivalent." By its16

very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code
"expressly makes the obligation to transfer ownership as an essential element of the contract of sale,
following modern codes, such as the German and the Swiss. Even in the absence of this express
requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin
and Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and
Alguer follow the same view, stating that the delivery of the thing does not mean a mere physical
transfer, but is a means of transmitting ownership. Transfer of title or an agreement to transfer it for a
price paid or promised to be paid is the essence of sale." In the case of a contract for a piece of
17

work, "the contractor binds himself to execute a piece of work for the employer, in consideration of a
certain price or compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the
thing, . . ." Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of
18

ownership is involved and a party necessarily walks away with an object. In the case at bench, it is
19

clear from the evidence on record that there was no sale either of objects or services because, as
adverted to earlier, there was no transfer of ownership over the research data obtained or the results
of research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in
pursuance of maintaining Ateneo's university status and not in the course of an independent
business of selling such research with profit in mind. This is clear from a reading of the regulations
governing universities:

31. In addition to the legal requisites an institution must meet, among others, the
following requirements before an application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified
staff at least three graduate departments in accordance with the rules and standards
for graduate education. One of the departments shall be science and
technology. The competence of the staff shall be judged by their effective teaching,
scholarly publications and research activities published in its school journal as well
as their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources
and support, a reasonable portion of which should be devoted to institutional
development and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to
maintain satisfactorily the standards and requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the
Ateneo is patently erroneous because the former is not an independent juridical entity that is
separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of
Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically
created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to
determine the issue of whether" Ateneo de Manila University may be deemed a subject of the three
21

percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of
principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which
is, by the very nature of its function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject unless there has been an
abuse or improvident exercise of authority . . ." This point becomes more evident in the case before
22

us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals
appear untainted by any abuse of authority, much less grave abuse of discretion. Thus, we find the
decision of the latter affirming that of the former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge
deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to
1985. In fact, it was Ateneo de Manila University itself that had funded the research projects of the
23

institute, and it was only when Ateneo could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research
activities done in furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the
Institute of Philippine Culture) that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual cost. Will you please tell us
in this case when the actual cost is a lot less than the grant who shoulders the
additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university

has to have its own research institute. 24

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

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court
of Appeals is hereby AFFIRMED in full.

SO ORDERED.

G.R. No. L-45355 January 12, 1990

THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL
TREASURER, petitioner,
vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO), respondent.

The issue in this case is a legal one: whether or not a corporation whose franchise expressly
provides that the payment of the "franchise tax of three per centum of the gross earnings shall be in
lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise,
and poles, wires, transformers, and insulators of the grantee." (p. 20, Rollo), is exempt from paying a
provincial franchise tax.

Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on
June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an electric light, heat
and power system in the City of Cagayan de Oro and its suburbs. Said franchise was amended on
June 21, 1963 by R.A. No. 3570 which added the municipalities of Tagoloan and Opol to
CEPALCO's sphere of operation, and was further amended on August 4, 1969 by R.A. No. 6020
which extended its field of operation to the municipalities of Villanueva and Jasaan.

R.A. Nos. 3247, 3570 and 6020 uniformly provide that:

 Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a
franchise tax equal to three per centum of the gross earnings for electric current sold under
this franchise, of which two per centum goes into the National Treasury and one per
centum goes into the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan
and Cagayan de Oro City, as the case may be: Provided, That the said franchise tax of
three per centum of the gross earnings shall be in lieu of all taxes and assessments of
whatever authority upon privileges earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee from which taxes and assessments
the grantee is hereby expressly exempted. (Emphasis supplied.)

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which provides:

Sec. 9. Franchise Tax.—Any provision of special laws to the contrary notwithstanding, the
province may impose a tax on businesses enjoying franchise, based on the gross receipts
realized within its territorial jurisdiction, at the rate of not exceeding one-half of one per cent
of the gross annual receipts for the preceding calendar year.

In the case of newly started business, the rate shall not exceed three thousand pesos per
year. Sixty per cent of the proceeds of the tax shall accrue to the general fund of the
province and forty per cent to the general fund of the municipalities serviced by the business
on the basis of the gross annual receipts derived therefrom by the franchise holder. In the
case of a newly started business, forty per cent of the proceeds of the tax shall be divided
equally among the municipalities serviced by the business. (Emphasis supplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue
Ordinance No. 19, whose Section 12 reads:

Sec. 12. Franchise Tax.—There shall be levied, collected and paid on businesses enjoying
franchise tax of one-half of one per cent of their gross annual receipts for the preceding
calendar year realized within the territorial jurisdiction of the province of Misamis Oriental. (p.
27, Rollo.)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax from
CEPALCO. The company refused to pay, alleging that it is exempt from all taxes except the
franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion rendered by the
Provincial Fiscal, upon CEPALCO's request, upholding the legality of the Revenue Ordinance,
CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's
ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO.

