Republic of the Philippines

SUPREME COURT
Manila

a) the grant of twenty percent (20%) discount from all

establishments relative to utilization of transportation services,
hotels and similar lodging establishment[s], restaurants and
recreation centers and purchase of medicine anywhere in the
country: Provided, That private establishments may claim the
cost as tax credit;

EN BANC
G.R. No. 175356

December 3, 2013

b) a minimum of twenty percent (20%) discount on admission fees

charged by theaters, cinema houses and concert halls, circuses, carnivals
and other similar places of culture, leisure, and amusement;

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT,

INC., Petitioners,
vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT and THE SECRETARY OF THE DEPARTMENT OF
FINANCE, Respondents.

c) exemption from the payment of individual income taxes: Provided, That

their annual taxable income does not exceed the property level as
determined by the National Economic and Development Authority (NEDA)
for that year;

DECISION

d) exemption from training fees for socioeconomic programs undertaken

by the OSCA as part of its work;

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof
rests upon him.

e) free medical and dental services in government establishment[s]

anywhere in the country, subject to guidelines to be issued by the
Department of Health, the Government Service Insurance System and the
Social Security System;

Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court

filed by petitioners Manila Memorial Park, Inc. and La Funeraria
Paz-Sucat, Inc., domestic corporations engaged in the business of
providing funeral and burial services, against public respondents
Secretaries of the Department of Social Welfare and Development
(DSWD) and the Department of Finance (DOF).

f) to the extent practicable and feasible, the continuance of the same

benefits and privileges given by the Government Service Insurance
System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case
may be, as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to
implement RA 7432. Sections 2(i) and 4 of RR No. 02-94 provide:

Petitioners assail the constitutionality of Section 4 of Republic Act (RA)

No. 7432,3 as amended by RA 9257, 4 and the implementing rules and
regulations issued by the DSWD and DOF insofar as these allow
business establishments to claim the 20% discount given to
senior citizens as a tax deduction.

Sec. 2. DEFINITIONS. For purposes of these regulations: i. Tax Credit

refers to the amount representing the 20% discount granted to a qualified
senior citizen by all establishments relative to their utilization of
transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses,
concert halls, circuses, carnivals and other similar places of culture,
leisure and amusement, which discount 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. x
x x x Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
ESTABLISHMENTS. Private establishments, i.e., transport services, hotels
and similar lodging establishments, restaurants, recreation centers,
drugstores, theaters, cinema houses, concert halls, circuses, carnivals and
other similar places of culture[,] leisure and amusement, giving 20%

Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior
citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be
entitled to the following:

discounts to qualified senior citizens are required to keep separate and

accurate record[s] of sales made to senior citizens, which shall include the
name, identification number, gross sales/receipts, discounts, dates of
transactions and invoice number for every transaction. The amount of
20% discount shall be deducted from the gross income for income
tax purposes and from gross sales of the business enterprise
concerned for purposes of the VAT and other percentage taxes.

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. 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 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 competence to provide." The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by
the courts. Courts, however, will not uphold these authorities
interpretations when clearly absurd, erroneous or improper. In the present
case, the tax authorities have given the term tax credit in Sections 2.i and
4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides.
Their interpretation has muddled x x x 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.

In Commissioner of Internal Revenue v. Central Luzon Drug

Corporation,5 the Court declared Sections 2(i) and 4 of RR No. 02-94 as
erroneous because these contravene RA 7432,6 thus:
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 procedures for its
availment. To deny such credit, despite the plain mandate of the law and
the regulations carrying out that mandate, is indefensible. First, the
definition given by petitioner is erroneous. It refers to tax credit as the
amount representing the 20 percent discount that "shall be deducted by
the said establishments from their gross income for income tax purposes
and from their gross sales for value-added tax or other percentage tax
purposes." In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount
shall be credited against taxes has not been clarified by the revenue
regulations. By ordinary acceptation, a discount is an "abatement or
reduction made from the gross amount or value of anything." To be more
precise, it is in business parlance "a deduction or lowering of an amount
of money;" or "a reduction from the full amount or value of something,
especially a price." In 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.

In case of conflict, the law must prevail. A "regulation adopted pursuant to

law is law." Conversely, a regulation or any portion thereof not adopted
pursuant to law is no law and has neither the force nor the effect of law. 7
On February 26, 2004, RA 9257 8 amended certain provisions of RA 7432,
to wit:

xxxx

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be
entitled to the following:

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit
as the 20 percent discount deductible from gross income for income tax
purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount.
This contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in the
income statement and cannot be deducted again, even for purposes of
computing the income tax. When the law says that the cost of the
discount may be claimed as a tax credit, it means that the amount
when claimed shall be treated as a reduction from any tax liability,
plain and simple. The option to avail of the tax credit benefit depends
upon the existence of a tax liability, but to limit the benefit to a sales
discount which is not even identical to the discount privilege that is

(a) the grant of twenty percent (20%) discount from all establishments
relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of
medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of
senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and
(h) as tax deduction based on the net cost of the goods sold or services
rendered: Provided, That the cost of the discount shall be allowed as
2

deduction from gross income for the same taxable year that the discount
is granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue
Code, as amended.

(i) Funeral parlors and similar establishments The beneficiary or any

person who shall shoulder the funeral and burial expenses of the
deceased senior citizen shall claim the discount, such as casket,
embalmment, cremation cost and other related services for the senior
citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA
9257, to wit:

To implement the tax provisions of RA 9257, the Secretary of Finance

issued RR No. 4-2006, the pertinent provision of which provides:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS
DEDUCTION FROM GROSS INCOME. Establishments enumerated in
subparagraph (6) hereunder granting sales discounts to senior citizens on
the sale of goods and/or services specified thereunder are entitled to
deduct the said discount from gross income subject to the following
conditions:

Article 8. Tax Deduction of Establishments. The establishment may claim

the discounts granted under Rule V, Section 4 Discounts for
Establishments, Section 9, Medical and Dental Services in Private Facilities
and Sections 10 and 11 Air, Sea and Land Transportation as tax
deduction based on the net cost of the goods sold or services rendered.

(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED
OR ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible
sales discount.

Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue
Code, as amended; Provided, finally, that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the
Bureau of Internal Revenue (BIR) and approved by the Department of
Finance (DOF).

(2) The gross selling price and the sales discount MUST BE SEPARATELY
INDICATED IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the
establishment for the sale of goods or services to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not
exceeding 20% of the gross selling price can be deducted from the gross
income, net of value added tax, if applicable, for income tax purposes,
and from gross sales or gross receipts of the business enterprise
concerned, for VAT or other percentage tax purposes.

Feeling aggrieved by the tax deduction scheme, petitioners filed the

present recourse, praying that Section 4 of RA 7432, as amended by RA
9257, and the implementing rules and regulations issued by the DSWD
and the DOF be declared unconstitutional insofar as these allow business
establishments to claim the 20% discount given to senior citizens as a tax
deduction; that the DSWD and the DOF be prohibited from enforcing the
same; and that the tax credit treatment of the 20% discount under the
former Section 4 (a) of RA 7432 be reinstated.

(4) The discount can only be allowed as deduction from gross income for
the same taxable year that the discount is granted.
(5) The business establishment giving sales discounts to qualified senior
citizens is required to keep separate and accurate record[s] of sales,
which shall include the name of the senior citizen, TIN, OSCA ID, gross
sales/receipts, sales discount granted, [date] of [transaction] and invoice
number for every sale transaction to senior citizen.

Issues
Petitioners raise the following issues:

(6) Only the following business establishments which granted sales

discount to senior citizens on their sale of goods and/or services may
claim the said discount granted as deduction from gross income, namely:

A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

xxxx
B.
3

WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS

IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY PROVIDE
THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY
BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS,
ARE INVALID AND UNCONSTITUTIONAL.9

Consequently, the implementation of the tax deduction scheme

prescribed under Section 4 of RA 9257 affects the businesses of
petitioners.26
Thus, there exists an actual case or controversy of transcendental
importance which deserves judicious disposition on the merits by the
highest court of the land.27

Petitioners Arguments
Petitioners emphasize that they are not questioning the 20% discount
granted to senior citizens but are only assailing the constitutionality of the
tax deduction scheme prescribed under RA 9257 and the implementing
rules and regulations issued by the DSWD and the DOF. 10

Respondents Arguments
Respondents, on the other hand, question the filing of the instant Petition
directly with the Supreme Court as this disregards the hierarchy of
courts.28

Petitioners posit that the tax deduction scheme contravenes Article III,
Section 9 of the Constitution, which provides that: "[p]rivate property
shall not be taken for public use without just compensation."11

They likewise assert that there is no justiciable controversy as petitioners

failed to prove that the tax deduction treatment is not a "fair and full
equivalent of the loss sustained" by them.29

In support of their position, petitioners cite Central Luzon Drug

Corporation,12 where it was ruled that the 20% discount privilege
constitutes taking of private property for public use which requires the
payment of just compensation,13 and Carlos Superdrug Corporation v.
Department of Social Welfare and Development,14 where it was
acknowledged that the tax deduction scheme does not meet the
definition of just compensation.15

As to the constitutionality of RA 9257 and its implementing rules and

regulations, respondents contend that petitioners failed to overturn its
presumption of constitutionality.30
More important, respondents maintain that the tax deduction scheme is a
legitimate exercise of the States police power.31

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug

Corporation16 that the tax deduction scheme adopted by the government
is justified by police power.17

Our Ruling
The Petition lacks merit.

They assert that "[a]lthough both police power and the power of eminent
domain have the general welfare for their object, there are still traditional
distinctions between the two"18 and that "eminent domain cannot be
made less supreme than police power."19

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a
law is put in issue, judicial review may be availed of only if the following
requisites concur: "(1) the existence of an actual and appropriate case; (2)
the existence of personal and substantial interest on the part of the party
raising the [question of constitutionality]; (3) recourse to judicial review is
made at the earliest opportunity; and (4) the [question of
constitutionality] is the lis mota of the case."32

Petitioners further claim that the legislature, in amending RA 7432, relied

on an erroneous contemporaneous construction that prior payment of
taxes is required for tax credit. 20
Petitioners also contend that the tax deduction scheme violates Article
XV, Section 421 and Article XIII, Section 1122of the Constitution because it
shifts the States constitutional mandate or duty of improving the welfare
of the elderly to the private sector.23

In this case, petitioners are challenging the constitutionality of the tax

deduction scheme provided in RA 9257 and the implementing rules and
regulations issued by the DSWD and the DOF. Respondents, however,
oppose the Petition on the ground that there is no actual case or
controversy. We do not agree with respondents. An actual case or
controversy exists when there is "a conflict of legal rights" or "an
assertion of opposite legal claims susceptible of judicial resolution." 33

Under the tax deduction scheme, the private sector shoulders 65% of the
discount because only 35% 24 of it is actually returned by the
government.25
4

The Petition must therefore show that "the governmental act being
challenged has a direct adverse effect on the individual challenging it." 34

would ordinarily become entitled to a just compensation. Just

compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the takers
gain but the owners loss. The word just is used to intensify the meaning
of the word compensation, and to convey the idea that the equivalent to
be rendered for the property to be taken shall be real, substantial, full and
ample. A tax deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition of just
compensation. Having said that, this raises the question of whether the
State, in promoting the health and welfare of a special group of citizens,
can impose upon private establishments the burden of partly subsidizing
a government program. The Court believes so. The Senior Citizens Act
was enacted primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for their
improvement and well-being as the State considers them an integral part
of our society. The priority given to senior citizens finds its basis in the
Constitution as set forth in the law itself. Thus, the Act provides: SEC. 2.
Republic Act No. 7432 is hereby amended to read as follows:

In this case, the tax deduction scheme challenged by petitioners has a

direct adverse effect on them. Thus, it cannot be denied that there exists
an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction
scheme under RA 9257, as an exercise of police power of the
State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination
of whether the legally mandated 20% senior citizen discount is an
exercise of police power or eminent domain. If it is police power, no just
compensation is warranted. But if it is eminent domain, the tax deduction
scheme is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior citizens. Thus, it
constitutes taking of private property without payment of just
compensation. At the outset, we note that this question has been settled
in Carlos Superdrug Corporation.35

SECTION 1. Declaration of Policies and Objectives. Pursuant to Article

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

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because
it constitutes deprivation of private property. Compelling drugstore
owners and establishments to grant the discount will result in a loss of
profit and capital because 1) drugstores impose a mark-up of only 5% to
10% on branded medicines; and 2) the law failed to provide a scheme
whereby drugstores will be justly compensated for the discount.
Examining petitioners arguments, it is apparent that what petitioners are
ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that
they extend to senior citizens. Based on the afore-stated DOF Opinion, the
tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is
subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of
tax which is due. Being a tax deduction, the discount does not reduce
taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of the discount as a
deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments, were it not
for R.A. No. 9257. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for public
use or benefit. This constitutes compensable taking for which petitioners

(f) To recognize the important role of the private sector in the

improvement of the welfare of senior citizens and to actively seek their
partnership.
To implement the above policy, the law grants a twenty percent discount
to senior citizens for medical and dental services, and diagnostic and
laboratory fees; admission fees charged by theaters, concert halls,
circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of
services in hotels and similar lodging establishments, restaurants and
recreation centers; and purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of reimbursement, the law
provides that business establishments extending the twenty percent
5

discount to senior citizens may claim the discount as a tax deduction. The
law is a legitimate exercise of police power which, similar to the power of
eminent domain, has general welfare for its object. Police power is not
capable of an exact definition, but has been purposely veiled in general
terms to underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to conditions
and circumstances, thus assuring the greatest benefits. Accordingly, it has
been described as "the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs." It is "[t]he
power vested in the legislature by the constitution to make, ordain, and
establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same." For this reason, when
the conditions so demand as determined by the legislature, property
rights must bow to the primacy of police power because property rights,
though sheltered by due process, must yield to general welfare. Police
power as an attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in
the absence of evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor. Given these,
it is incorrect for petitioners to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because petitioners have
not taken time to calculate correctly and come up with a financial report,
so that they have not been able to show properly whether or not the tax
deduction scheme really works greatly to their disadvantage. In treating
the discount as a tax deduction, petitioners insist that they will incur
losses because, referring to the DOF Opinion, for every P1.00 senior
citizen discount that petitioners would give, P0.68 will be shouldered by
them as only P0.32 will be refunded by the government by way of a tax
deduction. To illustrate this point, petitioner Carlos Super Drug cited the
anti-hypertensive maintenance drug Norvasc as an example. According to
the latter, it acquires Norvasc from the distributors at P37.57 per tablet,
and retails it at P39.60 (or at a margin of 5%). If it grants a 20% discount
to senior citizens or an amount equivalent to P7.92, then it would have to
sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per
tablet. Even if the government will allow a tax deduction, only P2.53 per
tablet will be refunded and not the full amount of the discount which
is P7.92. In short, only 32% of the 20% discount will be reimbursed to the
drugstores. Petitioners computation is flawed. For purposes of
reimbursement, the law states that the cost of the discount shall be
deducted from gross income, the amount of income derived from all
sources before deducting allowable expenses, which will result in net
income. Here, petitioners tried to show a loss on a per transaction basis,
which should not be the case. An income statement, showing an
accounting of petitioners' sales, expenses, and net profit (or loss) for a
given period could have accurately reflected the effect of the discount on

their income. Absent any financial statement, petitioners cannot

substantiate their claim that they will be operating at a loss should they
give the discount. In addition, the computation was erroneously based on
the assumption that their customers consisted wholly of senior citizens.
Lastly, the 32% tax rate is to be imposed on income, not on the amount of
the discount.
Furthermore, it is unfair for petitioners to criticize the law because they
cannot raise the prices of their medicines given the cutthroat nature of
the players in the industry. It is a business decision on the part of
petitioners to peg the mark-up at 5%. Selling the medicines below
acquisition cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right, petitioners cannot
reproach the law for being oppressive, simply because they cannot afford
to raise their prices for fear of losing their customers to competition. The
Court is not oblivious of the retail side of the pharmaceutical industry and
the competitive pricing component of the business. While the Constitution
protects property rights, petitioners must accept the realities of business
and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property
rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of
the Constitution provides the precept for the protection of property,
various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continuously serve as x x x
reminder[s] that the right to property can be relinquished upon the
command of the State for the promotion of public good. Undeniably, the
success of the senior citizens program rests largely on the support
imparted by petitioners and the other private establishments concerned.
This being the case, the means employed in invoking the active
participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient
proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain from quashing a
legislative act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction
scheme is a valid exercise of the police power of the State.
No compelling reason has been proffered to overturn, modify or
abandon the ruling in Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug
Corporation37 that the 20% discount is an exercise of the power of
eminent domain, thus, requiring the payment of just compensation. They
6

urge us to re-examine our ruling in Carlos Superdrug Corporation 38 which

allegedly reversed the ruling in Central Luzon Drug Corporation. 39

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. 42 (Italics in the
original; emphasis supplied)

They also point out that Carlos Superdrug Corporation 40 recognized that
the tax deduction scheme under the assailed law does not provide for
sufficient just compensation. We agree with petitioners observation that
there are statements in Central Luzon Drug Corporation 41 describing the
20% discount as an exercise of the power of eminent domain, viz.:
[T]he 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. The concept of public use is no longer confined to the traditional
notion of use by the public, but held synonymous with public interest,
public benefit, public welfare, and public convenience. The discount
privilege to which 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. 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 sanctions" and "clearly imposed for a public
purpose." In recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. 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 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 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

The above was partly incorporated in our ruling in Carlos Superdrug

Corporation43 when we stated preliminarily that
Petitioners assert that Section 4(a) of the law is unconstitutional because
it constitutes deprivation of private property. Compelling drugstore
owners and establishments to grant the discount will result in a loss of
profit and capital because 1) drugstores impose a mark-up of only 5% to
10% on branded medicines; and 2) the law failed to provide a scheme
whereby drugstores will be justly compensated for the discount.
Examining petitioners arguments, it is apparent that what petitioners are
ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that
they extend to senior citizens. Based on the afore-stated DOF Opinion, the
tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is
subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of
tax which is due. Being a tax deduction, the discount does not reduce
taxes owed on a peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of the discount as a
deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments, were it not
for R.A. No. 9257. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for public
use or benefit. This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation. Just
compensation is defined as the full and fair equivalent of the property
taken from its owner by the expropriator. The measure is not the takers
gain but the owners loss. The word just is used to intensify the meaning
of the word compensation, and to convey the idea that the equivalent to
be rendered for the property to be taken shall be real, substantial, full and
ample. A tax deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition of just
compensation. Having said that, this raises the question of whether the
State, in promoting the health and welfare of a special group of citizens,
7

can impose upon private establishments the burden of partly subsidizing

a government program. The Court believes so.44

In other words, to be a valid exercise of police power, it must have a

lawful subject or objective and a lawful method of accomplishing the
goal.60

This, notwithstanding, we went on to rule in Carlos Superdrug

Corporation45 that the 20% discount and tax deduction scheme is a valid
exercise of the police power of the State. The present case, thus, affords
an opportunity for us to clarify the above-quoted statements in Central
Luzon Drug Corporation46 and Carlos Superdrug Corporation.47

Under the police power of the State, "property rights of individuals may
be subjected to restraints and burdens in order to fulfill the objectives of
the government."61
The State "may interfere with personal liberty, property, lawful businesses
and occupations to promote the general welfare [as long as] the
interference [is] reasonable and not arbitrary."62

First, we note that the above-quoted disquisition on eminent domain in

Central Luzon Drug Corporation48 is obiter dicta and, thus, not binding
precedent. As stated earlier, in Central Luzon Drug Corporation, 49 we ruled
that the BIR acted ultra vires when it effectively treated the 20% discount
as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the
clear wording of the previous law that the same should be treated as a tax
credit. We were, therefore, not confronted in that case with the issue as to
whether the 20% discount is an exercise of police power or eminent
domain. Second, although we adverted to Central Luzon Drug
Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred
only to preliminary matters. A fair reading of Carlos Superdrug
Corporation52would show that we categorically ruled therein that the 20%
discount is a valid exercise of police power. Thus, even if the current law,
through its tax deduction scheme (which abandoned the tax credit
scheme under the previous law), does not provide for a peso for peso
reimbursement of the 20% discount given by private establishments, no
constitutional infirmity obtains because, being a valid exercise of police
power, payment of just compensation is not warranted. We have carefully
reviewed the basis of our ruling in Carlos Superdrug Corporation 53 and we
find no cogent reason to overturn, modify or abandon it. We also note that
petitioners arguments are a mere reiteration of those raised and resolved
in Carlos Superdrug Corporation. 54 Thus, we sustain Carlos Superdrug
Corporation.55

Eminent domain, on the other hand, is the inherent power of the State to
take or appropriate private property for public use.63
The Constitution, however, requires that private property shall not be
taken without due process of law and the payment of just compensation. 64
Traditional distinctions exist between police power and eminent domain.
In the exercise of police power, a property right is impaired by
regulation,65 or the use of property is merely prohibited, regulated or
restricted66 to promote public welfare. In such cases, there is no
compensable taking, hence, payment of just compensation is not
required. Examples of these regulations are property condemned for
being noxious or intended for noxious purposes (e.g., a building on the
verge of collapse to be demolished for public safety, or obscene materials
to be destroyed in the interest of public morals) 67 as well as zoning
ordinances prohibiting the use of property for purposes injurious to the
health, morals or safety of the community (e.g., dividing a citys territory
into residential and industrial areas).68
It has, thus, been observed that, in the exercise of police power (as
distinguished from eminent domain), although the regulation affects the
right of ownership, none of the bundle of rights which constitute
ownership is appropriated for use by or for the benefit of the public. 69

Nonetheless, we deem it proper, in what follows, to amplify our

explanation in Carlos Superdrug Corporation 56 as to why the 20% discount
is a valid exercise of police power and why it may not, under the specific
circumstances of this case, be considered as an exercise of the power of
eminent domain contrary to the obiter in Central Luzon Drug
Corporation.57

On the other hand, in the exercise of the power of eminent domain,

property interests are appropriated and applied to some public purpose
which necessitates the payment of just compensation therefor. Normally,
the title to and possession of the property are transferred to the
expropriating authority. Examples include the acquisition of lands for the
construction of public highways as well as agricultural lands acquired by
the government under the agrarian reform law for redistribution to
qualified farmer beneficiaries. However, it is a settled rule that the
acquisition of title or total destruction of the property is not essential for
"taking" under the power of eminent domain to be present.70

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain
the use of liberty and property for public welfare.58
The only limitation is that the restriction imposed should be reasonable,
not oppressive.59
8

Examples of these include establishment of easements such as where the

land owner is perpetually deprived of his proprietary rights because of the
hazards posed by electric transmission lines constructed above his
property71 or the compelled interconnection of the telephone system
between the government and a private company.72

subject regulation may be said to be similar to, but with substantial

distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures. 77
These laws generally regulate public utilities or industries/enterprises
imbued with public interest in order to protect consumers from exorbitant
or unreasonable pricing as well as temper corporate greed by controlling
the rate of return on investment of these corporations considering that
they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from adjusting the level of
prices of their goods and services, and (2) the discount does not apply to
all customers of a given establishment but only to the class of senior
citizens. Nonetheless, to the degree material to the resolution of this case,
the 20% discount may be properly viewed as belonging to the category of
price regulatory measures which affect the profitability of establishments
subjected thereto. On its face, therefore, the subject regulation is a police
power measure. The obiter in Central Luzon Drug Corporation, 78 however,
describes the 20% discount as an exercise of the power of eminent
domain and the tax credit, under the previous law, equivalent to the
amount of discount given as the just compensation therefor. The reason is
that (1) the discount would have formed part of the gross sales of the
establishment were it not for the law prescribing the 20% discount, and
(2) the permanent reduction in total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
The flaw in this reasoning is in its premise. It presupposes that the subject
regulation, which impacts the pricing and, hence, the profitability of a
private establishment, automatically amounts to a deprivation of property
without due process of law. If this were so, then all price and rate of return
on investment control laws would have to be invalidated because they
impact, at some level, the regulated establishments profits or
income/gross sales, yet there is no provision for payment of just
compensation. It would also mean that overnment cannot set price or rate
of return on investment limits, which reduce the profits or income/gross
sales of private establishments, if no just compensation is paid even if the
measure is not confiscatory. The obiter is, thus, at odds with the settled
octrine that the State can employ police power measures to regulate the
pricing of goods and services, and, hence, the profitability of business
establishments in order to pursue legitimate State objectives for the
common good, provided that the regulation does not go too far as to
amount to "taking."79

In these cases, although the private property owner is not divested of

ownership or possession, payment of just compensation is warranted
because of the burden placed on the property for the use or benefit of the
public.
The 20% senior citizen discount is an exercise of police power.
It may not always be easy to determine whether a challenged
governmental act is an exercise of police power or eminent domain. The
very nature of police power as elastic and responsive to various social
conditions73 as well as the evolving meaning and scope of public use 74 and
just compensation75 in eminent domain evinces that these are not static
concepts. Because of the exigencies of rapidly changing times, Congress
may be compelled to adopt or experiment with different measures to
promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain.
The judicious approach, therefore, is to look at the nature and effects of
the challenged governmental act and decide, on the basis thereof,
whether the act is the exercise of police power or eminent domain. Thus,
we now look at the nature and effects of the 20% discount to determine if
it constitutes an exercise of police power or eminent domain. The 20%
discount is intended to improve the welfare of senior citizens who, at their
age, are less likely to be gainfully employed, more prone to illnesses and
other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount
serves to honor senior citizens who presumably spent the productive
years of their lives on contributing to the development and progress of
the nation. This distinct cultural Filipino practice of honoring the elderly is
an integral part of this law. As to its nature and effects, the 20% discount
is a regulation affecting the ability of private establishments to price their
products and services relative to a special class of individuals, senior
citizens, for which the Constitution affords preferential concern. 76
In turn, this affects the amount of profits or income/gross sales that a
private establishment can derive from senior citizens. In other words, the
subject regulation affects the pricing, and, hence, the profitability of a
private establishment. However, it does not purport to appropriate or
burden specific properties, used in the operation or conduct of the
business of private establishments, for the use or benefit of the public, or
senior citizens for that matter, but merely regulates the pricing of goods
and services relative to, and the amount of profits or income/gross sales
that such private establishments may derive from, senior citizens. The

In City of Manila v. Laguio, Jr., 80 we recognized that x x x a taking also

could be found if government regulation of the use of property went "too
far." When regulation reaches a certain magnitude, in most if not in all
cases there must be an exercise of eminent domain and compensation to
support the act. While property may be regulated to a certain extent, if
regulation goes too far it will be recognized as a taking. No formula or rule
can be devised to answer the questions of what is too far and when
9

regulation becomes a taking. In Mahon, Justice Holmes recognized that it

was "a question of degree and therefore cannot be disposed of by general
propositions." On many other occasions as well, the U.S. Supreme Court
has said that the issue of when regulation constitutes a taking is a matter
of considering the facts in each case. The Court asks whether justice and
fairness require that the economic loss caused by public action must be
compensated by the government and thus borne by the public as a whole,
or whether the loss should remain concentrated on those few persons
subject to the public action.81

On its face, we find that there are at least two conceivable bases to
sustain the subject regulations validity absent clear and convincing proof
that it is unreasonable, oppressive or confiscatory. Congress may have
legitimately concluded that business establishments have the capacity to
absorb a decrease in profits or income/gross sales due to the 20%
discount without substantially affecting the reasonable rate of return on
their investments considering (1) not all customers of a business
establishment are senior citizens and (2) the level of its profit margins on
goods and services offered to the general public. Concurrently, Congress
may have, likewise, legitimately concluded that the establishments, which
will be required to extend the 20% discount, have the capacity to revise
their pricing strategy so that whatever reduction in profits or
income/gross sales that they may sustain because of sales to senior
citizens, can be recouped through higher mark-ups or from other products
not subject of discounts. As a result, the discounts resulting from sales to
senior citizens will not be confiscatory or unduly oppressive. In sum, we
sustain our ruling in Carlos Superdrug Corporation 88 that the 20% senior
citizen discount and tax deduction scheme are valid exercises of police
power of the State absent a clear showing that it is arbitrary, oppressive
or confiscatory.

The impact or effect of a regulation, such as the one under consideration,

must, thus, be determined on a case-to-case basis. Whether that line
between permissible regulation under police power and "taking" under
eminent domain has been crossed must, under the specific circumstances
of this case, be subject to proof and the one assailing the constitutionality
of the regulation carries the heavy burden of proving that the measure is
unreasonable, oppressive or confiscatory. The time-honored rule is that
the burden of proving the unconstitutionality of a law rests upon the one
assailing it and "the burden becomes heavier when police power is at
issue."82

Conclusion

The 20% senior citizen discount has not been shown to be unreasonable,
oppressive or confiscatory.