On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely
the opinion of the Secretary of Justice.

On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a
complaint for declaratory relief praying, among others, that the Court exercise its power to construe
P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No. 6020), and to declare the franchise
as having been amended by P.D. No. 231. The Court dismissed the complaint and ordered the
Province to return to CEPALCO the sum of P4,276.28 paid under protest.

The Province has appealed to this Court, alleging that the lower court erred in holding that:
1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not amended or
repealed by P.D. No. 231;

2) the imposition of the provincial franchise tax on CEPALCO would subvert the purpose of P.D. No.
231;

3) CEPALCO is exempt from paying the provincial franchise tax; and

4) petitioner should refund CEPALCO's tax payment of P4,276.28.

We find no merit in the petition for review.

There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3 of R.A.
No. 6020. The perceived repugnancy between the two statutes should be very clear before the Court
may hold that the prior one has been repealed by the later, since there is no express provision to
that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule is that a special and local statute
applicable to a particular case is not repealed by a later statute which is general in its terms,
provisions and application even if the terms of the general act are broad enough to include the cases
in the special law (id.) unless there is manifest intent to repeal or alter the special law.

Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while P.D.
No. 231 is a general tax law. The presumption is that the special statutes are exceptions to the
general law (P.D. No. 231) because they pertain to a special charter granted to meet a particular set
of conditions and circumstances.

The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of whatever
authority" except the three per centum (3%) tax on its gross earnings.

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or
collected by any authority" found in the franchise of the Visayan Electric Company was held to
exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of
the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385).

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the
franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila
Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432
and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497)
justified the exemption of the Philippine Railway Company from payment of the tax on its corporate
franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine
Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant
Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato
(Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was
required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as
amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No.
4] 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of
the franchise and the rendition of public service by the grantee. As a charter is in the nature of a
private contract, the imposition of another franchise tax on the corporation by the local authority
would constitute an impairment of the contract between the government and the corporation.

Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric Power
Company which provided that the company shall pay:

tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all taxes .
. . now or in the future . . . from which taxes . . . the grantee is hereby expressly exempted
and . . . no other tax . . . other than the franchise tax of 2% on the gross receipts as provided
for in the original franchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of the National Internal
Revenue Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R.
No. 23771, August 4, 1988).

On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc., Guagua
Electric Company, Inc. were subjected to the 5% tax on corporate franchise under Section 259 of the
Internal Revenue Code, as amended, because Act No. 667 of the Philippine Commission and the
ordinance or resolutions granting their respective franchises did not contain the "in-lieu-of-all-taxes"
clause (Balanga Power Plant Co. vs. Commissioner of Internal Revenue, G.R. No. L-20499, June
30, 1965; Imus Electric Co. vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua
Electric Light vs. Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).

Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it
crystal clear that the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be
imposed on companies with franchises that do not contain the exempting clause. Thus it provides:

The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax
Code, as amended, shall be collected from businesses holding franchise but not from
business establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable here
because what the Government sought to impose on Meralco in that case was not a franchise tax but
a compensating tax on the poles, wires, transformers and insulators which it imported for its use.

WHEREFORE, the petition for review is denied, and the decision of the Court of First Instance is
hereby affirmed in toto. No costs.

SO ORDERED.

G.R. No. 108358 January 20, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and THE HON.
COURT OF TAX APPEALS, respondents.
On 22 August 1986, during the period when the President of the Republic still wielded legislative
powers, Executive Order No. 41 was promulgated declaring a one-time tax amnesty on unpaid
income taxes, later amended to include estate and donor's taxes and taxes on business, for the
taxable years 1981 to 1985.

Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc., filed, in October
1986 and November 1986, its Tax Amnesty Return No. 34-F-00146-41 and Supplemental Tax
Amnesty Return No. 34-F-00146-64-B, respectively, and paid the corresponding amnesty taxes due.

Prior to this availment, petitioner Commissioner of Internal Revenue, in a communication received by

private respondent on 13 August 1986, assessed the latter deficiency income and business taxes for
its fiscal years ended 30 September 1981 and 30 September 1982 in an aggregate amount of
P1,410,157.71. The taxpayer wrote back to state that since it had been able to avail itself of the tax
amnesty, the deficiency tax notice should forthwith be cancelled and withdrawn. The request was
denied by the Commissioner, in his letter of 22 November 1988, on the ground that Revenue
Memorandum Order No. 4-87, dated 09 February 1987, implementing Executive Order No. 41, had
construed the amnesty coverage to include only assessments issued by the Bureau of Internal
Revenue after the promulgation of the executive order on 22 August 1986 and not to assessments
theretofore made. The invoked provisions of the memorandum order read:

TO: All Internal Revenue Officers and Others Concerned:

1.0. To give effect and substance to the immunity provisions of the tax amnesty under
Executive Order No. 41, as expanded by Executive Order No. 64, the following
instructions are hereby issued:

xxx xxx xxx

1.02. A certification by the Tax Amnesty Implementation Officer of the fact of

availment of the said tax amnesty shall be a sufficient basis for:

xxx xxx xxx

1.02.3. In appropriate cases, the cancellation/withdrawal of assessment notices and

letters of demand issued after August 21, 1986 for the collection of income,
business, estate or donor's taxes due during the same taxable years. (Emphasis
1

supplied)

Private respondent appealed the Commissioner's denial to the Court of Tax Appeals. Ruling for the
taxpayer, the tax court said:

Respondent (herein petitioner Commissioner) failed to present any case or law which
proves that an assessment can withstand or negate the force and effects of a tax
amnesty. This burden of proof on the petitioner (herein respondent taxpayer) was
created by the clear and express terms of the executive order's intention — qualified
availers of the amnesty may pay an amnesty tax in lieu of said unpaid taxes which
are forgiven (Section 2, Section 5, Executive Order No. 41, as amended). More
specifically, the plain provisions in the statute granting tax amnesty for unpaid taxes
for the period January 1, 1981 to December 31, 1985 shifted the burden of proof on
respondent to show how the issuance of an assessment before the date of the
promulgation of the executive order could have a reasonable relation with the
 objective periods of the amnesty, so as to make petitioner still answerable for a tax
liability which, through the statute, should have been erased with the proper
availment of the amnesty.

Additionally, the exceptions enumerated in Section 4 of Executive Order No. 41, as

amended, do not indicate any reference to an assessment or pending investigation
aside from one arising from information furnished by an informer. . . . Thus, we deem
that the rule in Revenue Memorandum Order No. 4-87 promulgating that only
assessments issued after August 21, 1986 shall be abated by the amnesty is beyond
the contemplation of Executive Order No. 41, as amended. 2

On appeal by the Commissioner to the Court of Appeals, the decision of the tax court was affirmed.
The appellate court further observed:

In the instant case, examining carefully the words used in Executive Order No. 41, as
amended, we find nothing which justifies petitioner Commissioner's ground for
denying respondent taxpayer's claim to the benefits of the amnesty law. Section 4 of
the subject law enumerates, in no uncertain terms, taxpayers who may not avail of
the amnesty granted,. . . .

Admittedly, respondent taxpayer does not fall under any of the . . . exceptions. The
added exception urged by petitioner Commissioner based on Revenue Memorandum
Order No. 4-87, further restricting the scope of the amnesty clearly amounts to an act
of administrative legislation quite contrary to the mandate of the law which the
regulation ought to implement.

xxx xxx xxx

Lastly, by its very nature, a tax amnesty, being a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law, partakes of an absolute
forgiveness or waiver by the Government of its right to collect what otherwise would
be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and thereby become a part
of the new society with a clean slate. (Republic vs. Intermediate Appellate Court. 196
SCRA 335, 340 [1991] citing Commissioner of Internal Revenue vs. Botelho Shipping
Corp., 20 SCRA 487) To follow [the restrictive application of Revenue Memorandum
Order No. 4-87 pressed by petitioner Commissioner would be to work against
the raison d'etre of E.O. 41, as amended, i.e., to raise government revenues by
encouraging taxpayers to declare their untaxed income and pay the tax due thereon.
(E.O. 41, first paragraph)]
3

In this petition for review, the Commissioner raises these related issues:

1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87, PROMULGATED

TO IMPLEMENT E.O. NO. 41, IS VALID;

2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE

EXTINGUISHED BY REASON OR PRIVATE RESPONDENT'S AVAILMENT OF
EXECUTIVE ORDER NO. 41 AS AMENDED BY EXECUTIVE ORDER NO. 64;
 3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE PRESUMPTION
OF VALIDITY OF ASSESSMENTS. 4

The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the
Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective
enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such
rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve
weight and respect by the courts. Much more fundamental than either of the above, however, is that
all such issuances must not override, but must remain consistent and in harmony with, the law they
seek to apply and implement. Administrative rules and regulations are intended to carry out, neither
to supplant nor to modify, the law.

The real and only issue is whether or not the position taken by the Commissioner coincides with the
meaning and intent of executive Order No. 41.