In closing, we note that petitioners hypothesize, consistent with our

previous ratiocinations, that the discount will force establishments to raise
their prices in order to compensate for its impact on overall profits or
income/gross sales. The general public, or those not belonging to the
senior citizen class, are, thus, made to effectively shoulder the subsidy for
senior citizens. This, in petitioners view, is unfair.

In Alalayan v. National Power Corporation, 83 petitioners, who were

franchise holders of electric plants, challenged the validity of a law
limiting their allowable net profits to no more than 12% per annum of
their investments plus two-month operating expenses. In rejecting their
plea, we ruled that, in an earlier case, it was found that 12% is a
reasonable rate of return and that petitioners failed to prove that the
aforesaid rate is confiscatory in view of the presumption of
constitutionality.84

As already mentioned, Congress may be reasonably assumed to have

foreseen this eventuality. But, more importantly, this goes into the
wisdom, efficacy and expediency of the subject law which is not proper for
judicial review. In a way, this law pursues its social equity objective in a
non-traditional manner unlike past and existing direct subsidy programs
of the government for the poor and marginalized sectors of our society.
Verily, Congress must be given sufficient leeway in formulating welfare
legislations given the enormous challenges that the government faces
relative to, among others, resource adequacy and administrative
capability in implementing social reform measures which aim to protect
and uphold the interests of those most vulnerable in our society. In the
process, the individual, who enjoys the rights, benefits and privileges of
living in a democratic polity, must bear his share in supporting measures
intended for the common good. This is only fair. In fine, without the
requisite showing of a clear and unequivocal breach of the Constitution,
the validity of the assailed law must be sustained.

We adopted a similar line of reasoning in Carlos Superdrug

Corporation85 when we ruled that petitioners therein failed to prove that
the 20% discount is arbitrary, oppressive or confiscatory. We noted that
no evidence, such as a financial report, to establish the impact of the 20%
discount on the overall profitability of petitioners was presented in order
to show that they would be operating at a loss due to the subject
regulation or that the continued implementation of the law would be
unconscionably detrimental to the business operations of petitioners. In
the case at bar, petitioners proceeded with a hypothetical computation of
the alleged loss that they will suffer similar to what the petitioners in
Carlos Superdrug Corporation86 did. Petitioners went directly to this Court
without first establishing the factual bases of their claims. Hence, the
present recourse must, likewise, fail. Because all laws enjoy the
presumption of constitutionality, courts will uphold a laws validity if any
set of facts may be conceived to sustain it.87

Refutation of the Dissent

10

The main points of Justice Carpios Dissent may be summarized as

follows: (1) the discussion on eminent domain in Central Luzon Drug
Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is
limited to property that is destroyed or placed outside the commerce of
man for public welfare; (3) the amount of mandatory discount is private
property within the ambit of Article III, Section 9 90 of the Constitution; and
(4) the permanent reduction in a private establishments total revenue,
arising from the mandatory discount, is a taking of private property for
public use or benefit, hence, an exercise of the power of eminent domain
requiring the payment of just compensation. I We maintain that the
discussion on eminent domain in Central Luzon Drug Corporation 91 is
obiter dicta. As previously discussed, in Central Luzon Drug
Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94,
treated the senior citizen discount in the previous law, RA 7432, as a tax
deduction instead of a tax credit despite the clear provision in that law
which stated

previous law provides for a tax credit instead of a tax deduction. The
Court surmised that the tax credit was a form of just compensation given
to the establishments covered by the 20% discount. However, the reason
why the previous law provided for a tax credit and not a tax deduction
was not necessary to resolve the issue as to whether the revenue
regulation contravenes the law. Hence, the discussion on eminent domain
is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes
or reasons that impelled the enactment of a particular statute or legal
provision. However, statements made relative thereto are not always
necessary in resolving the actual controversies presented before it. This
was the case in Central Luzon Drug Corporation 96resulting in that
unfortunate statement that the tax credit "can be deemed" as just
compensation. This, in turn, led to the erroneous conclusion, by deductive
reasoning, that the 20% discount is an exercise of the power of eminent
domain. The Dissent essentially adopts this theory and reasoning which,
as will be shown below, is contrary to settled principles in police power
and eminent domain analysis. II The Dissent discusses at length the
doctrine on "taking" in police power which occurs when private property is
destroyed or placed outside the commerce of man. Indeed, there is a
whole class of police power measures which justify the destruction of
private property in order to preserve public health, morals, safety or
welfare. As earlier mentioned, these would include a building on the verge
of collapse or confiscated obscene materials as well as those mentioned
by the Dissent with regard to property used in violating a criminal statute
or one which constitutes a nuisance. In such cases, no compensation is
required. However, it is equally true that there is another class of police
power measures which do not involve the destruction of private property
but merely regulate its use. The minimum wage law, zoning ordinances,
price control laws, laws regulating the operation of motels and hotels,
laws limiting the working hours to eight, and the like would fall under this
category. The examples cited by the Dissent, likewise, fall under this
category: Article 157 of the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely
regulate or, to use the term of the Dissent, burden the conduct of the
affairs of business establishments. In such cases, payment of just
compensation is not required because they fall within the sphere of
permissible police power measures. The senior citizen discount law falls
under this latter category. III The Dissent proceeds from the theory that
the permanent reduction of profits or income/gross sales, due to the 20%
discount, is a "taking" of private property for public purpose without
payment of just compensation. At the outset, it must be emphasized that
petitioners never presented any evidence to establish that they were
forced to suffer enormous losses or operate at a loss due to the effects of
the assailed law. They came directly to this Court and provided a
hypothetical computation of the loss they would allegedly suffer due to
the operation of the assailed law. The central premise of the Dissents
argument that the 20% discount results in a permanent reduction in

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be
entitled to the following:
a) The grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar lodging
establishment, restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law,
viz:
The 20 percent discount required by the law to be given to senior citizens
is a tax credit, not merely a tax deduction from the gross income or gross
sale of the establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants a tax credit to
all covered entities. Thus, the provisions of the revenue regulation that
withdraw or modify such grant are void. Basic is the rule that
administrative regulations cannot amend or revoke the law. 93
As can be readily seen, the discussion on eminent domain was not
necessary in order to arrive at this conclusion. All that was needed was to
point out that the revenue regulation contravened the law which it sought
to implement. And, precisely, this was done in Central Luzon Drug
Corporation94 by comparing the wording of the previous law vis--vis the
revenue regulation; employing the rules of statutory construction; and
applying the settled principle that a regulation cannot amend the law it
seeks to implement. A close reading of Central Luzon Drug
Corporation95 would show that the Court went on to state that the tax
credit "can be deemed" as just compensation only to explain why the
11

profits or income/gross sales, or forces a business establishment to

operate at a loss is, thus, wholly unsupported by competent evidence. To
be sure, the Court can invalidate a law which, on its face, is arbitrary,
oppressive or confiscatory.97

By revising its pricing strategy, a business establishment can recoup any

reduction of profits or income/gross sales which would otherwise arise
from the giving of the 20% discount. To illustrate, suppose A has two
customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law,
A sells his products at P10.00 a piece to X and Y resulting in income/gross
sales of P20.00 (P10.00 + P10.00). With the passage of the law, A must
now sell his product to X at P8.00 (i.e., P10.00 less 20%) so that his
income/gross sales would be P18.00 (P8.00 + P10.00) or lower by P2.00.
To prevent this from happening, A decides to increase the price of his
products to P11.11 per piece. Thus, he sells his product to X at P8.89
(i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his income/gross
sales would still be P20.00105 (P8.89 + P11.11). The capacity, then, of
business establishments to revise their pricing strategy makes it possible
for them not to suffer any reduction in profits or income/gross sales, or, in
the alternative, mitigate the reduction of their profits or income/gross
sales even after the passage of the law. In other words, business
establishments have the capacity to adjust their prices so that they may
remain profitable even under the operation of the assailed law.

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a
constitutional violation can be made because of the following reasons.
First, the assailed law, by imposing the senior citizen discount, does not
take any of the properties used by a business establishment like, say, the
land on which a manufacturing plant is constructed or the equipment
being used to produce goods or services. Second, rather than taking
specific properties of a business establishment, the senior citizen discount
law merely regulates the prices of the goods or services being sold to
senior citizens by mandating a 20% discount. Thus, if a product is sold
at P10.00 to the general public, then it shall be sold at P8.00 ( i.e., P10.00
less 20%) to senior citizens. Note that the law does not impose at what
specific price the product shall be sold, only that a 20% discount shall be
given to senior citizens based on the price set by the business
establishment. A business establishment is, thus, free to adjust the prices
of the goods or services it provides to the general public. Accordingly, it
can increase the price of the above product to P20.00 but is required to
sell it at P16.00 (i.e. , P20.00 less 20%) to senior citizens. Third, because
the law impacts the prices of the goods or services of a particular
establishment relative to its sales to senior citizens, its profits or
income/gross sales are affected. The extent of the impact would,
however, depend on the profit margin of the business establishment on a
particular good or service. If a product costs P5.00 to produce and is sold
at P10.00, then the profit98 is P5.0099 or a profit margin100 of 50%.101

The Dissent, however, states that The explanation by the majority that
private establishments can always increase their prices to recover the
mandatory discount will only encourage private establishments to adjust
their prices upwards to the prejudice of customers who do not enjoy the
20% discount. It was likewise suggested that if a company increases its
prices, despite the application of the 20% discount, the establishment
becomes more profitable than it was before the implementation of R.A.
7432. Such an economic justification is self-defeating, for more consumers
will suffer from the price increase than will benefit from the 20% discount.
Even then, such ability to increase prices cannot legally validate a
violation of the eminent domain clause. 106
But, if it is possible that the business establishment, by adjusting its
prices, will suffer no reduction in its profits or income/gross sales (or suffer
some reduction but continue to operate profitably) despite giving the
discount, what would be the basis to strike down the law? If it is possible
that the business establishment, by adjusting its prices, will not be unduly
burdened, how can there be a finding that the assailed law is an
unconstitutional exercise of police power or eminent domain? That there
may be a burden placed on business establishments or the consuming
public as a result of the operation of the assailed law is not, by itself, a
ground to declare it unconstitutional for this goes into the wisdom and
expediency of the law.

Under the assailed law, the aforesaid product would have to be sold
at P8.00 to senior citizens yet the business would still earn P3.00102 or a
30%103 profit margin. On the other hand, if the product costs P9.00 to
produce and is required to be sold at P8.00 to senior citizens, then the
business would experience a loss of P1.00.104
But note that since not all customers of a business establishment are
senior citizens, the business establishment may continue to earn P1.00
from non-senior citizens which, in turn, can offset any loss arising from
sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens,
it does not prevent the business establishment from revising its pricing
strategy.

The cost of most, if not all, regulatory measures of the government on

business establishments is ultimately passed on to the consumers but
that, by itself, does not justify the wholesale nullification of these
measures. It is a basic postulate of our democratic system of government
12

that the Constitution is a social contract whereby the people have

surrendered their sovereign powers to the State for the common good. 107

unconscionable losses to be indiscriminately suffered by business

establishments, which should have led to the closure of numerous
business establishments, has not come to pass. Verily, we cannot
invalidate the assailed law based on assumptions and conjectures.
Without adequate proof, the presumption of constitutionality must prevail.
IV At this juncture, we note that the Dissent modified its original
arguments by including a new paragraph, to wit:

All persons may be burdened by regulatory measures intended for the

common good or to serve some important governmental interest, such as
protecting or improving the welfare of a special class of people for which
the Constitution affords preferential concern. Indubitably, the one
assailing the law has the heavy burden of proving that the regulation is
unreasonable, oppressive or confiscatory, or has gone "too far" as to
amount to a "taking." Yet, here, the Dissent would have this Court nullify
the law without any proof of such nature.

Section 9, Article III of the 1987 Constitution speaks of private property

without any distinction. It does not state that there should be profit before
the taking of property is subject to just compensation. The private
property referred to for purposes of taking could be inherited, donated,
purchased, mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be
attended by corresponding payment of just compensation. The 20%
discount granted to senior citizens belong to private establishments,
whether these establishments make a profit or suffer a loss. In fact, the
20% discount applies to non-profit establishments like country, social, or
golf clubs which are open to the public and not only for exclusive
membership. The issue of profit or loss to the establishments is
immaterial.110

Further, this Court is not the proper forum to debate the economic
theories or realities that impelled Congress to shift from the tax credit to
the tax deduction scheme. It is not within our power or competence to
judge which scheme is more or less burdensome to business
establishments or the consuming public and, thereafter, to choose which
scheme the State should use or pursue. The shift from the tax credit to
tax deduction scheme is a policy determination by Congress and the
Court will respect it for as long as there is no showing, as here, that the
subject
regulation
has
transgressed
constitutional
limitations.
Unavoidably, the lack of evidence constrains the Dissent to rely on
speculative and hypothetical argumentation when it states that the 20%
discount is a significant amount and not a minimal loss (which
erroneously assumes that the discount automatically results in a loss
when it is possible that the profit margin is greater than 20% and/or the
pricing strategy can be revised to prevent or mitigate any reduction in
profits or income/gross sales as illustrated above), 108 and not all private
establishments make a 20% profit margin (which conversely implies that
there are those who make more and, thus, would not be greatly affected
by this regulation).109

Two things may be said of this argument. First, it contradicts the rest of
the arguments of the Dissent. After it states that the issue of profit or loss
is immaterial, the Dissent proceeds to argue that the 20% discount is not
a minimal loss111 and that the 20% discount forces business
establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation, 113 which the Dissent
essentially adopts and relies on, is premised on the permanent reduction
of total revenues and the loss that business establishments will be forced
to suffer in arguing that the 20% discount constitutes a "taking" under the
power of eminent domain. Thus, when the Dissent now argues that the
issue of profit or loss is immaterial, it contradicts itself because it later
argues, in order to justify that there is a "taking" under the power of
eminent domain in this case, that the 20% discount forces business
establishments to suffer a significant loss or to operate at a loss. Second,
this argument suffers from the same flaw as the Dissent's original
arguments. It is an erroneous characterization of the 20% discount.
According to the Dissent, the 20% discount is part of the gross sales and,
hence, private property belonging to business establishments. However,
as previously discussed, the 20% discount is not private property actually
owned and/or used by the business establishment. It should be
distinguished from properties like lands or buildings actually used in the
operation of a business establishment which, if appropriated for public
use, would amount to a "taking" under the power of eminent domain.
Instead, the 20% discount is a regulatory measure which impacts the
pricing and, hence, the profitability of business establishments. At the

In fine, because of the possible scenarios discussed above, we cannot

assume that the 20% discount results in a permanent reduction in profits
or income/gross sales, much less that business establishments are forced
to operate at a loss under the assailed law. And, even if we gratuitously
assume that the 20% discount results in some degree of reduction in
profits or income/gross sales, we cannot assume that such reduction is
arbitrary, oppressive or confiscatory. To repeat, there is no actual proof to
back up this claim, and it could be that the loss suffered by a business
establishment was occasioned through its fault or negligence in not
adapting to the effects of the assailed law. The law uniformly applies to all
business establishments covered thereunder. There is, therefore, no
unjust discrimination as the aforesaid business establishments are faced
with the same constraints. The necessity of proof is all the more pertinent
in this case because, as similarly observed by Justice Velasco in his
Concurring Opinion, the law has been in operation for over nine years
now. However, the grim picture painted by petitioners on the
13

time the discount is imposed, no particular property of the business

establishment can be said to be "taken." That is, the State does not
acquire or take anything from the business establishment in the way that
it takes a piece of private land to build a public road. While the 20%
discount may form part of the potential profits or income/gross sales 114 of
the business establishment, as similarly characterized by Justice Bersamin
in his Concurring Opinion, potential profits or income/gross sales are not
private property, specifically cash or money, already belonging to the
business establishment. They are a mere expectancy because they are
potential fruits of the successful conduct of the business. Prior to the sale
of goods or services, a business establishment may be subject to State
regulations, such as the 20% senior citizen discount, which may impact
the level or amount of profits or income/gross sales that can be generated
by such establishment. For this reason, the validity of the discount is to be
determined based on its overall effects on the operations of the business
establishment.

power of eminent domain. In such a case, it is not profits or income/gross

sales which are actually taken and appropriated for public use. Rather,
when the regulation causes an establishment to incur losses in an
unreasonable, oppressive or confiscatory manner, what is actually taken
is capital and the right of the business establishment to a reasonable
return on investment. If the business losses are not halted because of the
continued operation of the regulation, this eventually leads to the
destruction of the business and the total loss of the capital invested
therein. But, again, petitioners in this case failed to prove that the subject
regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of
return on investment control laws to justify the senior citizen discount law.
According to the Dissent, only profits from industries imbued with public
interest may be regulated because this is a condition of their franchises.
Profits of establishments without franchises cannot be regulated
permanently because there is no law regulating their profits. The Dissent
concludes that the permanent reduction of total revenues or gross sales
of business establishments without franchises is a taking of private
property under the power of eminent domain. In making this argument, it
is unfortunate that the Dissent quotes only a portion of the ponencia
The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures. These
laws generally regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they
have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from adjusting the level of
prices of their goods and services, and (2) the discount does not apply to
all customers of a given establishment but only to the class of senior
citizens. x x x116

Again, as previously discussed, the 20% discount does not automatically

result in a 20% reduction in profits, or, to align it with the term used by
the Dissent, the 20% discount does not mean that a 20% reduction in
gross sales necessarily results. Because (1) the profit margin of a product
is not necessarily less than 20%, (2) not all customers of a business
establishment are senior citizens, and (3) the establishment may revise
its pricing strategy, such reduction in profits or income/gross sales may be
prevented or, in the alternative, mitigated so that the business
establishment continues to operate profitably. Thus, even if we
gratuitously assume that some degree of reduction in profits or
income/gross sales occurs because of the 20% discount, it does not follow
that the regulation is unreasonable, oppressive or confiscatory because
the business establishment may make the necessary adjustments to
continue to operate profitably. No evidence was presented by petitioners
to show otherwise. In fact, no evidence was presented by petitioners at
all. Justice Leonen, in his Concurring and Dissenting Opinion,
characterizes "profits" (or income/gross sales) as an inchoate right.
Another way to view it, as stated by Justice Velasco in his Concurring
Opinion, is that the business establishment merely has a right to profits.
The Constitution adverts to it as the right of an enterprise to a reasonable
return on investment.115

The above paragraph, in full, states

Undeniably, this right, like any other right, may be regulated under the
police power of the State to achieve important governmental objectives
like protecting the interests and improving the welfare of senior citizens. It
should be noted though that potential profits or income/gross sales are
relevant in police power and eminent domain analyses because they may,
in appropriate cases, serve as an indicia when a regulation has gone "too
far" as to amount to a "taking" under the power of eminent domain. When
the deprivation or reduction of profits or income/gross sales is shown to
be unreasonable, oppressive or confiscatory, then the challenged
governmental regulation may be nullified for being a "taking" under the

The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures. These
laws generally regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they
have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the
14

discount does not prevent the establishments from adjusting the level of
prices of their goods and services, and (2) the discount does not apply to
all customers of a given establishment but only to the class of senior
citizens.

franchisees cannot be regulated permanently, and there is no such law

regulating their profits permanently,"119 it is assuming what it ought to
prove. First, there are laws which, in effect, permanently regulate profits
or income/gross sales of establishments without franchises, and RA 9257
is one such law. And, second, Congress can regulate such profits or
income/gross sales because, as previously noted, there is nothing in the
Constitution to prevent it from doing so. Here, again, it must be
emphasized that petitioners failed to present any proof to show that the
effects of the assailed law on their operations has been unreasonable,
oppressive or confiscatory. The permanent regulation of profits or
income/gross sales of business establishments, even those without
franchises, is not as uncommon as the Dissent depicts it to be. For
instance, the minimum wage law allows the State to set the minimum
wage of employees in a given region or geographical area. Because of the
added labor costs arising from the minimum wage, a permanent reduction
of profits or income/gross sales would result, assuming that the employer
does not increase the prices of his goods or services. To illustrate,
suppose it costs a company P5.00 to produce a product and it sells the
same at P10.00 with a 50% profit margin. Later, the State increases the
minimum wage. As a result, the company incurs greater labor costs so
that it now costs P7.00 to produce the same product. The profit per
product of the company would be reduced to P3.00 with a profit margin of
30%. The net effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen, the minimum
wage law could, likewise, lead to a permanent reduction of profits. Does
this mean that the minimum wage law should, likewise, be declared
unconstitutional on the mere plea that it results in a permanent reduction
of profits? Taking it a step further, suppose the company decides to
increase the price of its product in order to offset the effects of the
increase in labor cost; does this mean that the minimum wage law,
following the reasoning of the Dissent, is unconstitutional because the
consuming public is effectively made to subsidize the wage of a group of
laborers, i.e., minimum wage earners? The same reasoning can be
adopted relative to the examples cited by the Dissent which, according to
it, are valid police power regulations. Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the PagIBIG Fund Law would effectively increase the labor cost of a business
establishment. This would, in turn, be integrated as part of the cost of its
goods or services. Again, if the establishment does not increase its prices,
the net effect would be a permanent reduction in its profits or
income/gross sales. Following the reasoning of the Dissent that "any form
of permanent taking of private property (including profits or income/gross
sales)120 is an exercise of eminent domain that requires the State to pay
just compensation,"121 then these statutory provisions would, likewise,
have to be declared unconstitutional. It does not matter that these
benefits are deemed part of the employees legislated wages because the
net effect is the same, that is, it leads to higher labor costs and a
permanent reduction in the profits or income/gross sales of the business
establishments.122

Nonetheless, to the degree material to the resolution of this case, the

20% discount may be properly viewed as belonging to the category of
price regulatory measures which affects the profitability of establishments
subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the
past, regulated prices and profits of business establishments. In other
words, this type of regulatory measures is traditionally recognized as
police power measures so that the senior citizen discount may be
considered as a police power measure as well. What is more, the
substantial distinctions between price and rate of return on investment
control laws vis--vis the senior citizen discount law provide greater
reason to uphold the validity of the senior citizen discount law. As
previously discussed, the ability to adjust prices allows the establishment
subject to the senior citizen discount to prevent or mitigate any reduction
of profits or income/gross sales arising from the giving of the discount. In
contrast, establishments subject to price and rate of return on investment
control laws cannot adjust prices accordingly. Certainly, there is no
intention to say that price and rate of return on investment control laws
are the justification for the senior citizen discount law. Not at all. The
justification for the senior citizen discount law is the plenary powers of
Congress. The legislative power to regulate business establishments is
broad and covers a wide array of areas and subjects. It is well within
Congress legislative powers to regulate the profits or income/gross sales
of industries and enterprises, even those without franchises. For what are
franchises but mere legislative enactments? There is nothing in the
Constitution that prohibits Congress from regulating the profits or
income/gross sales of industries and enterprises without franchises. On
the contrary, the social justice provisions of the Constitution enjoin the
State to regulate the "acquisition, ownership, use, and disposition" of
property and its increments.117
This may cover the regulation of profits or income/gross sales of all
businesses, without qualification, to attain the objective of diffusing
wealth in order to protect and enhance the right of all the people to
human dignity.118
Thus, under the social justice policy of the Constitution, business
establishments may be compelled to contribute to uplifting the plight of
vulnerable or marginalized groups in our society provided that the
regulation is not arbitrary, oppressive or confiscatory, or is not in breach
of some specific constitutional limitation. When the Dissent, therefore,
states that the "profits of private establishments which are non15

The point then is this most, if not all, regulatory measures imposed by
the State on business establishments impact, at some level, the latters
prices and/or profits or income/gross sales.123

Power
Corporation126 and
followed
in Carlos
Superdurg
Corporation127 consistent with long standing principles in police power and
eminent domain analysis. Thus, the deprivation or reduction of profits or
income. Gross sales must be clearly shown to be unreasonable,
oppressive or confiscatory. Under the specific circumstances of this case,
such determination can only be made upon the presentation of competent
proof which petitioners failed to do. A law, which has been in operation for
many years and promotes the welfare of a group accorded special
concern by the Constitution, cannot and should not be summarily
invalidated on a mere allegation that it reduces the profits or
income/gross sales of business establishments.

If the Court were to sustain the Dissents theory, then a wholesale

nullification of such measures would inevitably result. The police power of
the State and the social justice provisions of the Constitution would, thus,
be rendered nugatory. There is nothing sacrosanct about profits or
income/gross sales. This, we made clear in Carlos Superdrug
Corporation:124
Police power as an attribute to promote the common good would be
diluted considerably if on the mere plea of petitioners that they will suffer
loss of earnings and capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its
nullification in view of the presumption of validity which every law has in
its favor.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

xxxx
The Court is not oblivious of the retail side of the pharmaceutical industry
and the competitive pricing component of the business. While the
Constitution protects property rights petitioners must the realities of
business and the State, in the exercise of police power, can intervene in
the operations of a business which may result in an impairment of
property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of
the Constitution provides the percept for the protection of property,
various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continously serve as a
reminder for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on
the support imparted by petitioners and the other private establishments
concerned. This being the case, the means employed in invoking the
active participation of the private sector, in order to achieve the purpose
or objective of the law, is reasonably and directly related. Without
sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain form quashing a
legislative act.125

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-41631 December 17, 1976

In conclusion, we maintain that the correct rule in determining whether

the subject regulatory measure has amounted to a "taking" under the
power of eminent domain is the one laid down in Alalayan v. National

HON. RAMON D. BAGATSING, as Mayor of the City of Manila;

ROMAN G. GARGANTIEL, as Secretary to the Mayor; THE MARKET
16

ADMINISTRATOR; and THE MUNICIPAL BOARD OF

MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the
Court of First Instance of Manila, Branch XXX and the
FEDERATION OF MANILA MARKET VENDORS, INC., respondents.

Market Vendors, Inc. to exhaust the administrative remedies outlined in

the Local Tax Code.
After due hearing on the merits, respondent Judge rendered its decision
on August 29, 1975, declaring the nullity of Ordinance No. 7522 of the
City of Manila on the primary ground of non-compliance with the
requirement of publication under the Revised City Charter. Respondent
Judge ruled:

Santiago F. Alidio and Restituto R. Villanueva for petitioners.

Antonio H. Abad, Jr. for private respondent.

There is, therefore, no question that the ordinance in

question was not published at all in two daily newspapers
of general circulation in the City of Manila before its
enactment. Neither was it published in the same manner
after approval, although it was posted in the legislative
hall and in all city public markets and city public libraries.
There being no compliance with the mandatory
requirement of publication before and after approval, the
ordinance in question is invalid and, therefore, null and
void.

Federico A. Blay for petitioner for intervention.

MARTIN, J.:
The chief question to be decided in this case is what law shall govern the
publication of a tax ordinance enacted by the Municipal Board of Manila,
the Revised City Charter (R.A. 409, as amended), which requires
publication of the ordinance before its enactment and after its approval,
or the Local Tax Code (P.D. No. 231), which only demands publication after
approval.

Petitioners moved for reconsideration of the adverse decision, stressing

that (a) only a post-publication is required by the Local Tax Code; and (b)
private respondent failed to exhaust all administrative remedies before
instituting an action in court.

On June 12, 1974, the Municipal Board of Manila enacted Ordinance No.
7522, "AN ORDINANCE REGULATING THE OPERATION OF PUBLIC MARKETS
AND PRESCRIBING FEES FOR THE RENTALS OF STALLS AND PROVIDING
PENALTIES FOR VIOLATION THEREOF AND FOR OTHER PURPOSES." The
petitioner City Mayor, Ramon D. Bagatsing, approved the ordinance on
June 15, 1974.

On September 26, 1975, respondent Judge denied the motion.

Forthwith, petitioners brought the matter to Us through the present
petition for review on certiorari.
We find the petition impressed with merits.

On February 17, 1975, respondent Federation of Manila Market Vendors,

Inc. commenced Civil Case 96787 before the Court of First Instance of
Manila presided over by respondent Judge, seeking the declaration of
nullity of Ordinance No. 7522 for the reason that (a) the publication
requirement under the Revised Charter of the City of Manila has not been
complied with; (b) the Market Committee was not given any participation
in the enactment of the ordinance, as envisioned by Republic Act 6039;
(c) Section 3 (e) of the Anti-Graft and Corrupt Practices Act has been
violated; and (d) the ordinance would violate Presidential Decree No. 7 of
September 30, 1972 prescribing the collection of fees and charges on
livestock and animal products.

1. The nexus of the present controversy is the apparent conflict between

the Revised Charter of the City of Manila and the Local Tax Code on the
manner of publishing a tax ordinance enacted by the Municipal Board of
Manila. For, while Section 17 of the Revised Charter provides:
Each proposed ordinance shall be published in two daily
newspapers of general circulation in the city, and shall not
be discussed or enacted by the Board until after the third
day following such publication. * * * Each approved
ordinance * * * shall be published in two daily newspapers
of general circulation in the city, within ten days after its
approval; and shall take effect and be in force on and
after the twentieth day following its publication, if no date
is fixed in the ordinance.

Resolving the accompanying prayer for the issuance of a writ of

preliminary injunction, respondent Judge issued an order on March 11,
1975, denying the plea for failure of the respondent Federation of Manila
17

Section 43 of the Local Tax Code directs:

Here, as always, a general provision must give way to a particular

provision. 3 Special provision governs. 4 This is especially true where the
law containing the particular provision was enacted later than the one
containing the general provision. The City Charter of Manila was
promulgated on June 18, 1949 as against the Local Tax Code which was
decreed on June 1, 1973. The law-making power cannot be said to have
intended the establishment of conflicting and hostile systems upon the
same subject, or to leave in force provisions of a prior law by which the
new will of the legislating power may be thwarted and overthrown. Such a
result would render legislation a useless and Idle ceremony, and subject
the law to the reproach of uncertainty and unintelligibility. 5

Within ten days after their approval, certified true copies

of all provincial, city, municipal and barrioordinances
levying or imposing taxes, fees or other charges shall be
published for three consecutive days in a newspaper or
publication widely circulated within the jurisdiction of the
local government, or posted in the local legislative hall or
premises and in two other conspicuous places within the
territorial jurisdiction of the local government. In either
case, copies of all provincial, city, municipal and barrio
ordinances shall be furnished the treasurers of the
respective component and mother units of a local
government for dissemination.

The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico

sued the City of Manila for damages arising from the injuries he suffered
when he fell inside an uncovered and unlighted catchbasin or manhole on
P. Burgos Avenue. The City of Manila denied liability on the basis of the
City Charter (R.A. 409) exempting the City of Manila from any liability for
damages or injury to persons or property arising from the failure of the
city officers to enforce the provisions of the charter or any other law or
ordinance, or from negligence of the City Mayor, Municipal Board, or other
officers while enforcing or attempting to enforce the provisions of the
charter or of any other law or ordinance. Upon the other hand, Article
2189 of the Civil Code makes cities liable for damages for the death of, or
injury suffered by any persons by reason of the defective condition of
roads, streets, bridges, public buildings, and other public works under
their control or supervision. On review, the Court held the Civil Code
controlling. It is true that, insofar as its territorial application is concerned,
the Revised City Charter is a special law and the subject matter of the two
laws, the Revised City Charter establishes a general rule of liability arising
from negligence in general, regardless of the object thereof, whereas the
Civil Code constitutes a particular prescription for liability due to defective
streets in particular. In the same manner, the Revised Charter of the City
prescribes a rule for the publication of "ordinance" in general, while the
Local Tax Code establishes a rule for the publication of "ordinance levying
or imposing taxes fees or other charges in particular.

In other words, while the Revised Charter of the City of Manila requires
publication before the enactment of the ordinance and after the approval
thereof in two daily newspapers of general circulation in the city, the Local
Tax Code only prescribes for publication after the approval of "ordinances
levying or imposing taxes, fees or other charges" either in a newspaper or
publication widely circulated within the jurisdiction of the local
government or by posting the ordinance in the local legislative hall or
premises and in two other conspicuous places within the territorial
jurisdiction of the local government. Petitioners' compliance with the Local
Tax Code rather than with the Revised Charter of the City spawned this
litigation.
There is no question that the Revised Charter of the City of Manila is
a special act since it relates only to the City of Manila, whereas the Local
Tax Code is a general law because it applies universally to all local
governments. Blackstone defines general law as a universal rule affecting
the entire community and special law as one relating to particular persons
or things of a class. 1 And the rule commonly said is that a prior special
law is not ordinarily repealed by a subsequent general law. The fact that
one is special and the other general creates a presumption that the
special is to be considered as remaining an exception of the general, one
as a general law of the land, the other as the law of a particular
case. 2 However, the rule readily yields to a situation where the special
statute refers to a subject in general, which the general statute treats
in particular. The exactly is the circumstance obtaining in the case at bar.
Section 17 of the Revised Charter of the City of Manila speaks of
"ordinance" in general, i.e., irrespective of the nature and scope
thereof, whereas, Section 43 of the Local Tax Code relates to "ordinances
levying or imposing taxes, fees or other charges" in particular. In regard,
therefore, to ordinances in general, the Revised Charter of the City of
Manila is doubtless dominant, but, that dominant force loses its continuity
when it approaches the realm of "ordinances levying or imposing taxes,
fees or other charges" in particular. There, the Local Tax Code controls.

In fact, there is no rule which prohibits the repeal even by implication of a

special or specific act by a general or broad one. 7 A charter provision may
be impliedly modified or superseded by a later statute, and where a
statute is controlling, it must be read into the charter notwithstanding any
particular charter provision. 8 A subsequent general law similarly
applicable to all cities prevails over any conflicting charter provision, for
the reason that a charter must not be inconsistent with the general laws
and public policy of the state. 9 A chartered city is not an independent
sovereignty. The state remains supreme in all matters not purely local.
Otherwise stated, a charter must yield to the constitution and general
laws of the state, it is to have read into it that general law which governs
the municipal corporation and which the corporation cannot set aside but
18

to which it must yield. When a city adopts a charter, it in effect adopts as

part of its charter general law of such character. 10

Tax Code (P.D. 231, July 1, 1973) authorizes in its Section 31: "Local
governments may collect fees for the slaughter of animals and the use of
corrals * * * "

2. The principle of exhaustion of administrative remedies is strongly

asserted by petitioners as having been violated by private respondent in
bringing a direct suit in court. This is because Section 47 of the Local Tax
Code provides that any question or issue raised against the legality of any
tax ordinance, or portion thereof, shall be referred for opinion to the city
fiscal in the case of tax ordinance of a city. The opinion of the city fiscal is
appealable to the Secretary of Justice, whose decision shall be final and
executory unless contested before a competent court within thirty (30)
days. But, the petition below plainly shows that the controversy between
the parties is deeply rooted in a pure question of law: whether it is the
Revised Charter of the City of Manila or the Local Tax Code that should
govern the publication of the tax ordinance. In other words, the dispute is
sharply focused on the applicability of the Revised City Charter or the
Local Tax Code on the point at issue, and not on the legality of the
imposition of the tax. Exhaustion of administrative remedies before resort
to judicial bodies is not an absolute rule. It admits of exceptions. Where
the question litigated upon is purely a legal one, the rule does not
apply. 11 The principle may also be disregarded when it does not provide a
plain, speedy and adequate remedy. It may and should be relaxed when
its application may cause great and irreparable damage. 12

4. The non-participation of the Market Committee in the enactment of

Ordinance No. 7522 supposedly in accordance with Republic Act No. 6039,
an amendment to the City Charter of Manila, providing that "the market
committee shall formulate, recommend and adopt, subject to the
ratification of the municipal board, and approval of the mayor, policies
and rules or regulation repealing or maneding existing provisions of the
market code" does not infect the ordinance with any germ of
invalidity. 17 The function of the committee is purely recommendatory as
the underscored phrase suggests, its recommendation is without binding
effect on the Municipal Board and the City Mayor. Its prior acquiescence of
an intended or proposed city ordinance is not a condition sine qua non
before the Municipal Board could enact such ordinance. The native power
of the Municipal Board to legislate remains undisturbed even in the
slightest degree. It can move in its own initiative and the Market
Committee cannot demur. At most, the Market Committee may serve as a
legislative aide of the Municipal Board in the enactment of city ordinances
affecting the city markets or, in plain words, in the gathering of the
necessary data, studies and the collection of consensus for the proposal
of ordinances regarding city markets. Much less could it be said that
Republic Act 6039 intended to delegate to the Market Committee the
adoption of regulatory measures for the operation and administration of
the city markets. Potestas delegata non delegare potest.

3. It is maintained by private respondent that the subject ordinance is not

a "tax ordinance," because the imposition of rentals, permit fees, tolls and
other fees is not strictly a taxing power but a revenue-raising function, so
that the procedure for publication under the Local Tax Code finds no
application. The pretense bears its own marks of fallacy. Precisely, the
raising of revenues is the principal object of taxation. Under Section 5,
Article XI of the New Constitution, "Each local government unit shall have
the power to create its own sources of revenue and to levy taxes, subject
to such provisions as may be provided by law." 13 And one of those
sources of revenue is what the Local Tax Code points to in particular:
"Local governments may collect fees or rentals for the occupancy or use
of public markets and premises * * *." 14 They can provide for and regulate
market stands, stalls and privileges, and, also, the sale, lease or
occupancy thereof. They can license, or permit the use of, lease, sell or
otherwise dispose of stands, stalls or marketing privileges. 15

5. Private respondent bewails that the market stall fees imposed in the
disputed ordinance are diverted to the exclusive private use of the Asiatic
Integrated Corporation since the collection of said fees had been let by
the City of Manila to the said corporation in a "Management and
Operating Contract." The assumption is of course saddled on erroneous
premise. The fees collected do not go direct to the private coffers of the
corporation. Ordinance No. 7522 was not made for the corporation but for
the purpose of raising revenues for the city. That is the object it serves.
The entrusting of the collection of the fees does not destroy the public
purpose of the ordinance. So long as the purpose is public, it does not
matter whether the agency through which the money is dispensed is
public or private. The right to tax depends upon the ultimate use, purpose
and object for which the fund is raised. It is not dependent on the nature
or character of the person or corporation whose intermediate agency is to
be used in applying it. The people may be taxed for a public purpose,
although it be under the direction of an individual or private
corporation. 18

It is a feeble attempt to argue that the ordinance violates Presidential

Decree No. 7, dated September 30, 1972, insofar as it affects livestock
and animal products, because the said decree prescribes the collection of
other fees and charges thereon "with the exception of ante-mortem and
post-mortem inspection fees, as well as the delivery, stockyard and
slaughter fees as may be authorized by the Secretary of Agriculture and
Natural Resources." 16Clearly, even the exception clause of the decree
itself permits the collection of the proper fees for livestock. And the Local

Nor can the ordinance be stricken down as violative of Section 3(e) of the
Anti-Graft and Corrupt Practices Act because the increased rates of
market stall fees as levied by the ordinance will necessarily inure to the
19

unwarranted benefit and advantage of the corporation. 19 We are

concerned only with the issue whether the ordinance in question is intra
vires. Once determined in the affirmative, the measure may not be
invalidated because of consequences that may arise from its
enforcement. 20

On November 5, 1985, a month after the promulgation of the

abovementioned decree, Presidential Decree No. 1994 amended the
National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each
processed video-tape cassette, ready for playback,
regardless of length, an annual tax of five pesos;
Provided, That locally manufactured or imported blank
video tapes shall be subject to sales tax.

ACCORDINGLY, the decision of the court below is hereby reversed and set
aside. Ordinance No. 7522 of the City of Manila, dated June 15, 1975, is
hereby held to have been validly enacted. No. costs.
SO ORDERED.

On October 23, 1986, the Greater Manila Theaters Association, Integrated

Movie Producers, Importers and Distributors Association of the Philippines,
and Philippine Motion Pictures Producers Association, hereinafter
collectively referred to as the Intervenors, were permitted by the Court to
intervene in the case, over petitioner's opposition, upon the allegations
that intervention was necessary for the complete protection of their rights
and that their "survival and very existence is threatened by the
unregulated proliferation of film piracy." The Intervenors were thereafter
allowed to file their Comment in Intervention.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-75697 June 18, 1987

The rationale behind the enactment of the DECREE, is set out in its
preambular clauses as follows:

VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO
MANILA COMMISSION, CITY MAYOR and CITY TREASURER OF
MANILA, respondents.

1. WHEREAS, the proliferation and unregulated circulation

of videograms including, among others, videotapes, discs,
cassettes or any technical improvement or variation
thereof, have greatly prejudiced the operations of
moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent
(40%) and a tremendous drop in the collection of sales,
contractor's specific, amusement and other taxes, thereby
resulting in substantial losses estimated at P450 Million
annually in government revenues;

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

2. WHEREAS, videogram(s) establishments collectively

earn around P600 Million per annum from rentals, sales
and disposition of videograms, and such earnings have
not been subjected to tax, thereby depriving the
Government of approximately P180 Million in taxes each
year;

MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own
behalf and purportedly on behalf of other videogram operators adversely
affected. It assails the constitutionality of Presidential Decree No. 1987
entitled "An Act Creating the Videogram Regulatory Board" with broad
powers to regulate and supervise the videogram industry (hereinafter
briefly referred to as the BOARD). The Decree was promulgated on
October 5, 1985 and took effect on April 10, 1986, fifteen (15) days after
completion of its publication in the Official Gazette.

3. WHEREAS, the unregulated activities of videogram

establishments have also affected the viability of the
movie industry, particularly the more than 1,200 movie
houses and theaters throughout the country, and
occasioned
industry-wide
displacement
and
20

unemployment due to the

moviehouses and theaters;

shutdown

of

numerous

3. There is no factual nor legal basis for the exercise by

the President of the vast powers conferred upon him by
Amendment No. 6;

4. "WHEREAS, in order to ensure national economic

recovery, it is imperative for the Government to create an
environment conducive to growth and development of all
business industries, including the movie industry which
has an accumulated investment of about P3 Billion;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it
were a nuisance, which it is not.

5. WHEREAS, proper taxation of the activities of

videogram establishments will not only alleviate the dire
financial condition of the movie industry upon which more
than 75,000 families and 500,000 workers depend for
their livelihood, but also provide an additional source of
revenue for the Government, and at the same time
rationalize the heretofore uncontrolled distribution of
videograms;

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one
subject which shall be expressed in the title thereof" 1 is sufficiently
complied with if the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The
requirement is satisfied if all the parts of the statute are related, and are
germane to the subject matter expressed in the title, or as long as they
are not inconsistent with or foreign to the general subject and title. 2 An
act having a single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long as they
are not inconsistent with or foreign to the general subject, and may be
considered in furtherance of such subject by providing for the method and
means of carrying out the general object." 3 The rule also is that the
constitutional requirement as to the title of a bill should not be so
narrowly construed as to cripple or impede the power of legislation. 4 It
should be given practical rather than technical construction. 5

6. WHEREAS, the rampant and unregulated showing of

obscene videogram features constitutes a clear and
present danger to the moral and spiritual well-being of the
youth, and impairs the mandate of the Constitution for the
State to support the rearing of the youth for civic
efficiency and the development of moral character and
promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called
for remedial measures to curb these blatant malpractices
which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies
corroding the moral values of the people and betraying
the national economic recovery program, bold emergency
measures must be adopted with dispatch; ... (Numbering
of paragraphs supplied).

Tested by the foregoing criteria, petitioner's contention that the tax

provision of the DECREE is a rider is without merit. That section
reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of
Videograms. Notwithstanding any provision of law to
the contrary, the province shall collect a tax of thirty
percent (30%) of the purchase price or rental rate, as the
case may be, for every sale, lease or disposition of a
videogram containing a reproduction of any motion
picture or audiovisual program. Fifty percent (50%) of the
proceeds of the tax collected shall accrue to the province,
and the other fifty percent (50%) shall acrrue to the
municipality where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally by
the City/Municipality and the Metropolitan Manila
Commission.

Petitioner's attack on the constitutionality of the DECREE rests on the

following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the
gross receipts payable to the local government is a RIDER
and the same is not germane to the subject matter
thereof;
2. The tax imposed is harsh, confiscatory, oppressive
and/or in unlawful restraint of trade in violation of the due
process clause of the Constitution;
21

xxx xxx xxx

The public purpose of a tax may legally exist even if the

motive which impelled the legislature to impose the tax
was to favor one industry over another. 11

The foregoing provision is allied and germane to, and is reasonably

necessary for the accomplishment of, the general object of the DECREE,
which is the regulation of the video industry through the Videogram
Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool
for regulation 6 it is simply one of the regulatory and control mechanisms
scattered throughout the DECREE. The express purpose of the DECREE to
include taxation of the video industry in order to regulate and rationalize
the heretofore uncontrolled distribution of videograms is evident from
Preambles 2 and 5, supra. Those preambles explain the motives of the
lawmaker in presenting the measure. The title of the DECREE, which is the
creation of the Videogram Regulatory Board, is comprehensive enough to
include the purposes expressed in its Preamble and reasonably covers all
its provisions. It is unnecessary to express all those objectives in the title
or that the latter be an index to the body of the DECREE. 7

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 "inequities which result from a singling out of
one particular class for taxation or exemption infringe no
constitutional limitation". 12 Taxation has been made the
implement of the state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing
legislature.
3. Petitioner argues that there was no legal nor factual basis for the
promulgation of the DECREE by the former President under Amendment
No. 6 of the 1973 Constitution providing that "whenever in the judgment
of the President ... , there exists a grave emergency or a threat or
imminence thereof, or whenever the interim Batasang Pambansa or the
regular National Assembly fails or is unable to act adequately on any
matter for any reason that in his judgment requires immediate action, he
may, in order to meet the exigency, issue the necessary decrees, orders,
or letters of instructions, which shall form part of the law of the land."

2. Petitioner also submits that the thirty percent (30%) tax imposed is
harsh and oppressive, confiscatory, and in restraint of trade. However, it
is beyond serious question that a tax does not cease to be valid merely
because it regulates, discourages, or even definitely deters the activities
taxed. 8 The power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in the discretion
of the authority which exercises it. 9 In imposing a tax, the legislature acts
upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. 10

In refutation, the Intervenors and the Solicitor General's Office aver that
the 8th "whereas" clause sufficiently summarizes the justification in that
grave emergencies corroding the moral values of the people and
betraying the national economic recovery program necessitated bold
emergency measures to be adopted with dispatch. Whatever the reasons
"in the judgment" of the then President, considering that the issue of the
validity of the exercise of legislative power under the said Amendment
still pends resolution in several other cases, we reserve resolution of the
question raised at the proper time.

The tax imposed by the DECREE is not only a regulatory but also a
revenue measure prompted by the realization that earnings of videogram
establishments of around P600 million per annum have not been
subjected to tax, thereby depriving the Government of an additional
source of revenue. It is an end-user tax, imposed on retailers for every
videogram they make available for public viewing. It is similar to the 30%
amusement tax imposed or borne by the movie industry which the
theater-owners pay to the government, but which is passed on to the
entire cost of the admission ticket, thus shifting the tax burden on the
buying or the viewing public. It is a tax that is imposed uniformly on all
videogram operators.

4. Neither can it be successfully argued that the DECREE contains an

undue delegation of legislative power. The grant in Section 11 of the
DECREE of authority to the BOARD to "solicit the direct assistance of other
agencies and units of the government and deputize, for a fixed and
limited period, the heads or personnel of such agencies and units to
perform enforcement functions for the Board" is not a delegation of the
power to legislate but merely a conferment of authority or discretion as to
its execution, enforcement, and implementation. "The true distinction is
between the delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring 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." 14 Besides, in the very language of the decree, the authority of
the BOARD to solicit such assistance is for a "fixed and limited period"

The levy of the 30% tax is for a public purpose. It was imposed primarily
to answer the need for regulating the video industry, particularly because
of the rampant film piracy, the flagrant violation of intellectual property
rights, and the proliferation of pornographic video tapes. And while it was
also an objective of the DECREE to protect the movie industry, the tax
remains a valid imposition.
22

with the deputized agencies concerned being "subject to the direction and
control of the BOARD." That the grant of such authority might be the
source of graft and corruption would not stigmatize the DECREE as
unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.

proof of the others is not unreasonable and arbitrary

because of lack of connection between the two in
common experience".16
Applied to the challenged provision, there is no question that there is a
rational connection between the fact proved, which is non-registration,
and the ultimate fact presumed which is violation of the DECREE, besides
the fact that theprima facie presumption of violation of the DECREE
attaches only after a forty-five-day period counted from its effectivity and
is, therefore, neither retrospective in character.

5. The DECREE is not violative of the ex post facto principle. An ex post

facto law is, among other categories, one which "alters the legal rules of
evidence, and authorizes conviction upon less or different testimony than
the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:

6. We do not share petitioner's fears that the video industry is being overregulated and being eased out of existence as if it were a nuisance. Being
a relatively new industry, the need for its regulation was apparent. While
the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its
enactment, considering "the unfair competition posed by rampant film
piracy; the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes containing
pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees
are required to engage in business. 17

All videogram establishments in the Philippines are

hereby given a period of forty-five (45) days after the
effectivity of this Decree within which to register with and
secure a permit from the BOARD to engage in the
videogram business and to register with the BOARD all
their inventories of videograms, including videotapes,
discs, cassettes or other technical improvements or
variations thereof, before they could be sold, leased, or
otherwise disposed of. Thereafter any videogram found in
the possession of any person engaged in the videogram
business without the required proof of registration by the
BOARD, shall be prima facie evidence of violation of the
Decree, whether the possession of such videogram be for
private showing and/or public exhibition.

The enactment of the Decree since April 10, 1986 has not brought about
the "demise" of the video industry. On the contrary, video establishments
are seen to have proliferated in many places notwithstanding the 30% tax
imposed.

raises immediately a prima facie evidence of violation of the DECREE

when the required proof of registration of any videogram cannot be
presented and thus partakes of the nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case
of Vallarta vs. Court of Appeals, et al. 15

In the last analysis, what petitioner basically questions is the necessity,

wisdom and expediency of the DECREE. These considerations, however,
are primarily and exclusively a matter of legislative concern.

... it is now well settled that "there is no constitutional

objection to the passage of a law providing that the
presumption of innocence may be overcome by a contrary
presumption founded upon the experience of human
conduct, and enacting what evidence shall be sufficient to
overcome such presumption of innocence" (People vs.
Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639641). And the "legislature may enact that when certain
facts have been proved that they shall be prima facie
evidence of the existence of the guilt of the accused and
shift the burden of proof provided there be a rational
connection between the facts proved and the ultimate
facts presumed so that the inference of the one from

Only congressional power or competence, not the wisdom

of the action taken, may be the basis for declaring a
statute invalid. This is as it ought to be. The principle of
separation of powers has in the main wisely allocated the
respective authority of each department and confined its
jurisdiction to such a sphere. There would then be
intrusion not allowable under the Constitution if on a
matter left to the discretion of a coordinate branch, the
judiciary would substitute its own. If there be adherence
to the rule of law, as there ought to be, the last offender
should be courts of justice, to which rightly litigants
submit their controversy precisely to maintain unimpaired
the supremacy of legal norms and prescriptions. The
attack on the validity of the challenged provision likewise
23

insofar as there may be objections, even if valid and

cogent on its wisdom cannot be sustained. 18

(2) A residential house and lot located at Wright St., Malate,

Manila; and

In fine, petitioner has not overcome the presumption of validity which

attaches to a challenged statute. We find no clear violation of the
Constitution which would justify us in pronouncing Presidential Decree No.
1987 as unconstitutional and void.

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely,
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership
called Roxas y Compania.

WHEREFORE, the instant Petition is hereby dismissed.

AGRICULTURAL LANDS
No costs.
At the conclusion of the Second World War, the tenants who have all been
tilling the lands in Nasugbu for generations expressed their desire to
purchase from Roxas y Cia. the parcels which they actually occupied. For
its part, the Government, in consonance with the constitutional mandate
to acquire big landed estates and apportion them among landless
tenants-farmers, persuaded the Roxas brothers to part with their
landholdings. Conferences were held with the farmers in the early part of
1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the
Government for distribution to actual occupants for a price of
P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

It turned out however that the Government did not have funds to cover
the purchase price, and so a special arrangement was made for the
Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount
of P1,500,000.00 as loan. Collateral for such loan were the lands proposed
to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed
the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan
from the proceeds of the yearly amortizations paid by the farmers.

EN BANC
G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their

own respective behalf and as judicial co-guardians of JOSE
ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a
net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was
reported for income tax purposes as gain on the sale of capital asset held
for more than one year pursuant to Section 34 of the Tax Code.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

RESIDENTIAL HOUSE

BENGZON, J.P., J.:

During their bachelor days the Roxas brothers lived in the residential
house at Wright St., Malate, Manila, which they inherited from their
grandparents. After Antonio and Eduardo got married, they resided
somewhere else leaving only Jose in the old house. In fairness to his
brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of
P8,000.00 a year.

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted
to their grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares,
situated in the municipality of Nasugbu, Batangas province;

ASSESSMENTS
24

On June 17, 1958, the Commissioner of Internal Revenue demanded from

Roxas y Cia the payment of real estate dealer's tax for 1952 in the
amount of P150.00 plus P10.00 compromise penalty for late payment,
and P150.00 tax for dealers of securities for 1952 plus P10.00
compromise penalty for late payment. The assessment for real estate
dealer's tax was based on the fact that Roxas y Cia. received house
rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194
of the Tax Code, an owner of a real estate who derives a yearly rental
income therefrom in the amount of P3,000.00 or more is considered a real
estate dealer and is liable to pay the corresponding fixed tax.

Manila Police Trust Fund

150.00

fund

for

Manila's

neediest
100.00

Contributions
to
Contribution
Our Lady of Fatima Chapel, FEU

to
50.00

ANTONIO ROXAS:
1953
Contributions to

1955
P5,813.00
5,828.00
5,588.00

Pasay City Firemen Christmas Fund

25.00

Pasay City Police Dept. X'mas fund

50.00

1955
Contributions to

The deficiency income taxes resulted from the inclusion as income of

Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955
derived from the sale of the Nasugbu farm lands to the tenants, and the
disallowance of deductions from gross income of various business
expenses and contributions claimed by Roxas y Cia. and the Roxas
brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm
lands and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate,
hence, 100% of the profits derived therefrom was taxed.

Baguio City Police Christmas fund

25.00

Pasay City Firemen Christmas fund

25.00

Pasay City Police Christmas fund

50.00

EDUARDO ROXAS:
1953

The following deductions were disallowed:

Contributions to
Hijas de Jesus' Retiro de Manresa

ROXAS Y CIA.:

Philippines
families

1953
Tickets
for
S. Osmea

Herald's

1955

In the same assessment, the Commissioner assessed deficiency income

taxes against the Roxas Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

100.00

Philippines
families

The Commissioner of Internal Revenue justified his demand for the fixed
tax on dealers of securities against Roxas y Cia., on the fact that said
partnership made profits from the purchase and sale of securities.

1953
P7,010.00
7,281.00
6,323.00

Philippine Air Force Chapel

Banquet

Gifts of San Miguel beer

in

honor

of

P 40.00
28.00

Contributions to
25

Herald's

fund

for

450.00
Manila's

neediest
100.00

1955
Contributions

to
Herald's
neediest families

fund

for

Philippines
Manila's
120.00

occupants on installment. To bolster his stand on the point, he cites one of

the purposes of Roxas y Cia. as contained in its articles of partnership,
quoted below:

JOSE ROXAS:
1955
Contributions

to
Herald's
neediest families

fund

for

Philippines
Manila's
120.00

The Roxas brothers protested the assessment but inasmuch as said

protest was denied, they instituted an appeal in the Court of Tax Appeals
on January 9, 1961. The Tax Court heard the appeal and rendered
judgment on July 31, 1965 sustaining the assessment except the demand
for the payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine Air Force
Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment
reads:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma

o que pueden pertenecer a ella en el futuro, alquilandoles por los
plazos y demas condiciones, estime convenientes y vendiendo
aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the
Commissioner of Internal Revenue cannot be favorably accepted by Us in
this isolated transaction with its peculiar circumstances in spite of the fact
that there were hundreds of vendees. Although they paid for their
respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during
the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the
very farmers who tilled them for generations was not only in consonance
with, but more in obedience to the request and pursuant to the policy of
our Government to allocate lands to the landless. It was the bounden duty
of the Government to pay the agreed compensation after it had
persuaded Roxas y Cia. to sell its haciendas, and to subsequently
subdivide them among the farmers at very reasonable terms and prices.
However, the Government could not comply with its duty for lack of funds.
Obligingly, Roxas y Cia. shouldered the Government's burden, went out of
its way and sold lands directly to the farmers in the same way and under
the same terms as would have been the case had the Government done it
itself. For this magnanimous act, the municipal council of Nasugbu passed
a resolution expressing the people's gratitude.

WHEREFORE, the decision appealed from is hereby affirmed with

respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose
Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue the amounts of P12,808.00,
P12,887.00 and P11,857.00, respectively, as deficiency income
taxes for the years 1953 and 1955, plus 5% surcharge and 1%
monthly interest as provided for in Sec. 51(a) of the Revenue
Code; and modified with respect to the partnership Roxas y Cia. in
the sense that it should pay only P150.00, as real estate dealer's
tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court.
The Commissioner of Internal Revenue did not appeal.