We agree with both the court of Appeals and court of Tax Appeals that Executive Order No. 41 is
quite explicit and requires hardly anything beyond a simple application of its provisions. It reads:

Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering unpaid income taxes
for the years 1981 to 1985 is hereby declared.

Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to avail himself of the
tax amnesty shall, on or before October 31, 1986;

a) file a sworn statement declaring his net worth as of December 31,

1985;

b) file a certified true copy of his statement declaring his net worth as
of December 31, 1980 on record with the Bureau of Internal
Revenue, or if no such record exists, file a statement of said net
worth therewith, subject to verification by the Bureau of Internal
Revenue;

c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31,
1985: Provided, That in no case shall the tax be less than P5,000.00
for individuals and P10,000.00 for judicial persons.

Sec. 3. Computation of Net Worth. — In computing the net worths referred to in

Section 2 hereof, the following rules shall govern:

a) Non-cash assets shall be valued at acquisition cost.

b) Foreign currencies shall be valued at the rates of exchange

prevailing as of the date of the net worth statement.

Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the
amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2

and 14;
 b) Those with income tax cases already filed in Court as of the
effectivity hereof;

c) Those with criminal cases involving violations of the income tax

already filed in court as of the effectivity filed in court as of the
effectivity hereof;

d) Those that have withholding tax liabilities under the National

Internal Revenue Code, as amended, insofar as the said liabilities are
concerned;

e) Those with tax cases pending investigation by the Bureau of

Internal Revenue as of the effectivity hereof as a result of information
furnished under Section 316 of the National Internal Revenue Code,
as amended;

f) Those with pending cases involving unexplained or unlawfully

acquired wealth before the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal

Exactions and Transactions) and Chapter Four (Malversation of
Public Funds and Property) of the Revised Penal Code, as amended.

xxx xxx xxx

Sec. 9. The Minister of finance, upon the recommendation of the Commissioner of

Internal Revenue, shall promulgate the necessary rules and regulations to implement
this Executive Order.

xxx xxx xxx

Sec. 11. This Executive Order shall take effect immediately.

DONE in the City of Manila, this 22nd day of August in the year of Our Lord, nineteen
hundred and eighty-six.

The period of the amnesty was later extended to 05 December 1986 from 31 October 1986 by
Executive Order No. 54, dated 04 November 1986, and, its coverage expanded, under Executive
Order No. 64, dated 17 November 1986, to include estate and honors taxes and taxes on business.

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-
1985 tax liabilities already assessed (administratively) prior to 22 August 1986, the law could have
simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that
the executive order has been designed to be in the nature of a general grant of tax amnesty subject
only to the cases specifically excepted by it.

It might not be amiss to recall that the taxable periods covered by the amnesty include the years
immediately preceding the 1986 revolution during which time there had been persistent calls, all too
vivid to be easily forgotten, for civil disobedience, most particularly in the payment of taxes, to the
martial law regime. It should be understandable then that those who ultimately took over the reigns
of government following the successful revolution would promptly provide for abroad, and not a
confined, tax amnesty.

Relative to the two other issued raised by the Commissioner, we need only quote from Executive
Order No. 41 itself; thus:

Sec. 6. Immunities and Privileges. — Upon full compliance with the conditions of the
tax amnesty and the rules and regulations issued pursuant to this Executive order,
the taxpayer shall enjoy the following immunities and privileges:

a) The taxpayer shall be relieved of any income tax liability on any

untaxed income from January 1, 1981 to December 31, 1985,
including increments thereto and penalties on account of the non-
payment of the said tax. Civil, criminal or administrative liability
arising from the non-payment of the said tax, which are actionable
under the National Internal Revenue Code, as amended, are likewise
deemed extinguished.

b) The taxpayer's tax amnesty declaration shall not be admissible in

evidence in all proceedings before judicial, quasi-judicial or
administrative bodies, in which he is a defendant or respondent, and
the same shall not be examined, inquired or looked into by any
person, government official, bureau or office.

c) The books of account and other records of the taxpayer for the
period from January 1, 1981 to December 31, 1985 shall not be
examined for income tax purposes: Provided, That the Commissioner
of Internal Revenue may authorize in writing the examination of the
said books of accounts and other records to verify the validity or
correctness of a claim for grant of any tax refund, tax credit (other
than refund on credit of withheld taxes on wages), tax incentives,
and/or exemptions under existing laws.

There is no pretension that the tax amnesty returns and due payments made by the taxpayer did not
conform with the conditions expressed in the amnesty order.

WHEREFORE, the decision of the court of Appeals, sustaining that of the court of Tax Appeals, is
hereby AFFIRMED in toto. No costs.

SO ORDERED.
.