The power of taxation is sometimes called also the power to destroy.

Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg".
And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. It does
not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and later
on to penalize him for duly answering the urgent call.

The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an
ordinary gain, hence 100% taxable?
(2) Are the deductions for business expenses and contributions
deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real
estate dealers?

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale
in question. Hence, pursuant to Section 34 of the Tax Code the lands sold
to the farmers are capital assets, and the gain derived from the sale
thereof is capital gain, taxable only to the extent of 50%.

The Commissioner of Internal Revenue contends that Roxas y Cia. could

be considered a real estate dealer because it engaged in the business of
selling real estate. The business activity alluded to was the act of
subdividing the Nasugbu farm lands and selling them to the farmers-

DISALLOWED DEDUCTIONS
26

Roxas y Cia. deducted from its gross income the amount of P40.00 for
tickets to a banquet given in honor of Sergio Osmena and P28.00 for San
Miguel beer given as gifts to various persons. The deduction were claimed
as representation expenses. Representation expenses are deductible from
gross income as expenditures incurred in carrying on a trade or business
under Section 30(a) of the Tax Code provided the taxpayer proves that
they are reasonable in amount, ordinary and necessary, and incurred in
connection with his business. In the case at bar, the evidence does not
show such link between the expenses and the business of Roxas y Cia.
The findings of the Court of Tax Appeals must therefore be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's
fixed tax upon it, because although it earned a rental income of P8,000.00
per annum in 1952, said rental income came from Jose Roxas, one of the
partners. Section 194 of the Tax Code, in considering as real estate
dealers owners of real estate receiving rentals of at least P3,000.00 a
year, does not provide any qualification as to the persons paying the
rentals. The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the
business of buying, selling, exchanging, leasing or renting
property on his own account as principal and holding himself out
as a full or part-time dealer in real estate or as an owner of rental
property or properties rented or offered to rent for an aggregate
amount of three thousand pesos or more a year: . . . (Emphasis
supplied) .

The petitioners also claim deductions for contributions to the Pasay City
Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila
Police Trust Fund, Philippines Herald's fund for Manila's neediest families
and Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay
City Firemen and Baguio City Police are not deductible for the reason that
the Christmas funds were not spent for public purposes but as Christmas
gifts to the families of the members of said entities. Under Section 39(h),
a contribution to a government entity is deductible when used exclusively
for public purposes. For this reason, the disallowance must be sustained.
On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its public
functions.

is too clear and explicit to admit construction. The findings of the Court of
Tax Appeals or, this point is sustained.1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio
Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay
deficiency income tax in the sum of P109.00, P91.00 and P49.00,
respectively, computed as follows: *
ANTONIO ROXAS

The contributions to the Philippines Herald's fund for Manila's neediest

families were disallowed on the ground that the Philippines Herald is not a
corporation or an association contemplated in Section 30 (h) of the Tax
Code. It should be noted however that the contributions were not made to
the Philippines Herald but to a group of civic spirited citizens organized by
the Philippines Herald solely for charitable purposes. There is no question
that the members of this group of citizens do not receive profits, for all
the funds they raised were for Manila's neediest families. Such a group of
citizens may be classified as an association organized exclusively for
charitable purposes mentioned in Section 30(h) of the Tax Code.

P315,476.5
9

Net income per return

Rightly, the Commissioner of Internal Revenue disallowed the contribution

to Our Lady of Fatima chapel at the Far Eastern University on the ground
that the said university gives dividends to its stockholders. Located within
the premises of the university, the chapel in question has not been shown
to belong to the Catholic Church or any religious organization. On the
other hand, the lower court found that it belongs to the Far Eastern
University, contributions to which are not deductible under Section 30(h)
of the Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders. The disallowance should be
sustained.

Add: 1/3 share, profits in Roxas y Cia.

P 153,249.15

Less amount declared

146,135.46

Amount understated

P 7,113.69

Contributions disallowed

115.00

P 7,228.69
Less 1/3 share of contributions
amounting to P21,126.06 disallowed
from partnership but allowed to
partners

27

7,042.02

186.67

Net income per review

P315,663.2
6

Less: Exemptions

4,200.00

Net taxable income

P311,463.2
6

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

Less profits declared

Amount understated
Less 1/3 share in contributions
amounting to P21,126.06 disallowed
from partnership but allowed to
partners

P
304,166.92

P91.00
========
===

P222,681.7
6

Add: 1/3 share, profits in Roxas y Cia.

P153,429.15

Less amount reported

146,135.46

Amount understated

7,113.69

Less 1/3 share of contributions

disallowed
from
partnership
but
allowed as deductions to partners

7,042.02

P 153,249.15
146,052.58

71.67

Net income per review

P222,753.4
3

Less: Exemption

1,800.00

Net income subject to tax

P220,953.4
3

P 7,196.57

7,042.02

155.55

Net income per review

P304,322.4
7

Less: Exemptions

4,800.00

Net taxable income

P299,592.4
7

Tax Due

Deficiency

Net income per return

EDUARDO ROXAS

Add: 1/3 share, profits in Roxas y Cia

147,159.00

JOSE ROXAS

P
109.00
========
==

Net income per return

Tax paid

Tax due

P102,763.00

Tax paid

102,714.00

Deficiency

P
49.00
========
===

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is

hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax
for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered
to pay the respective sums of P109.00, P91.00 and P49.00 as their

P147,250.00
28

individual deficiency income tax all corresponding for the year 1955. No
costs. So ordered.

a tax equivalent to the difference between the money value of the

rental or consideration collected and the amount representing 12
per centum of the assessed value of such land.

Republic of the Philippines

SUPREME COURT
Manila

According to section 6 of the law

SEC. 6. All collections made under this Act shall accrue to a
special fund in the Philippine Treasury, to be known as the 'Sugar
Adjustment and Stabilization Fund,' and shall be paid out only for
any or all of the following purposes or to attain any or all of the
following objectives, as may be provided by law.

EN BANC
G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of

the deceased Antonio Jayme Ledesma,plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal
Revenue, defendant-appellee.

First, to place the sugar industry in a position to maintain itself,

despite the gradual loss of the preferntial position of the
Philippine sugar in the United States market, and ultimately to
insure its continued existence notwithstanding the loss of that
market and the consequent necessity of meeting competition in
the free markets of the world;

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor
General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

Second, to readjust the benefits derived from the sugar industry

by all of the component elements thereof the mill, the
landowner, the planter of the sugar cane, and the laborers in the
factory and in the field so that all might continue profitably to
engage therein;lawphi1.net

REYES, J.B L., J.:

Third, to limit the production of sugar to areas more economically
suited to the production thereof; and

This case was initiated in the Court of First Instance of Negros Occidental
to test the legality of the taxes imposed by Commonwealth Act No. 567,
otherwise known as the Sugar Adjustment Act.

Fourth, to afford labor employed in the industry a living wage and

to improve their living and working conditions: Provided, That the
President of the Philippines may, until the adjourment of the next
regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the
establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with the view of
reducing manufacturing costs, (b) to produce and propagate
higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of
raising sugar cane, (d) to improve the buying quality of denatured
alcohol from molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of the industry, (f) to
determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the
solution of which would help rehabilitate and stabilize the
industry, and (2) for the improvement of living and working
conditions in sugar mills and sugar plantations, authorizing him to

Promulgated in 1940, the law in question opens (section 1) with a

declaration of emergency, due to the threat to our industry by the
imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffe Act, and the "eventual loss of its preferential position in
the United States market"; wherefore, the national policy was expressed
"to obtain a readjustment of the benefits derived from the sugar industry
by the component elements thereof" and "to stabilize the sugar industry
so as to prepare it for the eventuality of the loss of its preferential position
in the United States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the
existing tax on the manufacture of sugar, on a graduated basis, on each
picul of sugar manufactured; while section 3 levies on owners or persons
in control of lands devoted to the cultivation of sugar cane and ceded to
others for a consideration, on lease or otherwise

29

organize the necessary agency or agencies to take charge of the

expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary
amount or amounts needed for salaries, wages, travelling
expenses, equipment, and other sundry expenses of said agency
or agencies.

The protection of a large industry constituting one of the great

sources of the state's wealth and therefore directly or indirectly
affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be
within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the
sugar industry is a matter of public concern, it follows that the Legislature
may determine within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the legislative discretion
must be allowed fully play, subject only to the test of reasonableness; and
it is not contended that the means provided in section 6 of the law (above
quoted) bear no relation to the objective pursued or are oppressive in
character. If objective and methods are alike constitutionally valid, no
reason is seen why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the
state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412,
81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the

Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the
Collector of Internal Revenue the sum of P14,666.40 paid by the estate as
taxes, under section 3 of the Act, for the crop years 1948-1949 and 19491950; alleging that such tax is unconstitutional and void, being levied for
the aid and support of the sugar industry exclusively, which in plaintiff's
opinion is not a public purpose for which a tax may be constitutioally
levied. The action having been dismissed by the Court of First Instance,
the plaintifs appealed the case directly to this Court (Judiciary Act, section
17).
The basic defect in the plaintiff's position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted
in full), will show that the tax is levied with a regulatory purpose, to
provide means for the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an exercise of the
police power.

That the tax to be levied should burden the sugar producers themselves
can hardly be a ground of complaint; indeed, it appears rational that the
tax be obtained precisely from those who are to be benefited from the
expenditure of the funds derived from it. 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" (Carmichael vs. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

This Court can take judicial notice of the fact that sugar production is one
of the great industries of our nation, sugar occupying a leading position
among its export products; that it gives employment to thousands of
laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by
our government, and is thus pivotal in the plans of a regime committed to
a policy of currency stability. Its promotion, protection and advancement,
therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded
that the sugar industry should be stabilized in turn; and in the wide field
of its police power, the lawmaking body could provide that the distribution
of benefits therefrom be readjusted among its components to enable it to
resist the added strain of the increase in taxes that it had to sustain (Sligh
vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey,
99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So.
121).

From the point of view we have taken it appears of no moment that the
funds raised under the Sugar Stabilization Act, now in question, should be
exclusively spent in aid of the sugar industry, since it is that very
enterprise that is being protected. It may be that other industries are also
in need of similar protection; that the legislature is not required by the
Constitution to adhere to a policy of "all or none." As ruled in Minnesota
ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law
presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;"
and that "the legislative authority, exerted within its proper field, need not
embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin
Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be
said that the devotion of tax money to experimental stations to seek
increase of efficiency in sugar production, utilization of by-products and
solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus
industry in Florida

30

money being channeled directly to private persons, constitutes

expenditure of tax money for private purposes, (compare Everson vs.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The respondent Postmaster General, in implementation of the law,

thereafter issued four (4) administrative orders numbered 3 (June 20,
1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All
these administrative orders were issued with the approval of the
respondent Secretary of Public Works and Communications.

The decision appealed from is affirmed, with costs against appellant. So

ordered.

The pertinent portions of Adm. Order 3 read as follows:

Republic of the Philippines
SUPREME COURT
Manila

Such semi-postal stamps could not be made available during the

period from August 19 to September 30, 1957, for lack of time.
However, two denominations of such stamps, one at "5 + 5"
centavos and another at "10 + 5" centavos, will soon be released
for use by the public on their mails to be posted during the same
period starting with the year 1958.

EN BANC
G.R. No. L-23645

October 29, 1968

xxx

BENJAMIN P. GOMEZ, petitioner-appellee,

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

xxx

xxx

During the period from August 19 to September 30 each year

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

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

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

In the case of second-class mails and mails prepaid by means of

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

CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as
amended by Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the
Director of Posts shall order for the period from August nineteen
to September thirty every year the printing and issue of semipostal stamps of different denominations with face value showing
the regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail
matter shall be accepted in the mails unless it bears such semipostal stamps: Provided, That no such additional charge of five
centavos shall be imposed on newspapers. The additional
proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National
Treasury to be expended by the Philippine Tuberculosis Society in
carrying out its noble work to prevent and eradicate tuberculosis.

Mails posted during the said period starting in 1958, which are
found in street or post-office mail boxes without the required
semi-postal stamp, shall be returned to the sender, if known, with
a notation calling for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as
follows:
31

In the case of the following categories of mail matter and mails

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

official receipt shall be issued for the total sum thus collected, in
the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not
presented at the post-office window shall be affixed with the
necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided
for other mails.

1. Second-class mail. Aside from the postage at the secondclass rate, the extra charge of five centavos for the Philippine
Tuberculosis Society shall be collected on each separatelyaddressed piece of second-class mail matter, and the total sum
thus collected shall be entered in the same official receipt to be
issued for the postage at the second-class rate. In making such
entry, the total number of pieces of second-class mail posted shall
be stated, thus: "Total charge for TB Fund on 100 pieces . ..
P5.00." The extra charge shall be entered separate from the
postage in both of the official receipt and the Record of
Collections.

Adm. Order 9, amending Adm. Order 3, as amended, exempts

"Government and its Agencies and Instrumentalities Performing
Governmental Functions." Adm. Order 10, amending Adm. Order 3, as
amended, exempts "copies of periodical publications received for mailing
under any class of mail matter, including newspapers and magazines
admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez
mailed a letter at the post office in San Fernando, Pampanga. Because
this letter, addressed to a certain Agustin Aquino of 1014 Dagohoy Street,
Singalong, Manila did not bear the special anti-TB stamp required by the
statute, it was returned to the petitioner.

2. First-class and third-class mail permits. Mails to be posted

without postage affixed under permits issued by this Bureau shall
each be charged the usual postage, in addition to the five-centavo
extra charge intended for said society. The total extra charge thus
received shall be entered in the same official receipt to be issued
for the postage collected, as in subparagraph 1.

In view of this development, the petitioner brough suit for declaratory

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

3. Metered mail. For each piece of mail matter impressed by

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

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

4. Business reply cards and envelopes. Upon delivery of

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

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

5. Mails entitled to franking privilege. Government agencies,

officials, and other persons entitled to the franking privilege under
existing laws may pay in cash such extra charge intended for said
society, instead of affixing the semi-postal stamps to their mails,
provided that such mails are presented at the post-office window,
where the five-centavo extra charge for said society shall be
collected on each piece of such mail matter. In such case, an
32

The prime specification of an action for declaratory relief is that it must be

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

mail users into a class for the purpose of the tax while leaving untaxed
the rest of the population and that even among postal patrons the statute
discriminatorily grants exemption to newspapers while Administrative
Order 9 of the respondent Postmaster General grants a similar exemption
to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in
the nature of an excise tax, laid upon the exercise of a privilege, namely,
the privilege of using the mails. As such the objections levelled against it
must be viewed in the light of applicable principles of taxation.

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

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

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

That legislative classifications must be reasonable is of course undenied.

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

Nevertheless, we are of the view that the petitioner's choice of remedy is

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

While the principle that there must be a reasonable relationship

between classification made by the legislation and its purpose is
undoubtedly true in some contexts, it has no application to a
measure whose sole purpose is to raise revenue ... So long as the
classification imposed is based upon some standard capable of
reasonable comprehension, be that standard based upon ability to
produce revenue or some other legitimate distinction, equal
protection of the law has been afforded. See Allied Stores of Ohio,
Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown
Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S.
Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds
except by the clearest demonstration that it sanctions invidious
discrimination, which is all that the Constitution forbids. The remedy for
unwise legislation must be sought in the legislature. Now, the
classification of mail users is not without any reason. It is based on ability
to pay, let alone the enjoyment of a privilege, and on administrative
convinience. In the allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund can be assured by
those whose who can afford the use of the mails.

II.
We now consider the constitutional objections raised against the statute
and the implementing orders.
1. It is said that the statute is violative of the equal protection clause of
the Constitution. More specifically the claim is made that it constitutes
33

The classification is likewise based on considerations of administrative

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

TB stamp, is but a restatement of this well-known principle of

constitutional law.
The trial court likewise held the law invalid on the ground that it singles
out tuberculosis to the exclusion of other diseases which, it is said, are
equally a menace to public health. But it is never a requirement of equal
protection that all evils of the same genus be eradicated or none at
all.13 As this Court has had occasion to say, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there are
other instances to which it might have been applied."14
2. The petitioner further argues that the tax in question is invalid, first,
because it is not levied for a public purpose as no special benefits accrue
to mail users as taxpayers, and second, because it violates the rule of
uniformity in taxation.

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

The eradication of a dreaded disease is a public purpose, but if by public

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

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

Nor is the rule of uniformity and equality of taxation infringed by the

imposition of a flat rate rather than a graduated tax. A tax need not be
measured by the weight of the mail or the extent of the service rendered.
We have said that considerations of administrative convenience and cost
afford an adequate ground for classification. The same considerations
may induce the legislature to impose a flat tax which in effect is a charge
for the transaction, operating equally on all persons within the class
regardless of the amount involved. 16 As Mr. Justice Holmes said in
sustaining the validity of a stamp act which imposed a flat rate of two
cents on every $100 face value of stock transferred:

It is thus erroneous for the trial court to hold that because certain mail
users are exempted from the levy the law and administrative officials
have sanctioned an invidious discrimination offensive to the Constitution.
The application of the lower courts theory would require all mail users to
be taxed, a conclusion that is hardly tenable in the light of differences in
status of mail users. The Constitution does not require this kind of
equality.
As the United States Supreme Court has said, the legislature may
withhold the burden of the tax in order to foster what it conceives to be a
beneficent enterprise.11 This is the case of newspapers which, under the
amendment introduced by Republic Act 2631, are exempt from the
payment of the additional stamp.

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

As for the Government and its instrumentalities, their exemption rests on

the State's sovereign immunity from taxation. The State cannot be taxed
without its consent and such consent, being in derogation of its
sovereignty, is to be strictly construed. 12 Administrative Order 9 of the
respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti34

checks, irrespective of income or earning capacity, and many

others, illustrate the necessity and practice of sometimes
substituting count for weight ...17

guidance of postal officials and employees. As for Administrative Order 9,

we have already said that in listing the offices and entities of the
Government exempt from the payment of the stamp, the respondent
Postmaster General merely observed an established principle, namely,
that the Government is exempt from taxation.

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

ACCORDINGLY, the judgment a quo is reversed, and the complaint is

dismissed, without pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and
Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

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

Separate Opinions
FERNANDO, J., concurring:

Administrative Order 3, as amended by Administrative Orders 7 and 10,

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

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

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

1. For me, the state in question is an exercise of the regulatory power

connected with the performance of the public service. I refer of course to
the government postal function, one of respectable and ancient lineage.
The United States Constitution of 1787 vests in the federal government
acting through Congress the power to establish post offices. 1 The first act
providing for the organization of government departments in the
Philippines, approved Sept. 6, 1901, provided for the Bureau of Post
Offices in the Department of Commerce and Police. 2 Its creation is thus a
manifestation of one of the many services in which the government may
engage for public convenience and public interest. Such being the case, it
seems that any legislation that in effect would require increase cost of
postage is well within the discretionary authority of the government.

The anti-TB stamp is a distinctive stamp which shows on its face not only
the amount of the additional charge but also that of the regular postage.
In the case of business reply cards, for instance, it is obvious that to
require mailers to affix the anti-TB stamp on their cards would be to make
them pay much more because the cards likewise bear the amount of the
regular postage.

It may not be acting in a proprietary capacity but in fixing the fees that it
collects for the use of the mails, the broad discretion that it enjoys is
undeniable. In that sense, the principle announced in Esteban v.
Cabanatuan City,3 in an opinion by our Chief Justice, while not precisely
controlling furnishes for me more than ample support for the validity of
the challenged legislation. Thus: "Certain exactions, imposable under an
authority other than police power, are not subject, however, to
qualification as to the amount chargeable, unless the Constitution or the
pertinent laws provide otherwise. For instance, the rates of taxes, whether

It is likewise true that the statute does not provide for the disposition of
mails which do not bear the anti-TB stamp, but a declaration therein that
"no mail matter shall be accepted in the mails unless it bears such semipostal stamp" is a declaration that such mail matter is nonmailable within
the meaning of section 1952 of the Administrative Code. Administrative
Order 7 of the Postmaster General is but a restatement of the law for the
35

national or municipal, need not be reasonable, in the absence of such

constitutional or statutory limitation. Similarly, when a municipal
corporation fixes the fees for the use of its properties, such as public
markets, it does not wield the police power, or even the power of
taxation. Neither does it assert governmental authority. It exercises
merely a proprietary function. And, like any private owner, it is in the
absence of the aforementioned limitation, which does not exist in the
Charter of Cabanatuan City (Republic Act No. 526) free to charge such
sums as it may deem best, regardless of the reasonableness of the
amount fixed, for the prospective lessees are free to enter into the
corresponding contract of lease, if they are agreeable to the terms thereof
or, otherwise, not enter into such contract."

militant stand. As phrased by us in a recent decision, "if the liberty

involved were freedom of the mind or the person, the standard of its
validity of governmental acts is much more rigorous and exacting." 8
So much for the appropriate judicial attitude. Now on the question
of awareness of the controlling constitutional doctrines.
There is nothing I can add to the enlightening discussion of the equal
protection aspect as found in the majority opinion. It may not be amiss to
recall to mind, however, the language of Justice Laurel in the leading case
of People v. Vera,9 to the effect that the basic individual right of equal
protection "is a restraint on all the three grand departments of our
government and on the subordinate instrumentalities and subdivisions
thereof, and on many constitutional powers, like the police power,
taxation and eminent domain." 10 Nonetheless, no jurist was more careful
in avoiding the dire consequences to what the legislative body might have
deemed necessary to promote the ends of public welfare if the equal
protection guaranty were made to constitute an insurmountable obstacle.

2. It would appear likewise that an expression of one's personal view both

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

A similar sense of realism was invariably displayed by Justice Frankfurter,

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

Since the power of judicial review flows logically from the judicial function
of ascertaining the facts and applying the law and since obviously the
Constitution is the highest law before which statutes must bend, then
inferior tribunals can, in the discharge of their judicial functions, nullify
legislative acts. As a matter of fact, in clear cases, such is not only their
power but their duty. In the language of the present Chief Justice: "In fact,
whenever the conflicting claims of the parties to a litigation cannot
properly be settled without inquiring into the validity of an act of Congress
or of either House thereof, the courts have, not only jurisdiction to pass
upon said issue but, also, the duty to do so, which cannot be
evaded without violating the fundamental law and paving the way to its
eventual destruction."6
Nonetheless, the admonition of Cooley, specially addressed to inferior
tribunals, must ever be kept in mind. Thus: "It must be evident to any one
that the power to declare a legislative enactment void is one which the
judge, conscious of the fallibility of the human judgment, will shrink from
exercising in any case where he can conscientiously and with due regard
to duty and official oath decline the responsibility." 7

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

There must be a caveat however to the above Cooley pronouncement.

Such should not be the case, to paraphrase Freund, when the challenged
legislation imperils freedom of the mind and of the person, for given such
an undesirable situation, "it is freedom that commands a momentum of
respect." Here then, fidelity to the great ideal of liberty enshrined in the
Constitution may require the judiciary to take an uncompromising and
36

fixing the price of rice and to make the sale of it in violation of the
proclamation a crime."13

Republic of the Philippines

SUPREME COURT
Manila

Only recently, the present Chief Justice reaffirmed the above view
in Pelaez v. Auditor General,14 specially where the delegation deals not
with an administrative function but one essentially and eminently
legislative in character. What could properly be stigmatized though to
quote Justice Cardozo, is delegation of authority that is "unconfined and
vagrant, one not canalized within banks which keep it from overflowing." 15

EN BANC
G.R. No. L-10405

December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial

Governor of Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.

This is not the situation as it presents itself to us. What was delegated
was power not legislative in character. Justice Laurel himself, in a later
case, People v. Rosenthal,16 admitted that within certain limits, there
being a need for coping with the more intricate problems of society, the
principle of "subordinate legislation" has been accepted, not only in the
United States and England, but in practically all modern governments.
This view was reiterated by him in a 1940 decision, Pangasinan
Transportation Co., Inc. v. Public Service Commission.17 Thus:
"Accordingly, with the growing complexity of modern life, the
multiplication of the subjects of governmental regulation, and the
increased difficulty of administering the laws, there is a constantly
growing tendency toward the delegation of greater powers by the
legislature, and toward the approval of the practice by the courts."

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A.
Torres for appellee.

CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of
First Instance of Rizal, dismissing the above entitled case and dissolving
the writ of preliminary injunction therein issued, without costs.

In the light of the above views of eminent jurists, authoritative in

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

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor

of Rizal, instituted this action for declaratory relief, with injunction, upon
the ground that Republic Act No. 920, entitled "An Act Appropriating
Funds for Public Works", approved on June 20, 1953, contained, in section
1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction,
reconstruction, repair, extension and improvement" of Pasig feeder road
terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin
Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the
time of the passage and approval of said Act, the aforementioned feeder
roads were "nothing but projected and planned subdivision roads, not yet
constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig,
Rizal" (according to the tracings attached to the petition as Annexes A
and B, near Shaw Boulevard, not far away from the intersection between
the latter and Highway 54), which projected feeder roads "do not connect
any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as the
lands on which said feeder roads were to be construed) were private
properties of respondent Jose C. Zulueta, who, at the time of the passage
and approval of said Act, was a member of the Senate of the Philippines;
that on May, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder
37

roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer
was accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the names of
two of them"; that no deed of donation in favor of the municipality of
Pasig was, however, executed; that on July 10, 1953, respondent Zulueta
wrote another letter to said council, calling attention to the approval of
Republic Act. No. 920, and the sum of P85,000.00 appropriated therein for
the construction of the projected feeder roads in question; that the
municipal council of Pasig endorsed said letter of respondent Zulueta to
the District Engineer of Rizal, who, up to the present "has not made any
endorsement thereon" that inasmuch as the projected feeder roads in
question were private property at the time of the passage and approval of
Republic Act No. 920, the appropriation of P85,000.00 therein made, for
the construction, reconstruction, repair, extension and improvement of
said projected feeder roads, was illegal and, therefore, void ab initio"; that
said appropriation of P85,000.00 was made by Congress because its
members were made to believe that the projected feeder roads in
question were "public roads and not private streets of a private
subdivision"'; that, "in order to give a semblance of legality, when there is
absolutely none, to the aforementioned appropriation", respondents
Zulueta executed on December 12, 1953, while he was a member of the
Senate of the Philippines, an alleged deed of donation copy of which is
annexed to the petition of the four (4) parcels of land constituting said
projected feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same date,
accepted by the then Executive Secretary; that being subject to an
onerous condition, said donation partook of the nature of a contract; that,
such, said donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of
the projected feeder roads in question with public funds would greatly
enhance or increase the value of the aforementioned subdivision of
respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being undertaken by
the Bureau of Public Highways; and that, unless restrained by the court,
the respondents would continue to execute, comply with, follow and
implement the aforementioned illegal provision of law, "to the irreparable
damage, detriment and prejudice not only to the petitioner but to the
Filipino nation."

making and securing any new and further releases on the aforementioned
item of Republic Act No. 920, and the disbursing officers of the
Department of Public Works and Highways from making any further
payments out of said funds provided for in Republic Act No. 920; and that
pending final hearing on the merits, a writ of preliminary injunction be
issued enjoining the aforementioned parties respondent from making and
securing any new and further releases on the aforesaid item of Republic
Act No. 920 and from making any further payments out of said illegally
appropriated funds.
Respondents moved to dismiss the petition upon the ground that
petitioner had "no legal capacity to sue", and that the petition did "not
state a cause of action". In support to this motion, respondent Zulueta
alleged that the Provincial Fiscal of Rizal, not its provincial governor,
should represent the Province of Rizal, pursuant to section 1683 of the
Revised Administrative Code; that said respondent is " not aware of any
law which makes illegal the appropriation of public funds for the
improvements of . . . private property"; and that, the constitutional
provision invoked by petitioner is inapplicable to the donation in question,
the same being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail the
appropriation in question because "there is no actual bona fide case . . . in
which the validity of Republic Act No. 920 is necessarily involved" and
petitioner "has not shown that he has a personal and substantial interest"
in said Act "and that its enforcement has caused or will cause him a direct
injury."
Acting upon said motions to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that, since
public interest is involved in this case, the Provincial Governor of Rizal and
the provincial fiscal thereof who represents him therein, "have the
requisite personalities" to question the constitutionality of the disputed
item of Republic Act No. 920; that "the legislature is without power
appropriate public revenues for anything but a public purpose", that the
instructions and improvement of the feeder roads in question, if such
roads where private property, would not be a public purpose; that, being
subject to the following condition:
The within donation is hereby made upon the condition that the
Government of the Republic of the Philippines will use the parcels
of land hereby donated for street purposes only and for no other
purposes whatsoever; it being expressly understood that should
the Government of the Republic of the Philippines violate the
condition hereby imposed upon it, the title to the land hereby
donated shall, upon such violation, ipso facto revert to the
DONOR, JOSE C. ZULUETA. (Emphasis supplied.)

Petitioner prayed, therefore, that the contested item of Republic Act No.
920 be declared null and void; that the alleged deed of donation of the
feeder roads in question be "declared unconstitutional and, therefor,
illegal"; that a writ of injunction be issued enjoining the Secretary of Public
Works and Communications, the Director of the Bureau of Public Works
and Highways and Jose C. Zulueta from ordering or allowing the
continuance of the above-mentioned feeder roads project, and from
38

which is onerous, the donation in question is a contract; that said

donation or contract is "absolutely forbidden by the Constitution" and
consequently "illegal", for Article 1409 of the Civil Code of the Philippines,
declares in existence and void from the very beginning contracts "whose
cause, objector purpose is contrary to law, morals . . . or public policy";
that the legality of said donation may not be contested, however, by
petitioner herein, because his "interest are not directly affected" thereby;
and that, accordingly, the appropriation in question "should be upheld"
and the case dismissed.

As regards the legal feasibility of appropriating public funds for a public

purpose, the principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose. . . .
It is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which
the general advantage of the community, and thus the public
welfare,
may
be
ultimately
benefited
by
their
promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of
private enterprises or business, does not justify their aid by the
use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

At the outset, it should be noted that we are concerned with a decision

granting the aforementioned motions to dismiss, which as much, are
deemed to have admitted hypothetically the allegations of fact made in
the petition of appellant herein. According to said petition, respondent
Zulueta is the owner of several parcels of residential land situated in
Pasig, Rizal, and known as the Antonio Subdivision, certain portions of
which had been reserved for the projected feeder roads aforementioned,
which, admittedly, were private property of said respondent when
Republic Act No. 920, appropriating P85,000.00 for the "construction,
reconstruction, repair, extension and improvement" of said roads, was
passed by Congress, as well as when it was approved by the President on
June 20, 1953. The petition further alleges that the construction of said
roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta of the
burden of constructing his subdivision streets or roads at his own
expenses, 1and would "greatly enhance or increase the value of the
subdivision" of said respondent. The lower court held that under these
circumstances, the appropriation in question was "clearly for a private,
not a public purpose."

The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed suprasec. 14,
money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals. (85
C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the
constitution, public funds may be used only for public purpose.
The right of the legislature to appropriate funds is correlative with
its right to tax, and, under constitutional provisions against
taxation except for public purposes and prohibiting the collection
of a tax for one purpose and the devotion thereof to another
purpose, no appropriation of state funds can be made for other
than for a public purpose.

Respondents do not deny the accuracy of this conclusion, which is selfevident. 2However, respondent Zulueta contended, in his motion to
dismiss that:
A law passed by Congress and approved by the President can
never be illegal because Congress is the source of all laws . . .
Aside from the fact that movant is not aware of any law which
makes illegal the appropriation of public funds for the
improvement of what we, in the meantime, may assume as
private property . . . (Record on Appeal, p. 33.)

xxx

xxx

xxx

The test of the constitutionality of a statute requiring the use of

public funds is whether the statute is designed to promote the
public interest, as opposed to the furtherance of the advantage of
individuals,
although
each
advantage
to
individuals
might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)

The first proposition must be rejected most emphatically, it being

inconsistent with the nature of the Government established under the
Constitution of the Republic of the Philippines and the system of checks
and balances underlying our political structure. Moreover, it is refuted by
the decisions of this Court invalidating legislative enactments deemed
violative of the Constitution or organic laws. 3

Needless to say, this Court is fully in accord with the foregoing views
which, apart from being patently sound, are a necessary corollary to our
democratic system of government, which, as such, exists primarily for the
promotion of the general welfare. Besides, reflecting as they do, the
39

established jurisprudence in the United States, after whose constitutional

system ours has been patterned, said views and jurisprudence are,
likewise, part and parcel of our own constitutional law.lawphil.net

providing for the disbursement of public funds, 5upon the theory that "the
expenditure of public funds by an officer of the State for the purpose of
administering an unconstitutional act constitutes a misapplication of such
funds," which may be enjoined at the request of a taxpayer. 6Although
there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:

This notwithstanding, the lower court felt constrained to uphold the

appropriation in question, upon the ground that petitioner may not
contest the legality of the donation above referred to because the same
does not affect him directly. This conclusion is, presumably, based upon
the following premises, namely: (1) that, if valid, said donation cured the
constitutional infirmity of the aforementioned appropriation; (2) that the
latter may not be annulled without a previous declaration of
unconstitutionality of the said donation; and (3) that the rule set forth in
Article 1421 of the Civil Code is absolute, and admits of no exception. We
do not agree with these premises.

In the determination of the degree of interest essential to give the

requisite standing to attack the constitutionality of a statute, the
general rule is that not only persons individually affected, but
also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of
public moneys. (11 Am. Jur. 761; emphasis supplied.)

The validity of a statute depends upon the powers of Congress at the time
of its passage or approval, not upon events occurring, or acts performed,
subsequently thereto, unless the latter consists of an amendment of the
organic law, removing, with retrospective operation, the constitutional
limitation infringed by said statute. Referring to the P85,000.00
appropriation for the projected feeder roads in question, the legality
thereof depended upon whether said roads were public or private
property when the bill, which, latter on, became Republic Act 920, was
passed by Congress, or, when said bill was approved by the President and
the disbursement of said sum became effective, or on June 20, 1953 (see
section 13 of said Act). Inasmuch as the land on which the projected
feeder roads were to be constructed belonged then to respondent
Zulueta, the result is that said appropriation sought a private purpose,
and hence, was null and void. 4 The donation to the Government, over
five (5) months after the approval and effectivity of said Act, made,
according to the petition, for the purpose of giving a "semblance of
legality", or legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of unconstitutionality of said
appropriation.

However, this view was not favored by the Supreme Court of the U.S. in
Frothingham vs. Mellon (262 U.S. 447), insofar as federal laws are
concerned, upon the ground that the relationship of a taxpayer of the U.S.
to its Federal Government is different from that of a taxpayer of a
municipal
corporation
to
its
government.
Indeed,
under
thecomposite system of government existing in the U.S., the states of the
Union are integral part of the Federation from an international viewpoint,
but, each state enjoys internally a substantial measure of sovereignty,
subject to the limitations imposed by the Federal Constitution. In fact, the
same was made by representatives of each state of the Union, not of the
people of the U.S., except insofar as the former represented the people of
the respective States, and the people of each State has, independently of
that of the others, ratified said Constitution. In other words, the Federal
Constitution and the Federal statutes have become binding upon the
people of the U.S. in consequence of an act of, and, in this
sense, through the respective states of the Union of which they are
citizens. The peculiar nature of the relation between said people and the
Federal Government of the U.S. is reflected in the election of its President,
who is chosen directly, not by the people of the U.S., but by electors
chosen by each State, in such manner as the legislature thereof may
direct (Article II, section 2, of the Federal Constitution).lawphi1.net

Again, Article 1421 of our Civil Code, like many other statutory
enactments, is subject to exceptions. For instance, the creditors of a party
to an illegal contract may, under the conditions set forth in Article 1177 of
said Code, exercise the rights and actions of the latter, except only those
which are inherent in his person, including therefore, his right to the
annulment of said contract, even though such creditors are not affected
by the same, except indirectly, in the manner indicated in said legal
provision.

The relation between the people of the Philippines and its taxpayers, on
the other hand, and the Republic of the Philippines, on the other, is not
identical to that obtaining between the people and taxpayers of the U.S.
and its Federal Government. It is closer, from a domestic viewpoint, to
that existing between the people and taxpayers of each state and the
government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that
of the states of the Union, insofar as the simple and unitary type of our
national government is not subject to limitations analogous to those
imposed by the Federal Constitution upon the states of the Union, and
those imposed upon the Federal Government in the interest of the Union.

Again, it is well-stated that the validity of a statute may be contested only

by one who will sustain a direct injury in consequence of its enforcement.
Yet, there are many decisions nullifying, at the instance of taxpayers, laws
40

For this reason, the rule recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state public funds
which
has
been
upheld
by
the
Federal
Supreme
Court
(Crampton vs. Zabriskie, 101 U.S. 601) has greater application in the
Philippines than that adopted with respect to acts of Congress of the
United States appropriating federal funds.

Ch
airperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the
expropriation of a land by the Province of Tayabas, two (2) taxpayers
thereof were allowed to intervene for the purpose of contesting the price
being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and
employee of the Government was not permitted to question the
constitutionality of an appropriation for backpay of members of Congress.
However,
in
Rodriguez vs. Treasurer
of
the
Philippines
and
Barredo vs.Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we
entertained the action of taxpayers impugning the validity of certain
appropriations of public funds, and invalidated the same. Moreover, the
reason that impelled this Court to take such position in said two (2) cases
the importance of the issues therein raised is present in the case at
bar. Again, like the petitioners in the Rodriguez and Barredo cases,
petitioner herein is not merely a taxpayer. The Province of Rizal, which he
represents officially as its Provincial Governor, is our most populated
political subdivision, 8and, the taxpayers therein bear a substantial portion
of the burden of taxation, in the Philippines.

Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to
consider the constitutionality of statutes, executive orders, presidential
decrees and other issuances.The Constitution vests that power not only in
the Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of
the Decision[1] of the Court of Appeals (CA) affirming with modification
that ofthe RTC in Makati City,[2] finding petitioner Planters Products, Inc.
(PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the
levies it paid under Letter of Instruction (LOI) No. 1465.

Hence, it is our considered opinion that the circumstances surrounding

this case sufficiently justify petitioners action in contesting the
appropriation and donation in question; that this action should not have
been dismissed by the lower court; and that the writ of preliminary
injunction should have been maintained.

The Facts

Wherefore, the decision appealed from is hereby reversed, and the

records are remanded to the lower court for further proceedings not
inconsistent with this decision, with the costs of this instance against
respondent Jose C. Zulueta. It is so ordered.

Petitioner PPI and private respondent Fertiphil are private

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

Republic of the Philippines

Supreme Court
Manila

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

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

THIRD DIVISION

3. The Administrator of the Fertilizer Pesticide Authority to

include in its fertilizer pricing formula a capital
contribution component of not less than P10 per
bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all

PLANTERS PRODUCTS, INC., G.R. No. 166006

Petitioner,
Present:
YNARES-SANTIAGO, J.,
41

domestic sales of fertilizers

[5]
(Underscoring supplied)

in

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

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it
sold in the domestic market to the Fertilizer and Pesticide Authority
(FPA). FPA then remitted the amount collected to the Far East Bank and
Trust Company, the depositary bank of PPI.Fertiphil paid P6,689,144 to
FPA from July 8, 1985 to January 24, 1986.[6]

It is apparent that the imposition of P10 per

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

After the 1986 Edsa Revolution, FPA voluntarily stopped the

imposition of theP10 levy. With the return of democracy, Fertiphil
demanded from PPI a refund of the amounts it paid under LOI No. 1465,
but PPI refused to accede to the demand.[7]
Fertiphil filed a complaint for collection and damages [8] against
FPA and PPI with the RTC in Makati. It questioned the constitutionality of
LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an
unlawful imposition that amounted to a denial of due process of law.
[9]
Fertiphil alleged that the LOI solely favored PPI, a privately owned
corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.

One of the inherent limitations is that a tax may be levied

only for public purposes:
The power to tax can be resorted to only
for
a
constitutionally
valid
public
purpose. By the same token, taxes may
not be levied for purely private purposes,
for building up of private fortunes, or for
the redress of private wrongs. They
cannot be levied for the improvement of
private property, or for the benefit, and
promotion of private enterprises, except
where the aid is incident to the public
benefit. It is well-settled principle of
constitutional law that no general tax can
be levied except for the purpose of raising
money which is to be expended for public
use. Funds cannot be exacted under the
guise of taxation to promote a purpose
that is not of public interest. Without such
limitation, the power to tax could be
exercised or employed as an authority to
destroy the economy of the people. A tax,
however, is not held void on the ground of
want of public interest unless the want of
such interest is clear. (71 Am. Jur. pp. 371372)

In its Answer,[10] FPA, through the Solicitor General, countered that

the issuance of LOI No. 1465 was a valid exercise of the police power of
the State in ensuring the stability of the fertilizer industry in the country. It
also averred that Fertiphil did not sustain any damage from the LOI
because the burden imposed by the levy fell on the ultimate consumer,
not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,
disposing as follows:
WHEREFORE, in view of the foregoing, the Court
hereby renders judgment in favor of the plaintiff and
against the defendant Planters Product, Inc., ordering the
latter to pay the former:
1) the sum of P6,698,144.00 with interest
at 12% from the time of judicial
demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.

In the case at bar, the plaintiff paid the amount

of P6,698,144.00 to the Fertilizer and Pesticide Authority
pursuant to the P10 per bag of fertilizer sold imposition
under LOI 1465 which, in turn, remitted the amount to the
defendant Planters Products, Inc. thru the latters

SO ORDERED.[11]

42

depository bank, Far East Bank and Trust Co. Thus, by

virtue of LOI 1465 the plaintiff, Fertiphil Corporation,
which is a private domestic corporation, became poorer
by the amount of P6,698,144.00 and the defendant,
Planters Product, Inc., another private domestic
corporation,
became
richer
by
the
amount
of P6,698,144.00.

However, the courts are not precluded from exercising

such power when the following requisites are obtaining in
a controversy before it: First, there must be before the
court an actual case calling for the exercise of judicial
review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of
the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the
earliest
opportunity;
and
lastly,
the
issue
of
constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81
[2000]).

Tested by the standards of constitutionality as set forth in

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

Indisputably, the present case was primarily instituted for

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

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

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

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

In declaring LOI 1465 unconstitutional, the trial

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

IN VIEW OF ALL THE FOREGOING, the decision

appealed
from
is
herebyAFFIRMED, subject
to
the MODIFICATION that the award of attorneys fees is
hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial
court to exercise its power to judicially determine the
constitutionality of the subject statute in the instant case.

On the other hand, appellant submits that the subject

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

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

grounds, the courts will not resolve the constitutionality of
a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy
of the courts is to avoid ruling on constitutional questions
and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the
contrary.

Of the three fundamental powers of the State, the

exercise of police power has been characterized as the
most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs. It may
be exercised as long as the activity or the property sought
43

to be regulated has some relevance to public welfare

(Constitutional Law, by Isagani A. Cruz, p. 38, 1995
Edition).

strength of Letter of Undertaking (LOU) issued by then

Prime Minister Cesar Virata on April 18, 1985 and affirmed
by the Secretary of Justice in an Opinion dated October
12, 1987, to wit:

Vast as the power is, however, it must be exercised within

the limits set by the Constitution, which requires the
concurrence of a lawful subject and a lawful method.Thus,
our courts have laid down the test to determine the
validity of a police measure as follows: (1) the interests of
the public generally, as distinguished from those of a
particular class, requires its exercise; and (2) the means
employed
are
reasonably
necessary
for
the
accomplishment of the purpose and not unduly
oppressive upon individuals (National Development
Company v. Philippine Veterans Bank, 192 SCRA 257
[1990]).

2. Upon the effective date of this Letter of

Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a
capital recovery component, the proceeds
of which will be used initially for the
purpose of funding the unpaid portion of
the outstanding capital stock of Planters
presently held in trust by Planters
Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at
approximately P206 million (subject to
validation by Planters and Planters
Foundation) (such unpaid portion of the
outstanding capital stock of Planters being
hereafter referred to as the Unpaid
Capital), and subsequently for such capital
increases as may be required for the
continuing viability of Planters.

It is upon applying this established tests that We sustain

the trial courts holding LOI 1465 unconstitutional. To be
sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with
public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will
promote
the
public
welfare. The
governments
commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes
impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general
interest of the countrys farmers or even the Filipino
people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction
where none is needed. When a statutes public purpose is
spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being
an arbitrary exercise of government power. To rule in favor
of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private
individuals.[17]

The capital recovery component shall be

in the minimum amount of P10 per bag,
which will be added to the price of all
domestic
sales
of
fertilizer
in
the Philippines by any importer and/or
fertilizer
mother
company.
In
this
connection,
the
Republic
hereby
acknowledges that the advances by
Planters to Planters Foundation which
were applied to the payment of the
Planters shares now held in trust by
Planters Foundation, have been assigned
to,
among
others,
the
Creditors. Accordingly,
the
Republic,
through FPA, hereby agrees to deposit the
proceeds
of
the
capital
recovery
component in the special trust account
designated in the notice dated April 2,
1985, addressed by counsel for the
Creditors to Planters Foundation. Such
proceeds shall be deposited by FPA on or
before the 15th day of each month.

The CA did not accept PPIs claim that the levy imposed under LOI No.
1465 was for the benefit of Planters Foundation, Inc., a foundation created
to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465
was for the benefit of Planters Foundation, Incorporated
(PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PFI on the
44

The capital recovery component shall

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

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE

OF ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION
IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF
FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES
A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION ANDPOLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT
WAS
REMITTED
TO
THE
GOVERNMENT, AND BECAME
GOVERNMENT
FUNDS
PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW
WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY
VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO
ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI
1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE
ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT
CASE.[20] (Underscoring supplied)

Appellants proposition is open to question, to say the

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

Our Ruling
We shall first tackle the procedural issues of locus standi and the
jurisdiction of theRTC to resolve constitutional issues.
Fertiphil
has
locus
standi
because
it
suffered direct injury;
doctrine of standing is
a
mere
procedural
technicality which may
be waived.

PPI moved for reconsideration but its motion was denied. [19] It then
filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:

PPI argues that Fertiphil has no locus standi to question the

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

I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE
COLLATERALLY
ATTACKED AND BE
DECREED VIA A
DEFAULT
JUDGMENT
IN
A
CASE
FILED
FOR
COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY
PERSON OR ENTITY WHICH HASNO STANDING TO DO SO.

[22]

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

appearance in a court of justice has been adequately discussed by this
Court in a catena of cases.Succinctly put, the doctrine requires a litigant
to have a material interest in the outcome of a case. In private
suits, locus standi requires a litigant to be a real party in interest, which is

II
45

defined as the party who stands to be benefited or injured by the

judgment in the suit or the party entitled to the avails of the suit. [23]

Even assuming arguendo that there is no direct injury, We find

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

In public suits, this Court recognizes the difficulty of applying the

doctrine especially when plaintiff asserts a public right on behalf of the
general public because of conflicting public policy issues. [24] On one end,
there is the right of the ordinary citizen to petition the courts to be freed
from unlawful government intrusion and illegal official action. At the other
end, there is the public policy precluding excessive judicial interference in
official acts, which may unnecessarily hinder the delivery of basic public
services.
In this jurisdiction, We have adopted the direct injury test to
determine locus standi in public suits. In People v. Vera,[25] it was held that
a person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain
direct injury as a result. The direct injury test in public suits is similar to
the real party in interest rule for private suits under Section 2, Rule 3 of
the 1997 Rules of Civil Procedure.[26]

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

the statute. It is Our constitutional duty to squarely resolve the issue as
the final arbiter of all justiciable controversies. The doctrine of standing,
being a mere procedural technicality, should be waived, if at all, to
adequately thresh out an important constitutional issue.

Recognizing that a strict application of the direct injury test may

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

RTC may
resolve
constitutional
issues;
the constitutional issue
was adequately raised
in the complaint; it is
the lis mota of the
case.
PPI insists that the RTC and the CA erred in ruling on the
constitutionality of the LOI. It asserts that the constitutionality of the LOI
cannot be collaterally attacked in a complaint for collection.
[28]
Alternatively, the resolution of the constitutional issue is not necessary
for a determination of the complaint for collection.[29]

Whether or not the complaint for collection is characterized as a

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

Fertiphil counters that the constitutionality of the LOI was

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

Moreover, Fertiphil suffered harm from the enforcement of the LOI

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

SECTION 5. The Supreme Court shall have the

following powers:
xxxx
46

constitutional issue, however, (a) must be properly raised and presented

in the case,and (b) its resolution is necessary to a determination of the
case, i.e., the issue of constitutionality must be the very lis
mota presented.[37]

(2) Review, revise, reverse, modify, or affirm on

appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(a) All
cases
in
which
the constitutionality
or
validity
of
anytreaty, international or executive
agreement, law, presidential decree,
proclamation, order,
instruction,
ordinance, or regulation is in question.
(Underscoring supplied)

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was

properly and adequately raised in the complaint for collection filed with
the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465
on domestic sales of all grades of fertilizer in the
Philippines, is unlawful, unjust, uncalled for, unreasonable,
inequitable and oppressive because:
xxxx

In Mirasol v. Court of Appeals,[31] this Court recognized the power

of the RTCto resolve constitutional issues, thus:

(c) It favors only one private

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

On the first issue. It is settled that Regional Trial

Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or
executive order. The Constitution vests the power of
judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation not only in this
Court, but in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of
Foreign Affairs,[33] this Court reiterated:

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

There is no denying that regular courts have

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

7. The CRC was an unlawful; and unconstitutional

special assessment and its imposition is tantamount to
illegal exaction amounting to a denial of due process since
the persons of entities which had to bear the burden of
paying the CRC derived no benefit therefrom; that on the
contrary it was used by PPI in trying to regain its former
despicable monopoly of the fertilizer industry to the
detriment
of
other
distributors
and
importers.
[38]
(Underscoring supplied)

Judicial review of official acts on the ground of unconstitutionality

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

The constitutionality of LOI No. 1465 is also the very lis mota of
the complaint for collection. Fertiphil filed the complaint to compel PPI to
refund the levies paid under the statute on the ground that the law
imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void, Fertiphil had
47

no legal obligation to pay the levy. Necessarily, all levies duly paid
pursuant to an unconstitutional law should be refunded under the civil
code principle against unjust enrichment. The refund is a mere
consequence of the law being declared unconstitutional. The RTC surely
cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers the
refund. The issue of constitutionality is the very lis mota of the complaint
with theRTC.

In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition

of a vehicle registration fee is not an exercise by the State of its police
power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of
Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent
and purpose behind the law requiring owners of vehicles
to pay for their registration ismainly to raise funds for the
construction and maintenance of highways and to a much
lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly
regarded as taxes even though they also serve as an
instrument of regulation.

The P10 levy under

LOI No. 1465 is an
exercise of the power
of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling
against the constitutionality of the LOI.

Taxation may be made the implement of the

state's police power (Lutz v. Araneta, 98 Phil. 148). If the
purpose is primarily revenue, or if revenue is, at least, one
of the real and substantial purposes, then the exaction is
properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section
59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax
as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a tax or
fee. x x x Simply put, if the exaction under Rep. Act 4136
were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an additional tax. Rep. Act 4136 also
speaks of other fees such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to
be understood as taxes because such fees are very
minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 59(b) of the Code as taxes like the
motor vehicle registration fee and chauffeurs license
fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last
proviso of Sec. 61.[44] (Underscoring supplied)

PPI insists that LOI No. 1465 is a valid exercise either of the police
power or the power of taxation. It claims that the LOI was implemented
for the purpose of assuring the fertilizer supply and distribution in the
country and for benefiting a foundation created by law to hold in trust for
millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was
enacted to give benefit to a private company. The levy was imposed to
pay the corporate debt of PPI.Fertiphil also argues that, even if the LOI is
enacted under the police power, it is still unconstitutional because it did
not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact legislation that
may interfere with personal liberty or property in order to promote the
general welfare,[39] while the power of taxation is the power to levy taxes
to be used for public purpose. The main purpose of police power is the
regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to
determine the validity of a law enacted under the police power. [40] The
power of taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.

The P10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller or
the ultimate consumer. It increased the price of a bag of fertilizer by as
much as five percent.[45] A plain reading of the LOI also supports the
conclusion that the levy was for revenue generation. The LOI expressly
provided that the levy was imposed until adequate capital is raised to
make PPI viable.

We agree with the RTC that the imposition of the levy was an
exercise by the State of its taxation power. While it is true that the power
of taxation can be used as an implement of police power, [41] the primary
purpose of the levy is revenue generation.If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax.[42]

Taxes are exacted only

for a public purpose.
48

The P10
levy
is
unconstitutional
because it was not for
a public purpose. The
levy was imposed to
give undue benefit to
PPI.

bag. This capital contribution shall be collected until

adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all
domestic sales of fertilizers in the Philippines.
[48]
(Underscoring supplied)

An inherent limitation on the power of taxation is public

purpose. Taxes are exacted only for a public purpose. They cannot be
used for purely private purposes or for the exclusive benefit of private
persons.[46] The reason for this is simple. The power to tax exists for the
general welfare; hence, implicit in its power is the limitation that it should
be used only for a public purpose. It would be a robbery for the State to
tax its citizens and use the funds generated for a private purpose. As an
old United States case bluntly put it: To lay with one hand, the power of
the government on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private enterprises and build up
private fortunes, is nonetheless a robbery because it is done under the
forms of law and is called taxation.[47]

It is a basic rule of statutory construction that the text of a statute

should be given a literal meaning. In this case, the text of the LOI is plain
that the levy was imposed in order to raise capital for PPI. The framers of
the LOI did not even hide the insidious purpose of the law. They were
cavalier enough to name PPI as the ultimate beneficiary of the taxes
levied under the LOI. We find it utterly repulsive that a tax law would
expressly name a private company as the ultimate beneficiary of the
taxes to be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming financially viable. This
suggests that the levy was actually imposed to benefit PPI. The LOI
notably does not fix a maximum amount when PPI is deemed financially
viable. Worse, the liability of Fertiphil and other domestic sellers of
fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.

The term public purpose is not defined. It is an elastic concept

that can be hammered to fit modern standards. Jurisprudence states that
public purpose should be given a broad interpretation. It does not only
pertain to those purposes which are traditionally viewed as essentially
government functions, such as building roads and delivery of basic
services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.

Third, the RTC and the CA held that the levies paid under the LOI
were directly remitted and deposited by FPA to Far East Bank and Trust
Company, the depositary bank of PPI. [49] This proves that PPI benefited
from the LOI. It is also proves that the main purpose of the law was to give
undue benefit and advantage to PPI.

While the categories of what may constitute a public purpose are

continually expanding in light of the expansion of government functions,
the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a tax
law is only a mask to exact funds from the public when its true intent is to
give undue benefit and advantage to a private enterprise, that law will not
satisfy the requirement of public purpose.

Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding [50] dated May 18, 1985 signed by
then Prime Minister Cesar Virata reveals that PPI was in deep financial
problem because of its huge corporate debts. There were pending
petitions for rehabilitation against PPI before the Securities and Exchange
Commission. The government guaranteed payment of PPIs debts to its
foreign creditors. To fund the payment, President Marcos issued LOI No.
1465. The pertinent portions of the letter of understanding read:

The purpose of a law is evident from its text or inferable from

other secondary sources. Here, We agree with the RTC and that CA that
the levy imposed under LOI No. 1465 was not for a public purpose.

Republic of the Philippines

Office of the Prime Minister
Manila

First, the LOI expressly provided that the levy be imposed to

benefit PPI, a private company. The purpose is explicit from Clause 3 of
the law, thus:

LETTER OF UNDERTAKING

3. The Administrator of the Fertilizer Pesticide Authority to

include in its fertilizer pricing formula a capital
contribution component of not less than P10 per

ay
1985
49

M
18,

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)

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

Gentlemen:
This has reference to Planters which is the principal
importer and distributor of fertilizer, pesticides and
agricultural chemicals in the Philippines. As regards
Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has
outstanding obligations in foreign currency and/or pesos,
to the Creditors, (2) thatPlanters is currently experiencing
financial difficulties, and (3) that there are presently
pending with the Securities and Exchange Commission of
the Philippines a petition filed at Planters own behest for
the suspension of payment of all its obligations, and a
separate petition filed by Manufacturers Hanover Trust
Company, Manila Offshore Branch for the appointment of
a rehabilitation receiver for Planters.

REPUBLIC
OF
PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA

THE

Prime Minister and Minister of Finance[51]

In connection with the foregoing, the Republic of the
Philippines (the Republic) confirms that it considers and
continues to consider Planters as a major fertilizer
distributor. Accordingly, for and in consideration of your
expressed willingness to consider and participate in the
effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful
rehabilitation and continuing viability of Planters, and to
that end, hereby binds and obligates itself to the creditors
and Planters, as follows:

It is clear from the Letter of Understanding that the levy was

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

xxxx
The
LOI
is
still
unconstitutional even
if enacted under the
police power; it did not
promote
public
interest.

2. Upon the effective date of this Letter of

Undertaking, the Republic shall cause FPA to include in its
fertilizer pricing formula a capital recovery component,
the proceeds of which will be used initially for the purpose
of funding the unpaid portion of the outstanding capital
stock of Planters presently held in trust by Planters
Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately P206 million
(subject to validation by Planters and Planters Foundation)
such unpaid portion of the outstanding capital stock of
Planters being hereafter referred to as the Unpaid
Capital), and subsequently for such capital increases as
may be required for the continuing viability of Planters.

Even if We consider LOI No. 1695 enacted under the police power of the
State, it would still be invalid for failing to comply with the test of lawful
subjects and lawful means. Jurisprudence states the test as follows: (1)
the interest of the public generally, as distinguished from those of
particular class, requires its exercise; and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.[52]
50

For the same reasons as discussed, LOI No. 1695 is invalid because it did
not promote public interest. The law was enacted to give undue
advantage to a private corporation.We quote with approval the CA
ratiocination on this point, thus:

duties and affords no protection. It has no legal effect. It is, in legal

contemplation, inoperative as if it has not been passed. [54] Being void,
Fertiphil is not required to pay the levy. All levies paid should be refunded
in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code,
which provides:

It is upon applying this established tests that We

sustain the trial courts holding LOI 1465 unconstitutional.
To be sure, ensuring the continued supply and distribution
of fertilizer in the country is an undertaking imbued with
public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will
promote
the
public
welfare. The
governments
commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statutes
impartiality. There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general
interest of the countrys farmers or even the Filipino
people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction
where none is needed.When a statutes public purpose is
spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being
an arbitrary exercise of government power. To rule in favor
of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private
individuals. (Underscoring supplied)

ART. 7. Laws are repealed only by subsequent

ones, and their violation or non-observance shall not be
excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent
with the Constitution, the former shall be void and the
latter shall govern.
The doctrine of operative fact, as an exception to the general rule,
only applies as a matter of equity and fair play. [55] It nullifies the effects of
an unconstitutional law by recognizing that the existence of a statute
prior to a determination of unconstitutionality is an operative fact and
may have consequences which cannot always be ignored. The past
cannot always be erased by a new judicial declaration. [56]
The
doctrine
is
applicable
when
a
declaration
of
unconstitutionality will impose an undue burden on those who have relied
on the invalid law. Thus, it was applied to a criminal case when a
declaration of unconstitutionality would put the accused in double
jeopardy[57] or would put in limbo the acts done by a municipality in
reliance upon a law creating it.[58]

The general rule is that

an unconstitutional law
is void; the doctrine of
operative
fact
is
inapplicable.

Here, We do not find anything iniquitous in ordering PPI to refund

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

PPI also argues that Fertiphil cannot seek a refund even if LOI No.
1465 is declared unconstitutional. It banks on the doctrine of operative
fact, which provides that an unconstitutional law has an effect before
being declared unconstitutional. PPI wants to retain the levies paid under
LOI No. 1465 even if it is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument
will be entertained on appeal, unless it has been raised in the court a quo.
[53]
PPI did not raise the applicability of the doctrine of operative fact with
the RTC and the CA. It cannot belatedly raise the issue with Us in order to
extricate itself from the dire effects of an unconstitutional law.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision

datedNovember 28, 2003 is AFFIRMED.

At any rate, We find the doctrine inapplicable. The general rule is

that an unconstitutional law is void. It produces no rights, imposes no
51

NAZARIO, an
d
GARCIA, JJ.
THE
HONORABLE
EXECUTIVE
SECRETARY
EDUARDO ERMITA; HONORABLE SECRETARY OF
THE
DEPARTMENT
OF
FINANCE
CESAR
PURISIMA; and HONORABLE COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR.,
Respondents.
x-------------------------x
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITOESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA III,

EN BANC

ABAKADA GURO PARTY LIST (Formerly AASJAS)

OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO,
Petitioners,

- versus -

G.R.
168207

No.

G.R.
168461

No.

Petitioners,
G.R.
168056

No.

- versus EXECUTIVE SECRETARY EDUARDO R. ERMITA,

CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER
OF THE BUREAU OF INTERNAL REVENUE,
Respondents.

Present:
DAVIDE,
JR., C.J.,
PUNO,
PANGANIBAN,
QUISUMBING,
YNARESSANTIAGO,
SANDOVALGUTIERREZ,
CARPIO,
AUSTRIAMARTINEZ,
CORONA,
CARPIOMORALES,

x-------------------------x
ASSOCIATION OF PILIPINAS SHELL DEALERS,
INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS ASSOCIATION
represented by its President, RUTH E.
BARBIBI; ASSOCIATION OF CALTEX DEALERS OF
THE PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO
doing business under the name and style of
ANB
NORTH
SHELL
SERVICE
STATION;
LOURDES MARTINEZ doing business under the
name and style of SHELL GATE N. DOMINGO;
BETHZAIDA TAN doing business under the
name and style of ADVANCE SHELL STATION;
REYNALDO P. MONTOYA doing business under
the name and style of NEW LAMUAN SHELL
SERVICE
STATION;
EFREN
SOTTO
doing
business under the name and style of RED
FIELD SHELL SERVICE STATION; DONICA
CORPORATION represented by its President,
DESI TOMACRUZ; RUTH E. MARBIBI doing

CALLEJO, SR.,

AZCUNA,
TINGA,
CHICO52

business under the name and style of R&R

PETRON STATION; PETER M. UNGSON doing
business under the name and style of CLASSIC
STAR GASOLINE SERVICE STATION; MARIAN
SHEILA A. LEE doing business under the name
and style of NTE GASOLINE & SERVICE
STATION; JULIAN CESAR P. POSADAS doing
business under the name and style of
STARCARGA
ENTERPRISES;
ADORACION
MAEBO doing business under the name and
style of CMA MOTORISTS CENTER; SUSAN M.
ENTRATA doing business under the name and
style of LEONAS GASOLINE STATION and
SERVICE CENTER; CARMELITA BALDONADO
doing business under the name and style of
FIRST CHOICE SERVICE CENTER; MERCEDITAS
A. GARCIA doing business under the name and
style of LORPED SERVICE CENTER; RHEAMAR
A. RAMOS doing business under the name and
style of RJRAM PTT GAS STATION; MA. ISABEL
VIOLAGO doing business under the name and
style of VIOLAGO-PTT SERVICE CENTER;
MOTORISTS HEART CORPORATION represented
by its Vice-President for Operations, JOSELITO
F.
FLORDELIZA;
MOTORISTS
HARVARD
CORPORATION represented by its VicePresident
for
Operations,
JOSELITO
F.
FLORDELIZA;
MOTORISTS
HERITAGE
CORPORATION represented by its VicePresident
for
Operations,
JOSELITO
F.
FLORDELIZA;
PHILIPPINE
STANDARD
OIL
CORPORATION represented by its VicePresident
for
Operations,
JOSELITO
F.
FLORDELIZA; ROMEO MANUEL doing business
under the name and style of ROMMAN
GASOLINE STATION; ANTHONY ALBERT CRUZ
III doing business under the name and style of
TRUE SERVICE STATION,
Petitioners,

FRANCIS JOSEPH G. ESCUDERO, VINCENT

CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINOCUSTODIO, OSCAR G. MALAPITAN, BENJAMIN
C. AGARAO, JR. JUAN EDGARDO M. ANGARA,
JUSTIN MARC SB. CHIPECO, FLORENCIO G.
NOEL, MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO
DL. GUINGONA III, RUY ELIAS C. LOPEZ,
RODOLFO Q. AGBAYANI and TEODORO A.
CASIO,
Petitioners,

G.R.
168463

No.

G.R.
168730

No.

- versus CESAR V. PURISIMA, in his capacity as

Secretary of Finance, GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of
Internal Revenue, and EDUARDO R. ERMITA, in
his capacity as Executive Secretary,
Respondents.
x-------------------------x
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.

Petitioner,
- versus HON. EDUARDO R. ERMITA, in his capacity as
the Executive Secretary; HON. MARGARITO
TEVES, in his capacity as Secretary of Finance;
HON. JOSE MARIO BUNAG, in his capacity as
the OIC Commissioner of the Bureau of
Internal Revenue; and HON. ALEXANDER
AREVALO, in his capacity as the OIC
Commissioner of the Bureau of Customs,

- versus CESAR V. PURISIMA, in his capacity as

Secretary of the Department of Finance and
GUILLERMO L. PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue,
Respondents.

Respondents.

Promulgated:
September 1,
2005

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

x-------------------------x
53

DECISION

House Bill No. 3705[3] 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.

AUSTRIA-MARTINEZ, J.:

Meanwhile, the Senate Committee on Ways and Means

approved Senate Bill No. 1950[4] 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.

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)

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.

French statesman and economist

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.

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.

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.

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.

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.

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.

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 oclock in the afternoon.
But before that, there was a lot of
complaints aired on television and

House Bill No. 3555[2] 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.

54

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
theyll 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, thats not true. Its not true
that the e-vat law necessarily
increased prices by 10% uniformly
isnt it?

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 its not correct to
say that all prices must go up by
10%.
ATTY. BANIQUED : Youre 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 : No, Your Honor.

J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an
Executive Order that granted the
Petroleum
companies
some
subsidy . . . interrupted

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

J. PANGANIBAN : Thats correct . . .

J. PANGANIBAN : There are other products that the people

were complaining on that first
day,
were
being
increased
arbitrarily by 10%. And thats one
reason among many others this
Court had to issue TRO because of
the
confusion
in
the
implementation. Thats why we
added as an issue in this case,
even if its 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

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%
55

location and situation of each

product, of each service, of each
company, isnt it?

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.

ATTY. BANIQUED : Yes, Your Honor.

G.R. No. 168207

J. PANGANIBAN : Alright. So thats 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]

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a

petition forcertiorari 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 4/5of the GDP of the previous year, should only be based on fiscal
adequacy.

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:

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 (P1, 000,000.00);

. . . 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

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

(ii) National government deficit as a percentage of

GDP of the previous year exceeds one and one-half
percent (1 %).

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,
56

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.

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

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.

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition
for certiorariand 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.

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.

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.

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.

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.

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:

Respondents also refute petitioners argument that the increase to

12%, as well as the 70% limitation on the creditable input tax, the 60month amortization on the purchase or importation of capital goods
exceeding P1,000,000.00, 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.

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

Finally, respondents manifest that R.A. No. 9337 is the anchor of

the governments fiscal reform agenda. A reform in the value-added
57

system of taxation is the core revenue measure that will tilt the balance
towards a sustainable macroeconomic environment necessary for
economic growth.

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]

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)

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]

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:

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.

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

The Court will now discuss the issues in logical sequence.

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:

PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates
Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

the

following

provisions

of

the

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

RULING OF THE COURT

A. The Bicameral Conference Committee

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.

Petitioners Escudero, et al., and Pimentel, et al., allege that the

Bicameral Conference Committee exceeded its authority by:

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.

1) Inserting the stand-by authority in favor of

President in Sections 4, 5, and 6 of R.A. No. 9337;

the

2) Deleting entirely the no pass-on provisions found in

both the House and Senate bills;

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
58

3) Inserting the provision imposing a 70% limit on the

amount of input tax to be credited against the output tax;
and

Conference Committee Report in the same manner and

procedure as it votes on a bill on third and final reading.

4) Including the amendments introduced only by Senate

Bill No. 1950 regarding other kinds of taxes in addition to
the value-added tax.

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.

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.

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.

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.

...
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 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
latters 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.
...

In the recent case of Farias 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
Congresss creation of two sets of bicameral conference committees, the

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
59

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.

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)

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 Courts
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 2ndor 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.:

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 Farias 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 coequal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the
case ofTolentino 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.

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 Osmea 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

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:

60

House Bill No.3705

House Bill No. 3555

Senate
1950

Bill

sale
of
petroleum
products
shall
be
absorbed
by
generation companies
or
sellers,
respectively, and shall
not be passed on to
consumers

No.

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 on sales of
goods or properties
and reduced rates for
sale of certain locally
manufactured goods
and
petroleum
products
and
raw
materials to be used
in the manufacture
thereof
(amending
Sec. 106 of NIRC);
12%
VAT
on
importation of goods
and reduced rates for
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)

Provides for a
single
rate
of
10% VAT on sale
of
goods
or
properties
(amending
Sec.
106
of
NIRC),
10% VAT on sale
of
services
including sale of
electricity
by
generation
companies,
transmission and
distribution
companies, and
use or lease of
properties
(amending
Sec.
108 of NIRC)

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 the no pass-on provision

No similar provision

Provides that the VAT

imposed on power
generation and on the

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

VAT imposed on
sales
of
61

No similar provision

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.

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.

With regard to amendments to be made to NIRC provisions

regarding income and excise taxes

No
provision

similar

No similar provision

Provided
for
amendments
to
several
NIRC
provisions regarding
corporate
income,
percentage, franchise
and excise taxes

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:

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.

(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
(P1,000,000.00): 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: . . .

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 1%, when the
President, upon recommendation of the Secretary of Finance shall raise
the rate of VAT to 12% effective January 1, 2006.

(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
62

shall not exceed seventy percent (70%) of

the output VAT: PROVIDED, HOWEVER,
THAT any input tax attributable to zerorated sales by a VAT-registered person
may at his option be refunded or credited
against other internal revenue taxes, . . .

. . . 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 lets keep it plain and
simple. Lets 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, lets keep the VAT simple. [26] (Emphasis
supplied)

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.

Rep. Teodoro Locsin further made the manifestation that the no

pass-onprovision 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]

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.

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.

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.

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. Prado [29] 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 Tolentinocase, it was held that:

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-onprovision in this wise:

. . . 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
63

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)

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.

B. R.A. No. 9337 Does Not Violate Article

VI,
Section
26(2)
of
the
Constitution
on
the
NoAmendment Rule

C. R.A. No. 9337 Does Not Violate Article

VI, Section 24 of the Constitution
on
Exclusive
Origination
of
Revenue Bills

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.

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

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
Committees 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
64

28(A)(1)

Tax on Resident
Corporation

Foreign

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from

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.

VAT

The argument does not hold water.

117

Percentage Tax on domestic

carriers and keepers of
Garage

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.

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
products

236

on

Article VI, Section 24 of the Constitution reads:

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 valueadded 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?

mineral

The foregoing question had been squarely

the Tolentino case, wherein the Court held, thus:

Registration requirements

237

Issuance of receipts or sales

or commercial invoices

288

Disposition of Incremental
Revenue

answered

. . . 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
Senates
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.

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
65

in

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.
...

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:

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)

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)

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.

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 countrys 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:

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 countrys 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

All in all, the proposal of the Senate Committee on

Ways and Means will raiseP64.3 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 P48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab P10.5 billion- will
be picked by corporations.
66

What we therefore prescribe is a burden sharing

between corporate Philippinesand the consumer. Why
should the latter bear all the pain? Why should the fiscal
salvation be only on the burden of the consumer?

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.

The corporate worlds 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 P10.5 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.

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]

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 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.

The responsibility will not rest solely on the weary

shoulders of the small man. Big business will be there to
share the burden.[35]

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 countrys fiscal deficit, among others. Thus, the Senate
acted within its power to propose those amendments.

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.

SUBSTANTIVE ISSUES
I.

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:

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.

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
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 thestand-by authority to raise the VAT rate from 10%

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.
67

to 12% when a certain condition is met, constitutes undue delegation of

the legislative power to tax.

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.

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)

(i) value-added tax collection as a

percentage of Gross Domestic
Product (GDP) of the previous
year exceeds two and fourfifth 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 %).

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

SEC. 6. Section 108 of the same Code, as

amended, is hereby further amended to read as follows:

(ii) national government deficit as a

percentage of GDP of the
previous year exceeds one
and one-half percent (1 %).

SEC. 108. Value-added Tax on Sale of

Services and Use or Lease of Properties

SEC. 5. Section 107 of the same Code, as

amended, is hereby further amended to read as follows:

(A) Rate and Base of Tax. There shall be

levied, assessed and collected, a valueadded 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,

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
68

2006, raise the rate of value-added

tax to twelve percent (12%), after
any of the following conditions has
been satisfied.

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.

(i) value-added tax collection as a

percentage of Gross Domestic
Product (GDP) of the previous
year exceeds two and fourfifth 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 %).
(Emphasis supplied)

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.

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:

A brief discourse on the principle of non-delegation of powers is

instructive.

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.

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 nondelegation 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]

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.

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 Philippineswhich 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.

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 Presidents 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.
69

Nonetheless, the general rule barring delegation of legislative

powers is subject to the following recognized limitations or exceptions:

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.

(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;

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

(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,
70

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]

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 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]

In the present case, the challenged section of R.A. No. 9337 is the
commonproviso 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 %).
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.

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]

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]

The rationale for this is that the preliminary ascertainment of

facts as basis for the enactment of legislation is not of itself a legislative
71

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.

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 (1%). 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]

The Court finds no merit to the contention of petitioners ABAKADA

GURO Party List, et al. that the law effectively nullified the Presidents
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]

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.

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

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.
72

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.

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.

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 24/5 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 1%.

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]

2.

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]

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.

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]

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]

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.

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 countrys
gloomy state of economic affairs, thus:

Petitioners obviously overlooked that increase in VAT collection is

not the onlycondition. 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 %).

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. Thats interest plus
amortization of our debt. So clearly, this is not a
sustainable situation. Thats the first fact.

Respondents explained the philosophy behind these alternative

conditions:
1.

Natl Govt Deficit/GDP >1.5%

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
73

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 image portrayed is chilling. Congress passed the law hoping

for rescue from an inevitable catastrophe. Whether the law is indeed
sufficient to answer the states economic dilemma is not for the Court to
judge. In the Farias 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:

The third thing that Id 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.

. . . 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]

What do I mean by that?

In the past five years, weve 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,
thePhilippines 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.

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

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]

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
74

property without due process of law, as embodied in Article III, Section 1

of the Constitution.

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).

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]

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

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:

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:

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.

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

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.

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 taxpayers option. [70]

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.

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 laymans 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.

More importantly, the excess input tax, if any, is retained in a

businesss 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
75

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 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 ofP1 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.

The input tax is not a property or a property right within the

constitutional purview of the due process clause. A VAT-registered persons
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]

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.

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% multistage 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.

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.

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:

(C) Withholding of Value-added Tax. The

Government or any of its political subdivisions,
instrumentalities or agencies, including governmentowned 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.

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
(P1,000,000.00): 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 value-added tax withheld under this Section

shall be remitted within ten (10) days following the end of
the month the withholding was made.

76

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.

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]

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 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 governmentowned 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 valueadded 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 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.

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 applied to value-added tax, this means that taxable

transactions with the government are subject to a 5% rate, which

As amended, the use of the word final and the deletion of the
word creditableexhibits Congresss 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
77

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.

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
ones 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]

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 brought to the Courts attention the introduction of

Senate Bill No. 2038 by Sens. S.R. Osmea 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.

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.
Whats 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.

B. Uniformity and Equitability of Taxation

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]

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.

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 States 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]

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.

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
78

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]

tax credit allowed on the corporations 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.

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 P1,500,000.00.[88] Also, 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 inKapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc.
vs. Tan:[90]

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.

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
exceedingP200,000.00. 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.

Progressive taxation is built on the principle of the taxpayers

ability to pay. This principle was also lifted from Adam Smiths 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]

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 P1.5 Million. This acts as a
equalizer because in effect, bigger businesses that qualify for VAT
coverage and VAT-exempt taxpayers stand on equal-footing.

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.

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 gas[92] 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

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:
79

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 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.

The words of the Court in Vera vs. Avelino[101] holds true then, as it
still holds true now. All things considered, there is no raison d'tre 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.

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]

SO ORDERED.

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

FIRST DIVISION
G.R. No. 181756, June 15, 2015
80

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY

(MCIAA), Petitioner, v. CITY OF LAPU-LAPU AND ELENA T.
PACALDO, Respondents.

Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes
granted to natural or juridical persons, including government-owned or
controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section
14 of its Charter, R.A. No. 6958, has been withdrawn. x x
x.chanroblesvirtuallawlibrary
On January 7, 1997, respondent City issued to petitioner a Statement of
Real Estate Tax assessing the lots comprising the Mactan International
Airport in the amount of P162,058,959.52. Petitioner complained that
there were discrepancies in said Statement of Real Estate Tax as
follows:chanRoblesvirtualLawlibrary
(a) [T]he statement included lots and buildings not found in the inventory
of
petitioners
real
properties;

DECISION
LEONARDO-DE CASTRO, J.:
This is a clear opportunity for this Court to clarify the effects of our two
previous decisions, issued a decade apart, on the power of local
government units to collect real property taxes from airport authorities
located within their area, and the nature or the juridical personality of said
airport
authorities.
Before us is a Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure seeking to reverse and set aside the October 8,
2007 Decision1 of the Court of Appeals (Cebu City) inCA-G.R. SP No.
01360 and the February 12, 2008 Resolution2 denying petitioners
motion
for
reconsideration.
THE

(b) [S]ome of the lots were covered by two separate tax declarations
which
resulted
in
double
assessment;
(c) [There were] double entries pertaining to the same lots; and

FACTS

(d) [T]he statement included lots utilized exclusively for governmental

purposes.5
Respondent City amended its billing and sent a new Statement of Real
Estate Tax to petitioner in the amount of P151,376,134.66. Petitioner
averred that this amount covered real estate taxes on the lots utilized
solely and exclusively for public or governmental purposes such as the
airfield, runway and taxiway, and the lots on which they are
situated.6chanrobleslaw

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was

created by Congress on July 31, 1990 under Republic Act No. 6958 3 to
undertake the economical, efficient and effective control, management
and supervision of the Mactan International Airport in the Province of
Cebu and the Lahug Airport in Cebu City x x x and such other airports as
may be established in the Province of Cebu. It is represented in this case
by
the
Office
of
the
Solicitor
General.

Petitioner paid respondent City the amount of four million pesos

(P4,000,000.00) monthly, which was later increased to six million pesos
(P6,000,000.00) monthly. As of December 2003, petitioner had paid
respondent
City
a
total
of
P275,728,313.36. 7chanrobleslaw

Respondent City of Lapu-Lapu is a local government unit and political

subdivision, created and existing under its own charter with capacity to
sue and be sued. Respondent Elena T. Pacaldo was impleaded in her
capacity
as
the
City
Treasurer
of
respondent
City.

Upon request of petitioners General Manager, the Secretary of the

Department of Justice (DOJ) issued Opinion No. 50, Series of 1998, 8 and
we
quote
the
pertinent
portions
of
said
Opinion
below:chanRoblesvirtualLawlibrary
You further state that among the real properties deemed transferred to
MCIAA are the airfield, runway, taxiway and the lots on which the runway
and taxiway are situated, the tax declarations of which were transferred
in the name of the MCIAA. In 1997, the City of Lapu-Lapu imposed real
estate taxes on these properties invoking the provisions of the Local
Government
Code.

Upon its creation, petitioner enjoyed exemption from realty taxes under
the
following
provision
of
Republic
Act
No.
6958:chanRoblesvirtualLawlibrary
Section 14. Tax Exemptions. The Authority shall be exempt from
realty taxes imposed by the National Government or any of its political
subdivisions, agencies and instrumentalities: Provided, That no tax
exemption herein granted shall extend to any subsidiary which may be
organized by the Authority.chanroblesvirtuallawlibrary
On September 11, 1996, however, this Court rendered a decision
in Mactan-Cebu International Airport Authority v. Marcos 4 (the 1996 MCIAA
case) declaring that upon the effectivity of Republic Act No. 7160 (The
Local Government Code of 1991), petitioner was no longer exempt from
real estate taxes. The Court held:chanRoblesvirtualLawlibrary

It is your view that these properties are not subject to real property tax
because they are exclusively used for airport purposes. You said that the
runway and taxiway are not only used by the commercial airlines but also
81

by the Philippine Air Force and other government agencies. As such and in
conjunction with the above interpretation of Section 15 of R.A. No. 6958,
you believe that these properties are considered owned by the Republic of
the
Philippines.
Hence,
this
request
for
opinion.

1998, advanced that this Department (DOF) interposes no

objection to the request of Mactan Cebu International Airport
Authority for exemption from payment of real property tax on the
property used for airport purposes mentioned above.

The query is resolved in the affirmative. The properties used for

airport purposes (i.e. airfield, runway, taxiway and the lots on
which the runway and taxiway are situated) are owned by the
Republic
of
the
Philippines.

The City Assessor, therefore, is hereby instructed to transfer the

assessment of the subject airfield, runway, taxiway and the lots
on which the runway and taxiway are situated, from the Taxable
Roll
to
the
Exempt
Roll
of
real
properties.

The City Treasurer thereat should be informed on the action taken for his
immediate appropriate action. (Emphases added.)
Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of
Real Property Tax Balances up to the year 2002 reflecting the amount of
P246,395,477.20. Petitioner claimed that the statement again included
the lots utilized solely and exclusively for public purpose such as the
airfield, runway, and taxiway and the lots on which these are built.
Respondent Pacaldo then issued Notices of Levy on 18 sets of real
properties
of
petitioner.10chanrobleslaw

Under the Law on Public Corporations, the legislature has complete

control over the property which a municipal corporation has acquired in
its public or governmental capacity and which is devoted to public or
governmental use. The municipality in dealing with said property is
subject to such restrictions and limitations as the legislature may impose.
On the other hand, property which a municipal corporation acquired in its
private or proprietary capacity, is held by it in the same character as a
private individual. Hence, the legislature in dealing with such property, is
subject to the constitutional restrictions concerning property (Martin,
Public Corporations [1997], p. 30; see also Province of Zamboanga del
[Norte] v. City of Zamboanga [131 Phil. 446]). The same may be said of
properties transferred to the MCIAA and used for airport purposes, such as
those involved herein. Since such properties are of public dominion, they
are deemed held by the MCIAA in trust for the Government and can be
alienated
only
as
may
be
provided
by
law.

Petitioner filed a petition for prohibition 11 with the Regional Trial Court
(RTC) of Lapu-Lapu City with prayer for the issuance of a temporary
restraining order (TRO) and/or a writ of preliminary injunction, docketed
as SCA No. 6056-L. Branch 53 of RTC Lapu-Lapu City then issued a 72hour TRO. The petition for prohibition sought to enjoin respondent City
from issuing a warrant of levy against petitioners properties and from
selling them at public auction for delinquency in realty tax obligations.
The petition likewise prayed for a declaration that the airport terminal
building, the airfield, runway, taxiway and the lots on which they are
situated are exempted from real estate taxes after due hearing. Petitioner
based
its
claim
of
exemption
on
DOJ
Opinion
No.
50.

Based on the foregoing, it is our considered opinion that the

properties used for airport purposes, such as the airfield, runway
and taxiway and the lots on which the runway and taxiway are
located, are owned by the State or by the Republic of the
Philippines and are merely held in trust by the MCIAA,
notwithstanding that certificates of titles thereto may have been
issued in the name of the MCIAA. (Emphases added.)
Based on the above DOJ Opinion, the Department of Finance issued a
2nd Indorsement to the City Treasurer of Lapu-Lapu dated August 3,
1998,9 which reads:chanRoblesvirtualLawlibrary
The distinction as to which among the MCIAA properties are still
considered owned by the State or by the Republic of the Philippines,
such as the resolution in the above-cited DOJ Opinion No. 50, for purposes
of real property tax exemption is hereby deemed tenable considering that
the subject airfield, runway, taxiway and the lots on which the runway
and taxiway are situated appears to be the subject of real property tax
assessment and collection of the city government of Lapu-Lapu, hence,
the same are definitely located within the jurisdiction of Lapu-Lapu City.

The RTC issued an Order denying the motion for extension of the TRO.
Thus, on December 10, 2003, respondent City auctioned 27 of petitioners
properties. As there was no interested bidder who participated in the
auction sale, respondent City forfeited and purchased said properties. The
corresponding Certificates of Sale of Delinquent Property were issued to
respondent
City.12chanrobleslaw
Petitioner claimed before the RTC that it had discovered that respondent
City did not pass any ordinance authorizing the collection of real property
tax, a tax for the special education fund (SEF), and a penalty interest for
its nonpayment. Petitioner argued that without the corresponding tax
ordinances, respondent City could not impose and collect real property
tax, an additional tax for the SEF, and penalty interest from
petitioner.13chanrobleslaw

Moreover, then Undersecretary Antonio P. Belicena of the

Department of Finance, in his 1 st Indorsement dated May 18,

The RTC issued an Order 14 on December 28, 2004 granting petitioners

82

application for a writ of preliminary injunction. The pertinent portions of

the Order are quoted below:chanRoblesvirtualLawlibrary
The supervening legal issue has rendered it imperative that the matter of
the consolidation of the ownership of the auctioned properties be placed
on hold. Furthermore, it is the view of the Court that great prejudice and
damage will be suffered by petitioner if it were to lose its dominion over
these properties now when the most important legal issue has still to be
resolved by the Court. Besides, the respondents and the intervenor have
not sufficiently shown cause why petitioners application should not be
granted.

This difference does not however detract from the essential enforceability
and effectivity of Ordinance No. 44 pursuant to Section 529 of RA 7160
and Article 278 of the Implementing Rules and Regulations. The outcome
of this disparity is simply that respondent City can only collect an interest
of 2% per month on the unpaid tax. Consequently, respondent City [has]
to
recompute
the
petitioners
tax
liability.
It is also the Courts perception that respondent City can still collect the
additional 1% tax on real property without an ordinance to this effect. It
may be recalled that Republic Act No. 5447 has created the Special
Education Fund which is constituted from the proceeds of the additional
tax on real property imposed by the law. Respondent City has collected
this tax as mandated by this law without any ordinance for the purpose,
as there is no need for it. Even when RA 5447 was amended by PD 464
(Real Property Tax Code), respondent City had continued to collect the
tax,
as
it
used
to.

WHEREFORE, the foregoing considered, petitioners application for a writ

of preliminary injunction is granted. Consequently, upon the approval of a
bond in the amount of one million pesos (P1,000,000.00), let a writ of
preliminary injunction issue enjoining the respondents, the intervenor,
their agents or persons acting in [their] behalf, to desist from
consolidating and exercising ownership over the properties of the
petitioner.chanroblesvirtuallawlibrary
However, upon motion of respondents, the RTC lifted the writ of
preliminary injunction in an Order 15dated December 5, 2005. The RTC
reasoned as follows:chanRoblesvirtualLawlibrary
The respondent City, in the course of the hearing of its motion, presented
to this Court a certified copy of its Ordinance No. 44 (Omnibus Tax
Ordinance of the City of Lapu-Lapu), Section 25 whereof authorized the
collection of a rate of one and one-half (1 ) [per centum] from owners,
executors or administrators of any real estate lying within the jurisdiction
of the City of Lapu-Lapu, based on the assessed value as shown in the
latest
revision.

It is true that RA 7160 has repealed RA 5447, but what has been repealed
are only Section 3, a(3) and b(2) which concern the allocation of the
additional tax, considering that under RA 7160, the proceeds of the
additional 1% tax on real property accrue exclusively to the Special
Education Fund. Nevertheless, RA 5447 has not been totally repealed;
there
is
only
a
partial
repeal.
It may be observed that there is no requirement in RA 7160 that an
ordinance be enacted to enable the collection of the additional 1% tax.
This is so since RA 5447 is still in force and effect, and the declared policy
of the government in enacting the law, which is to contribute to the
financial support of the goals of education as provided in the Constitution,
necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the
passage of an ordinance in order that the tax may be collected would be
to place the collection of the tax at the option of the local legislature. This
would run counter to the declared policy of the government when the SEF
was
created
and
the
tax
imposed.

Though this ordinance was enacted prior to the effectivity of Republic Act
No. 7160 (Local Government Code of 1991), to the mind of the Court this
ordinance is still a valid and effective ordinance in view of Sec. 529 of RA
7160 x x x [and the] Implementing Rules and Regulations of RA 7160 x x
x.
x

x
As regards the allegation of respondents that this Court has no jurisdiction
to entertain the instant petition, the Court deems it proper, at this stage
of the proceedings, not to treat this issue, as it involves facts which are
yet
to
be
established.

The tax collected under Ordinance No. 44 is within the rates prescribed by
RA 7160, though the 25% penalty collected is higher than the 2% interest
allowed
under
Sec.
255
of
the
said
law
which
provides:chanRoblesvirtualLawlibrary
In case of failure to pay the basic real property tax or any other tax levied
under this Title upon the expiration of the periods as provided in Section
250, or when due, as the case may be, shall subject the taxpayer to the
payment of interest at the rate of two percent (2%) per month on the
unpaid amount or a fraction thereof, until the delinquent tax shall have
been fully paid: Provided, however, That in no case shall the total interest
on the unpaid tax or portion thereof exceed thirty-six (36)
months.chanroblesvirtuallawlibrary

x x x [T]he Courts issuance of a writ of preliminary injunction may appear

to be a futile gesture in the light of Section 263 of RA 7160. x x x.
x

It would seem from the foregoing provisions, that once the taxpayer fails
to redeem within the one-year period, ownership fully vests on the local
government unit concerned. Thus, when in the present case petitioner
83

failed to redeem the parcels of land acquired by respondent City, the

ownership thereof became fully vested on respondent City without the
latter having to perform any other acts to perfect its ownership. Corollary
thereto, ownership on the part of respondent City has become a fait
accompli.

Petitioner filed a Motion for Partial Reconsideration20 of the questioned

Decision covering only the portion of said decision declaring that
petitioner is a GOCC and, therefore, not exempt from the realty tax and
special education fund imposed by respondent City. Petitioner
cited Manila International Airport Authority v. Court of Appeals 21 (the 2006
MIAA case) involving the City of Paraaque and the Manila International
Airport Authority. Petitioner claimed that it had been described by this
Court as a government instrumentality, and that it followed as a logical
consequence that petitioner is exempt from the taxing powers of
respondent
City
of
Lapu-Lapu.22 Petitioner
alleged
that
the
1996 MCIAA case had been overturned by the Court in the
2006 MIAA case. Petitioner thus prayed that it be declared exempt from
paying the realty tax, special education fund, and interest being collected
by
respondent
City.

WHEREFORE, in the light of the foregoing considerations, respondents

motion for reconsideration is granted, and the order of this Court dated
December 28, 2004 is hereby reconsidered. Consequently, the writ of
preliminary
injunction
issued
by
this
Court
is
hereby
lifted.chanroblesvirtuallawlibrary
Aggrieved, petitioner filed a petition for certiorari16 with the Court of
Appeals (Cebu City), with urgent prayer for the issuance of a TRO and/or
writ of preliminary injunction, docketed as CA-G.R. SP No. 01360. The
Court of Appeals (Cebu City) issued a TRO 17 on January 5, 2006 and
shortly thereafter, issued a writ of preliminary injunction 18 on February 17,
2006.
RULING

OF

THE

COURT

OF

On February 12, 2008, the Court of Appeals denied petitioners motion for
partial
reconsideration
in
the
questioned
Resolution.

APPEALS

The Court of Appeals followed and applied the precedent established in

the 1996 MCIAA case and refused to apply the 2006 MIAA case. The Court
of Appeals wrote in the questioned Decision: We find that our position is
in line with the coherent and cohesive interpretation of the relevant
provisions of the Local Government Code on local taxation enunciated in
the [1996 MCIAA] case which to our mind is more elegant and rational
and provides intellectual clarity than the one provided by the Supreme
Court
in
the
[2006] MIAA case.23chanrobleslaw

The Court of Appeals (Cebu City) promulgated the questioned Decision on

October 8, 2007, holding that petitioner is a government-owned or
controlled corporation and its properties are subject to realty tax. The
dispositive
portion
of
the
questioned
Decision
reads:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, judgment is hereby rendered by
us as follows:
a.

We DECLARE the airport terminal building, the airfield, runway,

taxiway and the lots on which they are situated NOT
EXEMPT from the real estate tax imposed by the respondent City
of Lapu-Lapu;

b.

We DECLARE the imposition and collection of the real estate tax,

the additional levy for the Special Education Fund and the penalty
interest as VALID and LEGAL. However, pursuant to Section 255
of the Local Government Code, respondent city can only collect an
interest of 2% per month on the unpaid tax which total interest
shall, in no case, exceed thirty-six (36) months;

c.

In the questioned Decision, the Court of Appeals held that petitioners

airport terminal building, airfield, runway, taxiway, and the lots on which
they are situated are not exempt from real estate tax reasoning as
follows:chanRoblesvirtualLawlibrary
Under the Local Government Code (LGC for brevity), enacted pursuant to
the constitutional mandate of local autonomy, all natural and juridical
persons, including government-owned or controlled corporations (GOCCs),
instrumentalities and agencies, are no longer exempt from local taxes
even if previously granted an exemption. The only exemptions from local
taxes are those specifically provided under the Code itself, or those
enacted
through
subsequent
legislation.
Thus, the LGC, enacted pursuant to Section 3, Article X of the
Constitution, provides for the exercise by local government units of their
power to tax, the scope thereof or its limitations, and the exemptions from
local
taxation.

We DECLARE the sale in public auction of the aforesaid

properties and the eventual forfeiture and purchase of the subject
property by the respondent City of Lapu-Lapu as NULL and VOID.
However, petitioner MCIAAs property is encumbered only by a
limited lien possessed by the respondent City of Lapu-Lapu in
accord with Section 257 of the Local Government Code. 19

Section 133 of the LGC prescribes the common limitations on the taxing
powers
of
local
government
units.
x
x
x.
x
84

The above-stated provision, however, qualified the exemption of the

National Government, its agencies and instrumentalities from local
taxation with the phrase unless otherwise provided herein.

hereinafter specifically exempted. The exemptions from real property

taxes are enumerated in Section 234 of the Code which specifically states
that only real properties owned by the Republic of the Philippines or any
of its political subdivisions are exempted from the payment of the tax.
Clearly, instrumentalities or GOCCs do not fall within the exceptions under
Section
234
of
the
LGC.

Section 232 of the LGC provides for the power of the local government
units (LGUs for brevity) to levy real property tax. x x x.
x

Thus, as ruled in the [1996 MCIAA] case, the prohibition on taxing the
national government, its agencies and instrumentalities under Section
133 is qualified by Sections 232 and 234, and accordingly, the only
relevant exemption now applicable to these bodies is what is now
provided under Section 234(a) of the Code. It may be noted that the
express withdrawal of previously granted exemptions to persons from the
payment of real property tax by the LGC does not even make any
distinction as to whether the exempt person is a governmental entity or
not. As Sections 193 and 234 of the Code both state, the withdrawal
applies to all persons, including GOCCs, thus encompassing the two
classes of persons recognized under our laws, natural persons and
juridical
persons.

Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions granted to natural and
juridical
persons,
including
government-owned
and
controlled
corporations,
except
as
provided
therein.
x
x
x.
x

Section 193 of the LGC is the general provision on withdrawal of tax

exemption privileges. x x x.24 (Citations omitted.)
The Court of Appeals went on to state that contrary to the ruling of the
Supreme
Court
in
the
2006 MIAAcase,
it
finds
and
rules
that:chanRoblesvirtualLawlibrary
a) Section 133 of the LGC is not an absolute prohibition on the power of
the LGUs to tax the National Government, its agencies and
instrumentalities as the same is qualified by Sections 193, 232 and 234
which
otherwise
provided;
and

The question of whether or not petitioner MCIAA is an instrumentality or a

GOCC has already been lengthily but soundly, cogently and lucidly
answered
in
the
[1996 MCIAA]
case
x
x
x.

b) Petitioner MCIAA is a GOCC.25 (Emphasis ours.)

The
Court
of
Appeals
ratiocinated
in
the
following
manner:chanRoblesvirtualLawlibrary
Pursuant to the explicit provision of Section 193 of the LGC, exemptions
previously enjoyed by persons, whether natural or juridical, like the
petitioner MCIAA, are deemed withdrawn upon the effectivity of the Code.
Further, the last paragraph of Section 234 of the Code also unequivocally
withdrew, upon the Codes effectivity, exemptions from payment of real
property taxes previously granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the
said section. Petitioner MCIAA, undoubtedly a juridical person, it follows
that its exemption from such tax granted under Section 14 of R.A. 6958
has
been
withdrawn.
x

Based on the foregoing, the claim of the majority of the Supreme Court in
the [2006MIAA] case that MIAA (and also petitioner MCIAA) is not a
government-owned or controlled corporation but an instrumentality based
on Section 2(10) of the Administrative Code of 1987 appears to be
unsound. In the [2006 MIAA] case, the majority justifies MIAAs purported
exemption on Section 133(o) of the Local Government Code which places
agencies and instrumentalities: as generally exempt from the taxation
powers of the LGUs. It further went on to hold that By express mandate
of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. x x
x.26 (Citations omitted.)
The Court of Appeals further cited Justice Tingas dissent in the
2006 MIAA case as well as provisions from petitioner MCIAAs charter to
show
that
petitioner
is
a
GOCC. 27 The
Court
of
Appeals
wrote:chanRoblesvirtualLawlibrary
These cited provisions establish the fitness of the petitioner MCIAA to be
the subject of legal relations. Under its charter, it has the power to
acquire, possess and incur obligations. It also has the power to contract in
its own name and to acquire title to movable or immovable property. More
importantly, it may likewise exercise powers of a corporation under the
Corporation Code. Moreover, based on its own allegation, it even

From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133
of the LGC, instrumentalities were generally exempt from all forms of local
government taxation, unless otherwise provided in the Code. On the other
hand, Section 232 otherwise provided insofar as it allowed local
government units to levy an ad valorem real property tax, irrespective of
who owned the property. At the same time, the imposition of real property
taxes under Section 232 is, in turn, qualified by the phrase not
85

recognized itself as a GOCC when it alleged in its petition for prohibition

filed before the lower court that it is a body corporate organized and
existing
under
Republic
Act
No.
6958
x
x
x.

Act No. 5447, as amended by Presidential Decree No. 464 (the Real
Property Tax Code), which does not require an enabling tax ordinance. The
Court of Appeals affirmed the RTCs ruling that Republic Act No. 5447 was
still in force and effect notwithstanding the passing of the LGC, as the
latter only partially repealed the former law. What Section 534 of the LGC
repealed was Section 3 a(3) and b(2) of Republic Act No. 5447, and not
the entire law that created the Special Education Fund. 32 The repealed
provisions referred to allocation of taxes on Virginia type cigarettes and
duties on imported leaf tobacco and the percentage remittances to the
taxing authority concerned. The Court of Appeals, citing The Commission
on Audit of the Province of Cebu v. Province of Cebu,33 held that [t]he
failure to add a specific repealing clause particularly mentioning the
statute to be repealed indicates that the intent was not to repeal any
existing law on the matter, unless an irreconcilable inconsistency and
repugnancy exists in the terms of the new and the old laws. 34 The Court
of Appeals quoted the RTCs discussion on this issue, which we reproduce
below:chanRoblesvirtualLawlibrary
It may be observed that there is no requirement in RA 7160 that an
ordinance be enacted to enable the collection of the additional 1% tax.
This is so since R.A. 5447 is still in force and effect, and the declared
policy of the government in enacting the law, which is to contribute to the
financial support of the goals of education as provided in the Constitution,
necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the
passage of an ordinance in order that the tax may be collected would be
to place the collection of the tax at the option of the local legislature. This
would run counter to the declared policy of the government when the SEF
was created and the tax imposed.35
Regarding the penalty interest, the Court of Appeals found that Section 30
of Ordinance No. 44 of respondent City provided for a penalty surcharge
of 25% of the tax due for a given year. Said provision
reads:chanRoblesvirtualLawlibrary
Section 30. PENALTY FOR FAILURE TO PAY TAX. Failure to pay the tax
provided for under this Chapter within the time fixed in Section 27, shall
subject the taxpayer to a surcharge of twenty-five percent (25%), without
interest.36
The Court of Appeals however declared that after the effectivity of the
Local Government Code, the respondent City could only collect penalty
surcharge up to the extent of 72%, covering a period of three years or 36
months, for the entire delinquent property. 37 This was lower than the 25%
per annum surcharge imposed by Ordinance No. 44. 38 The Court of
Appeals affirmed the findings of the RTC in the decision quoted
below:chanRoblesvirtualLawlibrary
The tax collected under Ordinance No. 44 is within the rates prescribed by
RA 7160, though the 25% penalty collected is higher than the 2% allowed
under Sec. 255 of the said law which provides:ChanRoblesVirtualawlibrary

We also find to be not meritorious the assertion of petitioner MCIAA that

the respondent city can no longer challenge the tax-exempt character of
the properties since it is estopped from doing so when respondent City of
Lapu-Lapu, through its former mayor, Ernest H. Weigel, Jr., had long ago
conceded that petitioners properties are exempt from real property tax.
It is not denied by the respondent city that it considered, through its
former mayor, Ernest H. Weigel, Jr., petitioners subject properties,
specifically the runway and taxiway, as exempt from taxes. However, as
astutely pointed out by the respondent city it can never be in estoppel,
particularly in matters involving taxes. It is a well-known rule that
erroneous application and enforcement of the law by public officers do not
preclude subsequent correct application of the statute, and that the
Government is never estopped by mistake or error on the part of its
agents.28 (Citations omitted.)
The
Court
of
Appeals
established
the
following:chanRoblesvirtualLawlibrary
a) [R]espondent City was able to prove and establish that it has a valid
and existing ordinance for the imposition of realty tax against petitioner
MCIAA;
b) [T]he imposition and collection of additional levy of 1% Special
Education Fund (SEF) is authorized by law, Republic Act No. 5447; and
c) [T]he collection of penalty interest for delinquent taxes is not only
authorized by law but is likewise [sanctioned] by respondent Citys
ordinance.29
The Court of Appeals likewise held that respondent City has a valid and
existing local tax ordinance, Ordinance No. 44, or the Omnibus Tax
Ordinance of Lapu-Lapu City, which provided for the imposition of real
property tax. The relevant provision reads:chanRoblesvirtualLawlibrary
Chapter
5

Tax
on
Real
Property
Ownership
Section 25. RATE OF TAX. - A rate of one and one-half (1 ) percentum
shall be collected from owners, executors or administrators of any real
estate lying within the territorial jurisdiction of the City of Lapu-Lapu,
based on the assessed value as shown in the latest revision. 30
The Court of Appeals found that even if Ordinance No. 44 was enacted
prior to the effectivity of the LGC, it remained in force and effect, citing
Section 529 of the LGC and Article 278 of the LGCs Implementing Rules
and
Regulations.31chanrobleslaw
As regards the Special Education Fund, the Court of Appeals held that
respondent City can still collect the additional 1% tax on real property
even without an ordinance to this effect, as this is authorized by Republic

x
86

This difference does not however detract from the essential enforceability
and effectivity of Ordinance No. 44 pursuant to Section 529 of RA No.
7160 and Article 278 of the Implementing Rules and Regulations. The
outcome of this disparity is simply that respondent City can only collect
an interest of 2% per month on the unpaid tax. Consequently, respondent
city will have to [recompute] the petitioners tax liability. 39
It is worthy to note that the Court of Appeals nevertheless held
that even if it is clear that respondent City has the power to
impose real property taxes over petitioner, it is also evident and
categorical that, under Republic Act No. 6958, the properties of
petitioner MCIAA may not be conveyed or transferred to any
person or entity except to the national government.40 The relevant
provisions of the said law are quoted below:chanRoblesvirtualLawlibrary
Section 4. Functions, Powers and Duties. The Authority shall have
the following functions, powers and duties:ChanRoblesVirtualawlibrary
x

person or entity except to the national government and it is not

empowered to obtain loans or encumber its property without the approval
of the President.41 The questioned Decision contained the following
conclusion:chanRoblesvirtualLawlibrary
With the advent of RA 7160, the Local Government Code, the power to tax
is no longer vested exclusively on Congress. LGUs, through its local
legislative bodies, are now given direct authority to levy taxes, fees and
other charges pursuant to Article X, Section 5 of the 1987 Constitution.
And one of the most significant provisions of the LGC is the removal of the
blanket inclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. The express withdrawal
by the Code of previously granted exemptions from realty taxes applied to
instrumentalities and government-owned or controlled corporations
(GOCCs) such as the petitioner Mactan-Cebu International Airport
Authority. Thus, petitioner MCIAA became a taxable person in view of the
withdrawal of the realty tax exemption that it previously enjoyed under
Section 14 of RA No. 6958 of its charter. As expressed and categorically
held in theMactan case, the removal and withdrawal of tax exemptions
previously enjoyed by persons, natural or juridical, are consistent with the
State policy to ensure autonomy to local governments and the objective
of the Local Government Code that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest development as selfreliant communities and make them effective partners in the attainment
of
national
goals.

(e) To acquire, purchase, own, administer, lease, mortgage, sell or

otherwise dispose of any land, building, airport facility, or property of
whatever kind and nature, whether movable or immovable, or any
interest
therein: Provided,
That
any
asset
located
in
theMactan International Airport important to national security shall not be
subject to alienation or mortgage by the Authority nor to transfer to any
entity
other
than
the
National
Government[.]

However, in the case at bench, petitioner MCIAAs charter expressly bars

the alienation or mortgage of its property to any person or entity except
to the national government. Therefore, while petitioner MCIAA is a taxable
person for purposes of real property taxation, respondent City of LapuLapu is prohibited from seizing, selling and owning these properties by
and through a public auction in order to satisfy petitioner MCIAAs tax
liability.42 (Citations omitted.)
In the questioned Resolution that affirmed its questioned Decision, the
Court of Appeals denied petitioners motion for reconsideration based on
the following grounds:chanRoblesvirtualLawlibrary
First, the MCIAA case remains the controlling law on the matter
as the same is the established precedent; not the MIAA case but
the MCIAA case since the former, as keenly pointed out by the
respondent City of Lapu-Lapu, has not yet attained finality as
there is still yet a pending motion for reconsideration filed with
the
Supreme
Court
in
the
aforesaid
case.

Section 13. Borrowing Power. The Authority may, in accordance with

Section 21, Article XII of the Constitution and other existing laws, rules
and regulations on local or foreign borrowing, raise funds, either from
local or international sources, by way of loans, credit or securities, and
other borrowing instruments with the power to create pledges, mortgages
and other voluntary liens or encumbrances on any of its assets or
properties, subject to the prior approval of the President of the
Philippines.
All loans contracted by the Authority under this section, together with all
interests and other sums payable in respect thereof, shall constitute a
charge upon all the revenues and assets of the Authority and shall rank
equally with one another, but shall have priority over any other claim or
charge on the revenue and assets of the Authority: Provided, That this
provision shall not be construed as a prohibition or restriction on the
power of the Authority to create pledges, mortgages and other voluntary
liens or encumbrances on any asset or property of the Authority.

Second, and more importantly, the ruling of the Supreme Court in

the MIAA case cannot be similarly invoked in the case at bench.
The said case cannot be considered as the law of the case. The
law of the case doctrine has been defined as that principle under which
determinations of questions of law will generally be held to govern a case
throughout all its subsequent stages where such determination has
already been made on a prior appeal to a court of last resort. It is merely

The payment of the loans or other indebtedness of the Authority may be

guaranteed by the National Government subject to the approval of the
President of the Philippines.chanroblesvirtuallawlibrary
The Court of Appeals concluded that it is clear that petitioner MCIAA is
denied by its charter the absolute right to dispose of its property to any
87

a rule of procedure and does not go to the power of the court, and will not
be adhered to where its application will result in an unjust decision. It
relates entirely to questions of law, and is confined in its operation to
subsequent proceedings in the same case. According to said doctrine,
whatever has been irrevocably established constitutes the law of the case
only as to the same parties in the same case and not to different parties
in an entirely different case. Besides, pending resolution of the aforesaid
motion for reconsideration in the MIAA case, the latter case has not
irrevocably
established
anything.

III
RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY TAX
WITHOUT ANY APPROPRIATE ORDINANCE.
IV
RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL 1%
TAX FOR THE SPECIAL EDUCATION FUND IN THE ABSENCE OF ANY
CORRESPONDING ORDINANCE.

Thus, after a thorough and judicious review of the allegations in

petitioners motion for reconsideration, this Court resolves to deny the
same as the matters raised therein had already been exhaustively
discussed in the decision sought to be reconsidered, and that no new
matters were raised which would warrant the modification, much less
reversal, thereof.43 (Emphasis added, citations omitted.)
PETITIONERS THEORY

V
RESPONDENT
CITY
OF
LAPU-LAPU
CANNOT
IMPOSE
INTEREST SANS ANY ORDINANCE MANDATING ITS IMPOSITION. 46
Petitioner claims the following similarities with MIAA:

Petitioner is before us now claiming that this Court, in the

2006 MIAA case, had expressly declared that petitioner, while vested with
corporate powers, is not considered a government-owned or controlled
corporation, but is a government instrumentality like the Manila
International Airport Authority (MIAA), Philippine Ports Authority (PPA),
University of the Philippines, and Bangko Sentral ng Pilipinas (BSP).
Petitioner alleges that as a government instrumentality, all its airport
lands and buildings are exempt from real estate taxes imposed by
respondent
City.44chanrobleslaw
Petitioner alleges that Republic Act No. 6958 placed a limitation on
petitioners administration of its assets and properties as it provides
under Section 4(e) that any asset in the international airport important to
national security cannot be alienated or mortgaged by petitioner or
transferred
to
any
entity
other
than
the
National
Government.45chanrobleslaw

ANY

1.

MCIAA belongs to the same class and performs identical functions

as MIAA;

2.

MCIAA is a public utility like MIAA;

3.

MIAA was organized to operate the international and domestic

airport in Paranaque City for public use, while MCIAA was
organized to operate the international and domestic airport
inMactan for public use.

4.

Both are attached agencies of the Department of Transportation

and Communications.47

Petitioner compares its charter (Republic Act No. 6958) with that of MIAA
(Executive
Order
No.
903).
Section
3
of
Executive
Order
No.
903
provides:chanRoblesvirtualLawlibrary
Sec. 3. Creation of the Manila International Airport Authority. There is
hereby established a body corporate to be known as the Manila
International Airport Authority which shall be attached to the Ministry of
Transportation and Communications. The principal office of the Authority
shall be located at the New Manila International Airport. The Authority
may establish such offices, branches, agencies or subsidiaries as it may
deem proper and necessary; x x x.chanroblesvirtuallawlibrary
Section 2 of Republic Act No. 6958 reads:chanRoblesvirtualLawlibrary
Section 2. Creation of the Mactan-Cebu International Airport
Authority. There is hereby established a body corporate to be known
as the Mactan-Cebu International Airport Authority which shall be
attached to the Department of Transportation and Communications. The

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred
in disregarding the following:chanRoblesvirtualLawlibrary
I
PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY
DECLARED BY THE HONORABLE COURT IN THE MIAA CASE. AS SUCH, IT IS
EXEMPT FROM PAYING REAL ESTATE TAXES IMPOSED BY RESPONDENT
CITY OF LAPU-LAPU.
II
THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT TERMINAL
BUILDING, AIRFIELD, RUNWAY, TAXIWAY, INCLUDING THE LOTS ON WHICH
THEY ARE SITUATED, ARE EXEMPT FROM REAL PROPERTY TAXES.
88

principal office of the Authority shall be located at the MactanInternational

Airport,
Province
of
Cebu.

(b) To control, supervise, construct, maintain, operate and provide such

facilities or services as shall be necessary for the efficient functioning
of the Airport;

The Authority may have such branches, agencies or subsidiaries as it may

deem proper and necessary.chanroblesvirtuallawlibrary
As to MIAAs purposes and objectives, Section 4 of Executive Order No.
903 reads:chanRoblesvirtualLawlibrary
Sec. 4. Purposes and Objectives. The Authority shall have the following
purposes
and
objectives:ChanRoblesVirtualawlibrary

(c) To promulgate rules and regulations governing the planning,

development, maintenance, operation and improvement of the
Airport, and to control and/or supervise as may be necessary the
construction of any structure or the rendition of any services within
the Airport;

(a) To help encourage and promote international and domestic air traffic
in the Philippines as a means of making the Philippines a center of
international trade and tourism and accelerating the development of the
means of transportation and communications in the country;

(d) To sue and be sued in its corporate name;

(e) To adopt and use a corporate seal;

(b) To formulate and adopt for application in the Airport internationally

acceptable standards of airport accommodation and service; and

(f) To succeed by its corporate name;

(g) To adopt its by-laws, and to amend or repeal the same from time to
time;

(c) To upgrade and provide safe, efficient, and reliable airport facilities for
international and domestic air travel.chanroblesvirtuallawlibrary
Petitioner claims that the above purposes and objectives are analogous to
those enumerated in its charter, specifically Section 3 of Republic Act No.
6958, which reads:chanRoblesvirtualLawlibrary
Section 3. Primary Purposes and Objectives. The Authority shall
principally undertake the economical, efficient and effective control,
management and supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City, hereinafter
collectively referred to as the airports, and such other airports as may be
established in the Province of Cebu. In addition, it shall have the following
objectives:ChanRoblesVirtualawlibrary

(h) To execute or enter into contracts of any kind or nature;

(i) To acquire, purchase, own, administer, lease, mortgage, sell or
otherwise dispose of any land, building, airport facility, or property of
whatever kind and nature, whether movable or immovable, or any
interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes
and objectives;
(k) To levy, and collect dues, charges, fees or assessments for the use of
the Airport premises, works, appliances, facilities or concessions or for
any service provided by the Authority, subject to the approval of the
Minister of Transportation and Communications in consultation with
the Minister of Finance, and subject further to the provisions of Batas
Pambansa Blg. 325 where applicable;

(a) To encourage, promote and develop international and domestic air

traffic in the central Visayas and Mindanao regions as a means of making
the regions centers of international trade and tourism, and accelerating
the development of the means of transportation and communications in
the
country;
and
(b) To upgrade the services and facilities of the airports and to formulate
internationally acceptable standards of airport accommodation and
service.chanroblesvirtuallawlibrary
The powers, functions and duties of MIAA under Section 5 of Executive
Order
No.
903
are:ChanRoblesVirtualawlibrary

(l) To invest its idle funds, as it may deem proper, in government

securities and other evidences of indebtedness of the government;
(m) To provide services, whether on its own or otherwise, within the
Airport and the approaches thereof, which shall include but shall not
be limited to, the following:

Sec. 5. Functions, Powers and Duties. The Authority shall have the
following functions, powers and duties:chanRoblesvirtualLawlibrary
(a) To formulate, in coordination with the Bureau of Air Transportation and
other appropriate government agencies, a comprehensive and
integrated policy and program for the Airport and to implement,
review and update such policy and program periodically;

(1) Aircraft movement and allocation of parking areas of aircraft on

the ground;
(2) Loading or unloading of aircrafts;
89

(3) Passenger handling and other services directed towards the care,
convenience and security of passengers, visitors and other airport
users; and

(g) To levy and collect dues, charges, fees or assessments for the use of
airport premises, works, appliances, facilities or concessions, or for any
service
provided
by
the
Authority;

(4) Sorting, weighing, measuring, warehousing or handling of baggage

and goods.

(h) To retain and appropriate dues, fees and charges collected by the
Authority relative to the use of airport premises for such measures as may
be necessary to make the Authority more effective and efficient in the
discharge
of
its
assigned
tasks;

(n) To perform such other acts and transact such other business, directly
or indirectly necessary, incidental or conducive to the attainment of
the purposes and objectives of the Authority, including the adoption of
necessary measures to remedy congestion in the Airport; and

(i) To invest its idle funds, as it may deem proper, in government

securities
and
other
evidences
of
indebtedness;
and

(o) To exercise all the powers of a corporation under the Corporation Law,
insofar as these powers are not inconsistent with the provisions of this
Executive Order.
Petitioner claims that MCIAA has related functions, powers and duties
under Section 4 of Republic Act No. 6958, as shown in the provision
quoted below:chanRoblesvirtualLawlibrary
Section 4. Functions, Powers and Duties. The Authority shall have
the following functions, powers and duties:ChanRoblesVirtualawlibrary

(j) To provide services, whether on its own or otherwise, within the

airports and the approaches thereof as may be necessary or in connection
with the maintenance and operation of the airports and their
facilities.chanroblesvirtuallawlibrary
Petitioner claims that like MIAA, it has police authority within its premises,
as
shown
in
their
respective
charters
quoted
below:chanRoblesvirtualLawlibrary
EO 903, Sec. 6. Police Authority. The Authority shall have the
power to exercise such police authority as may be necessary within its
premises to carry out its functions and attain its purposes and objectives,
without prejudice to the exercise of functions within the same premises by
the Ministry of National Defense through the Aviation Security Command
(AVSECOM) as provided in LOI 961: Provided, That the Authority may
request the assistance of law enforcement agencies, including request for
deputization
as
may
be
required.
x
x
x.

(a) To formulate a comprehensive and integrated development policy and

program for the airports and to implement, review and update such policy
and
program
periodically;
(b) To control, supervise, construct, maintain, operate and provide such
facilities or services as shall be necessary for the efficient functioning of
the
airports;

R.A. No. 6958, Section 5. Police Authority. The Authority shall have
the power to exercise such police authority as may be necessary within its
premises or areas of operation to carry out its functions and attain its
purposes and objectives: Provided, That the Authority may request the
assistance of law enforcement agencies, including request for
deputization as may be required. x x x.chanroblesvirtuallawlibrary
Petitioner pointed out other similarities in the two charters, such
as:ChanRoblesVirtualawlibrary

(c) To promulgate rules and regulations governing the planning,

development, maintenance, operation and improvement of the airports,
and to control and supervise the construction of any structure or the
rendition
of
any
service
within
the
airports;
(d) To exercise all the powers of a corporation under the Corporation Code
of the Philippines, insofar as those powers are not inconsistent with the
provisions
of
this
Act;

1. Both MCIAA and MIAA are covered by the Civil Service Law, rules and
regulations (Section 15, Executive Order No. 903; Section 12, Republic Act
No.
6958);

(e) To acquire, purchase, own, administer, lease, mortgage, sell or

otherwise dispose of any land, building, airport facility, or property of
whatever kind and nature, whether movable or immovable, or any
interest
therein: Provided,
That
any
asset
located
in
theMactan International Airport important to national security shall not be
subject to alienation or mortgage by the Authority nor to transfer to any
entity
other
than
the
National
Government;

2. Both charters contain a proviso on tax exemptions (Section 21,

Executive Order No. 903; Section 14, Republic Act No. 6958);
3. Both MCIAA and MIAA are required to submit to the President an annual
report generally dealing with their activities and operations (Section 14,
Executive Order No. 903; Section 11, Republic Act No. 6958); and

(f) To exercise the power of eminent domain in the pursuit of its purposes
and
objectives;

4. Both have borrowing power subject to the approval of the President

90

(Section 16, Executive Order No. 903; Section 13, Republic Act No.
6958).48chanrobleslaw

Petitioner prays that judgment be rendered:chanRoblesvirtualLawlibrary

a) Declaring petitioner exempt from paying real property taxes as it is a
government instrumentality;

Petitioner suggests that it is because of its similarity with MIAA that this
Court, in the 2006 MIAA case, placed it in the same class as MIAA and
considered
it
as
a
government
instrumentality.

b) Declaring respondent City of Lapu-Lapu as bereft of any authority to

levy and collect the basic real property tax, the additional tax for the
SEF and the penalty interest for its failure to pass the corresponding
tax ordinances; and

Petitioner submits that since it is also a government instrumentality like

MIAA, the following conclusion arrived by the Court in the 2006 MIAA case
is also applicable to petitioner:chanRoblesvirtualLawlibrary
Under Section 2(10) and (13) of the Introductory Provisions of the
Administrative Code, which governs the legal relation and status
of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality
and not a government-owned or controlled corporation. Under
Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is
not subject to [t]axes, fees or charges of any kind by local
governments. The only exception is when MIAA leases its real
property to a taxable person as provided in Section 234(a) of
the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable
persons like private parties are subject to real estate tax by the
City
of
Paraaque.

c) Declaring, in the alternative, the airport lands and buildings of

petitioner as exempt from real property taxes as they are used solely
and exclusively for public purpose.51
In its Consolidated Reply filed through the OSG, petitioner claims that the
2006 MIAA ruling has overturned the 1996 MCIAA ruling. Petitioner cites
Justice Dante O. Tingas dissent in the MIAA ruling,
as
follows:chanRoblesvirtualLawlibrary
[The] ineluctable conclusion is that the majority rejects the rationale and
ruling in Mactan. The majority provides for a wildly different interpretation
of Section 133, 193 and 234 of the Local Government Code than that
employed by the Court in Mactan. Moreover, the parties in Mactan and in
this case are similarly situated, as can be obviously deducted from the
fact that both petitioners are airport authorities operating under similarly
worded charters. And the fact that the majority cites doctrines
contrapuntal
to
the
Local
Government
Code
as
in Basco and Maceda evinces an intent to go against the Courts
jurisprudential trend adopting the philosophy of expanded local
government
rule
under
the
Local
Government
Code.

Under Article 420 of the Civil Code, the Airport Lands and
Buildings of MIAA, being devoted to public use, are properties of
public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions ports x x x
constructed by the State, which includes public airports and seaports, as
properties of public dominion and owned by the Republic. As properties
of public dominion owned by the Republic, there is no doubt
whatsoever that the Airport Lands and Buildings are expressly
exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that
properties of public dominion are not subject to execution or
foreclosure sale.49(Emphases added.)
Petitioner insists that its properties consisting of the airport terminal
building, airfield, runway, taxiway and the lots on which they are situated
are not subject to real property tax because they are actually, solely and
exclusively used for public purposes.50 They are indispensable to the
operation of the MactanInternational Airport and by their very nature,
these properties are exempt from tax. Said properties belong to the State
and are merely held by petitioner in trust. As earlier mentioned, petitioner
claims that these properties are important to national security and cannot
be alienated, mortgaged, or transferred to any entity except the National
Government.

x x x The majority is obviously inconsistent with Mactan and there is no

way these two rulings can stand together. Following basic principles in
statutory construction, Mactan will be deemed as giving way to this new
ruling.
x

There is no way the majority can be justified unless Mactan is overturned.

The MCIAA and the MIAA are similarly situated. They are both, as will be
demonstrated, GOCCs, commonly engaged in the business of operating
an airport. They are the owners of airport properties they respectively
maintain and hold title over these properties in their name. These entities
are both owned by the State, and denied by their respective charters the
absolute right to dispose of their properties without prior approval
elsewhere. Both of them are not empowered to obtain loans or encumber
their properties without prior approval the prior approval of the
President.52 (Citations omitted.)
Petitioner likewise claims that the enactment of Ordinance No. 070-2007
is an admission on respondent Citys part that it must have a tax measure
to be able to impose a tax or special assessment. Petitioner avers that
91

assuming that it is a non-exempt entity or that its airport lands and

buildings are not exempt, it was only upon the effectivity of Ordinance No.
070-2007 on January 1, 2008 that respondent City could properly impose
the basic real property tax, the additional tax for the SEF, and the interest
in
case
of
nonpayment.53chanrobleslaw
Petitioner

filed

its

Memorandum54 on

June

RESPONDENTS

17,

7.

MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC56

Respondents claim that the mere mention of MCIAA in the MIAA v. [Court
of Appeals] case does not make it the controlling case on the
matter.57 Respondents further claim that the 1996 MCIAA case where this
Court held that petitioner is a GOCC is the controlling jurisprudence.
Respondents point out that petitioner and MIAA are two very different
entities. Respondents argue that petitioner is a GOCC contrary to its
assertions, based on its Charter and on DOJ Opinion No. 50.

2009.
THEORY

In their Comment,55 respondents point out that petitioner partially moved

for a reconsideration of the questioned Decision only as to the issue of
whether petitioner is a GOCC or not. Thus, respondents declare that the
other portions of the questioned decision had already attained finality and
ought not to be placed in issue in this petition for certiorari. Thus,
respondents discussed the other issues raised by petitioner with
reservation
as
to
this
objection.

Respondents contend that if petitioner is not a GOCC but an

instrumentality of the government, still the following statement in the
1996 MCIAA case applies:chanRoblesvirtualLawlibrary
Besides, nothing can prevent Congress from decreeing that even
instrumentalities
or
agencies
of
the
Government
performing
governmental functions may be subject to tax. Where it is done precisely
to fulfill a constitutional mandate and national policy, no one can doubt its
wisdom.58
Respondents argue that MCIAA properties such as the terminal building,
taxiway and runway are not exempt from real property taxation. As
discussed in the 1996 MCIAA case, Section 234 of the LGC omitted GOCCs
such as MCIAA from entities enjoying tax exemptions. Said decision also
provides that the transfer of ownership of the land to petitioner was
absolute and petitioner cannot evade payment of taxes. 59chanrobleslaw

Respondents summarized the issues and the grounds relied upon as

follows:chanRoblesvirtualLawlibrary
STATEMENT OF THE ISSUES
WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY
EXEMPT
FROM
PAYING
REAL
PROPERTY
TAXES
WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX, SPECIAL
EDUCATION
FUND
AND
PENALTY
INTEREST

Even if the following issues were not raised by petitioner in its motion for
reconsideration of the questioned Decision, and thus the ruling pertaining
to these issues in the questioned decision had become final, respondents
still discussed its side over its objections as to the propriety of bringing
these
up
before
this
Court.

WHETHER OR NOT THE AIRPORT TERMINAL BUILDING, AIRFIELD, RUNWAY,

TAXIWAY INCLUDING THE LOTS ON WHICH THEY ARE SITUATED ARE
EXEMPT FROM REALTY TAXES

1.

GROUNDS RELIED UPON

Estoppel

does

not

lie

against

the

government.

2. Respondent City can collect realty taxes and interest.

1.

PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES

2.

TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM

REALTY TAXES

3.

ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT

4.

CITY CAN COLLECT REALTY TAX AND INTEREST

5.

CITY CAN COLLECT SEF

6.

MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY WARRANTING

INJUNCTIVE RELIEF
92

a.

Based on the Local Government Code (Sections 232, 233, 255)

and its IRR (Sections 241, 247).

b.

The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the

Omnibus Tax Ordinance, wherein the imposition of real property
tax was made. This Ordinance was in force and effect by virtue of
Article 278 of the IRR of Republic Act No. 7160.60chanrobleslaw

c.

Ordinance No. 070-2007, known as the Revised Lapu-Lapu City

Revenue Code, imposed real property taxes, special education
fund and further provided for the payment of interest and
surcharges. Thus, the issue is pass and is moot and academic.

3. Respondent City can collect Special Education Fund.

a.

b.

4.

The LGC does not require the enactment of an ordinance for the
collection of the SEF.

Respondents assert that the constant reference to the 1996 MCIAA case
could hardly mean that the doctrine has breathed its last and that the
1996 MCIAA case stands as precedent and is controlling on petitioner
MCIAA.65chanrobleslaw

Congress did not entirely repeal the SEF law, hence, its levy,
imposition and collection need not be covered by ordinance.
Besides, the City has enacted the Revenue Code containing
provisions for the levy and collection of the SEF.61

Furthermore,

respondents

aver

Respondents allege that the issue for consideration is whether it is proper

for petitioner to raise the issue of whether it is not liable to pay real
property taxes, special education fund (SEF), interests and/or
surcharges.66 Respondents argue that the Court of Appeals was correct in
declaring petitioner liable for realty taxes, etc., on the terminal building,
taxiway, and runway. Respondent City relies on the following
grounds:chanRoblesvirtualLawlibrary

that:ChanRoblesVirtualawlibrary

1. Collection of taxes is beyond the ambit of injunction.

a.

b.

Respondents contend that the petition only questions the denial

of the writ of preliminary injunction by the RTC and the Court of
Appeals. Petitioner failed to show irreparable injury.
Comparing the alleged damage that may be caused petitioner
and the direct affront and challenge against the power to tax,
which is an attribute of sovereignty, it is but appropriate that
injunctive relief should be denied.

2. Petitioner did not comply with LGC provisions on payment under

protest.
a.

The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492

(2009)].

Petitioner should have protested the tax imposition as provided in

Article 285 of the IRR of Republic Act No. 7160. Section 252 of
Republic Act No. 716062 requires that the taxpayers protest can
only be entertained if the tax is first paid under protest. 63

Respondents submitted their Memorandum 64 on June 30, 2009, wherein

they allege that the 1996MCIAA case is still good law, as shown by the
following cases wherein it was quoted:

1.

The case of MCIAA v. Marcos, et al., is controlling on petitioner

MCIAA;

2.

MCIAA is a corporation;

3.

Section 133 in relation to Sections 232 and 234 of the Local

Government Code of 1991 authorizes the collection of real
property taxes (etc.) from MCIAA;

4.

Terminal Building, Runway & Taxiway are not of the Public

Dominion and are not exempt from realty taxes, special education
fund and interest;

5.

Respondent City can collect realty tax, interest/surcharge, and

Special Education Fund from MCIAA; [and]

6.

Estoppel does not lie against the government.67

THIS
1.

National Power Corporation v. Local Board of Assessment Appeals

of Batangas [545 Phil. 92 (2007)];

2.

Mactan-Cebu International Airport Authority v. Urgello [549 Phil.

302 (2007)];

3.

Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785

(2008)]; and

COURTS

RULING

The petition has merit. The petitioner is an instrumentality of the

government; thus, its properties actually, solely and exclusively used for
public purposes, consisting of the airport terminal building, airfield,
runway, taxiway and the lots on which they are situated, are not subject
to real property tax and respondent City is not justified in collecting taxes
from
petitioner
over
said
properties.
DISCUSSION
The Court of Appeals (Cebu City) erred in declaring that the
1996 MCIAA case still controls and that petitioner is a GOCC. The
93

2006 MIAA case

governs.

the

The Court of Appeals reliance on the 1996 MCIAA case is misplaced and
its staunch refusal to apply the 2006 MIAA case is patently erroneous. The
Court of Appeals, finding for respondents, refused to apply the ruling in
the 2006 MIAA case on the premise that the same had not yet reached
finality, and that as far as MCIAA is concerned, the 1996 MCIAA case is
still
good
law.68chanrobleslaw

Philippines

and

thus

exempt

from

real

estate

tax.

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

x

There is no dispute that a government-owned or controlled corporation is

not exempt from real estate tax. However, MIAA is not a governmentowned or controlled corporation. Section 2(13) of the Introductory
Provisions of the Administrative Code of 1987 defines a governmentowned or controlled corporation as follows:chanRoblesvirtualLawlibrary
SEC.
2. General
Terms
Defined.
x
x
x

While it is true, as respondents allege, that the 1996 MCIAA case was
cited in a long line of cases,69still, in 2006, the Court en banc decided a
case that in effect reversed the 1996 Mactan ruling. The 2006 MIAA case
had, since the promulgation of the questioned Decision and Resolution,
reached finality and had in fact been either affirmed or cited in numerous
cases by the Court.70 The decision became final and executory on
November 3, 2006.71 Furthermore, the 2006 MIAA case was decided by
the Court en banc while the 1996 MCIAA case was decided by a Division.
Hence, the 1996 MCIAA case should be read in light of the subsequent
and
unequivocal
ruling
in
the
2006 MIAA case.

(13) Government-owned or controlled corporation refers to any agency

organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature,
and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x
x.chanroblesvirtuallawlibrary
A government-owned or controlled corporation must be organized as a
stock or non-stock corporation. MIAA is not organized as a stock or nonstock corporation. MIAA is not a stock corporation because it has no
capital stock divided into shares. MIAA has no stockholders or voting
shares.
x
x
x

To recall, in the 2006 MIAA case, we held that MIAAs airport lands and
buildings are exempt from real estate tax imposed by local governments;
that it is not a GOCC but an instrumentality of the national government,
with its real properties being owned by the Republic of the Philippines,
and these are exempt from real estate tax. Specifically referring to
petitioner, we stated as follows:chanRoblesvirtualLawlibrary
Many government instrumentalities are vested with corporate
powers but they do not become stock or non-stock corporations,
which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled
corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines
and Bangko Sentral ng Pilipinas. All these government instrumentalities
exercise corporate powers but they are not organized as stock or nonstock corporations as required by Section 2(13) of the Introductory
Provisions
of
the
Administrative
Code.
These
government
instrumentalities are sometimes loosely called government corporate
entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative
Code, which is the governing law defining the legal relationship and status
of government entities.72 (Emphases ours.)
In the 2006 MIAA case, the issue before the Court was whether the
Airport Lands and Buildings of MIAA are exempt from real estate tax under
existing laws.73 We quote the extensive discussion of the Court that led
to its finding that MIAAs lands and buildings were exempt from real
estate tax imposed by local governments:chanRoblesvirtualLawlibrary
First, MIAA is not a government-owned or controlled corporation but an
instrumentality of the National Government and thus exempt from local
taxation. Second, the real properties of MIAA are owned by the Republic of

Clearly, under its Charter, MIAA does not have capital stock that is divided
into
shares.
Section 3 of the Corporation Code defines a stock corporation as one
whose capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x. MIAA has capital
but it is not divided into shares of stock. MIAA has no stockholders or
voting
shares.
Hence,
MIAA
is
not
a
stock
corporation.
MIAA is also not a non-stock corporation because it has no members.
Section 87 of the Corporation Code defines a non-stock corporation as
one where no part of its income is distributable as dividends to its
members, trustees or officers. A non-stock corporation must have
members. Even if we assume that the Government is considered as the
sole member of MIAA, this will not make MIAA a non-stock corporation.
Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of
its annual gross operating income to the National Treasury. This prevents
MIAA
from
qualifying
as
a
non-stock
corporation.
Section 88 of the Corporation Code provides that non-stock corporations
94

are organized for charitable, religious, educational, professional, cultural,

recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers. MIAA is not
organized for any of these purposes. MIAA, a public utility, is organized to
operate an international and domestic airport for public use.

organized as stock or non-stock corporations as required by

Section 2(13) of the Introductory Provisions of the Administrative
Code. These government instrumentalities are sometimes loosely
called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense
as understood under the Administrative Code, which is the
governing law defining the legal relationship and status of
government entities.74 (Emphases ours, citations omitted.)
The Court in the 2006 MIAA case went on to discuss the limitation on the
taxing power of the local governments as against the national
government or its instrumentality:chanRoblesvirtualLawlibrary
A government instrumentality like MIAA falls under Section 133(o) of the
Local Government Code, which states:chanRoblesvirtualLawlibrary
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units. - Unless otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and barangays shall not extend
to
the
levy
of
the
following:ChanRoblesVirtualawlibrary

Since MIAA is neither a stock nor a non-stock corporation, MIAA

does not qualify as a government-owned or controlled
corporation. What then is the legal status of MIAA within the
National
Government?
MIAA is a government instrumentality vested with corporate
powers to perform efficiently its governmental functions. MIAA is
like any other government instrumentality, the only difference is
that MIAA is vested with corporate powers. Section 2(10) of the
Introductory Provisions of the Administrative Code defines a government
instrumentality as follows:chanRoblesvirtualLawlibrary
SEC.
2. General
Terms
Defined.
x
x
x

x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x.chanroblesvirtuallawlibrary
When the law vests in a government instrumentality corporate
powers, the instrumentality does not become a corporation.
Unless the government instrumentality is organized as a stock or
non-stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers.
Thus, MIAA exercises the governmental powers of eminent
domain, police authority and the levying of fees and charges. At
the same time, MIAA exercises all the powers of a corporation
under the Corporation Law, insofar as these powers are not
inconsistent with the provisions of this Executive Order.

(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units. x x
x.chanroblesvirtuallawlibrary
Section 133(o) recognizes the basic principle that local governments
cannot tax the national government, which historically merely delegated
to local governments the power to tax. While the 1987 Constitution now
includes taxation as one of the powers of local governments, local
governments may only exercise such power subject to such guidelines
and limitations as the Congress may provide.
When local governments invoke the power to tax on national
government instrumentalities, such power is construed strictly
against local governments.The rule is that a tax is never presumed
and there must be clear language in the law imposing the tax. Any doubt
whether a person, article or activity is taxable is resolved against
taxation. This rule applies with greater force when local governments seek
to tax national government instrumentalities.

Likewise, when the law makes a government instrumentality operationally

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

Another rule is that a tax exemption is strictly construed against the

taxpayer claiming the exemption. However, when Congress grants an
exemption to a national government instrumentality from local taxation,
such exemption is construed liberally in favor of the national government
instrumentality. x x x.

Many government instrumentalities are vested with corporate

powers but they do not become stock or non-stock corporations,
which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled
corporation. Examples are the Mactan International Airport
Authority,the Philippine Ports Authority, the University of the Philippines
and Bangko
Sentral
ng
Pilipinas. All
these
government
instrumentalities exercise corporate powers but they are not

xxxx
There is, moreover, no point in national and local governments
taxing each other, unless a sound and compelling policy requires
such transfer of public funds from one government pocket to
95

another.
The Airport Lands and Buildings of MIAA x x x are properties of
public dominion because they are intended for public use. As
properties of public dominion, they indisputably belong to the
State or the Republic of the Philippines.76 (Emphases supplied,
citations omitted.)
The Court also held in the 2006 MIAA case that airport lands and buildings
are outside the commerce of man.
As properties of public dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has ruled repeatedly that
properties of public dominion are outside the commerce of man. As early
as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man,
thus:ChanRoblesVirtualawlibrary

There is also no reason for local governments to tax national

government instrumentalities for rendering essential public
services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities
for the delivery of essential public services for sound and compelling
policy considerations. There must be express language in the law
empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved
against local governments.
Thus, Section 133 of the Local Government Code states that unless
otherwise provided in the Code, local governments cannot tax national
government instrumentalities. x x x.75(Emphases ours, citations omitted.)
The Court emphasized that the airport lands and buildings of MIAA are
owned by the Republic and belong to the public domain. The Court
said:chanRoblesvirtualLawlibrary
The Airport Lands and Buildings of MIAA are property of public dominion
and therefore owned by the State or the Republic of the Philippines. x x x.

The Court has also ruled that property of public dominion, being outside
the commerce of man, cannot be the subject of an auction sale.
Properties of public dominion, being for public use, are not
subject to levy, encumbrance or disposition through public or
private sale. Any encumbrance, levy on execution or auction sale
of any property of public dominion is void for being contrary to
public policy. Essential public services will stop if properties of
public dominion are subject to encumbrances, foreclosures and
auction sale. This will happen if the City of Paraaque can foreclose and
compel the auction sale of the 600-hectare runway of the MIAA for nonpayment
of
real
estate
tax.

The Airport Lands and Buildings are devoted to public use

because they are used by the public for international and
domestic travel and transportation. The fact that the MIAA
collects terminal fees and other charges from the public does not
remove the character of the Airport Lands and Buildings as
properties
for
public
use. x
x
x.
x

No one can dispute that properties of public dominion mentioned in

Article 420 of the Civil Code, like roads, canals, rivers, torrents, ports and
bridges constructed by the State, are owned by the State. The term
ports includes seaports and airports. The MIAA Airport Lands and
Buildings constitute a port constructed by the State. Under Article 420
of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the
Philippines.

The Civil Code, Article 1271, prescribes that everything which is not
outside the commerce of man may be the object of a contract, x x x.
x

Before MIAA can encumber the Airport Lands and Buildings, the President
must first withdraw from public use the Airport Lands and Buildings. x x x.
x

Thus, unless the President issues a proclamation withdrawing the

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

The terminal fees MIAA charges to passengers, as well as the landing fees
MIAA charges to airlines, constitute the bulk of the income that maintains
the operations of MIAA. The collection of such fees does not change the
character of MIAA as an airport for public use. Such fees are often termed
users tax. This means taxing those among the public who actually use a
public facility instead of taxing all the public including those who never
use the particular public facility. A users tax is more equitable - a
principle
of
taxation
mandated
in
the
1987
Constitution.
96

The authority of the President to reserve lands of the public domain for
public use, and to withdraw such public use, is reiterated in Section 14,
Chapter 4, Title I, Book III of the Administrative Code of 1987, which
states:chanRoblesvirtualLawlibrary
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government. - (1) The President shall have the power to reserve for
settlement or public use, and for specific public purposes, any of the lands
of the public domain, the use of which is not otherwise directed by law.
The reserved land shall thereafter remain subject to the specific public
purpose indicated until otherwise provided by law or proclamation;
x
x
x
x

Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real
estate
tax.
However, portions of the Airport Lands and Buildings that MIAA leases to
private entities are not exempt from real estate tax. For example, the land
area occupied by hangars that MIAA leases to private corporations is
subject to real estate tax. In such a case, MIAA has granted the beneficial
use of such land area for a consideration to a taxable person and
therefore such land area is subject to real estate tax. x x x. 80
Significantly, the Court reiterated the above ruling and applied the same
reasoning in Manila International Airport Authority v. City of
Pasay,81 thus:chanRoblesvirtualLawlibrary
The only difference between the 2006 MIAA case and this case is
that the 2006 MIAA case involved airport lands and buildings
located in Paraaque City while this case involved airport lands
and buildings located in Pasay City. The 2006 MIAA case and this
case raised the same threshold issue: whether the local government can
impose real property tax on the airport lands, consisting mostly of the
runways, as well as the airport buildings, of MIAA. x x x.

There is no question, therefore, that unless the Airport Lands and

Buildings are withdrawn by law or presidential proclamation from public
use, they are properties of public dominion, owned by the Republic and
outside the commerce of man.77
Thus, the Court held that MIAA is merely holding title to the Airport Lands
and Buildings in trust for the Republic. [Under] Section 48, Chapter 12,
Book I of the Administrative Code [which] allows instrumentalities like
MIAA
to
hold
title
to
real
properties
owned
by
the
Republic.78chanrobleslaw

The Court in the 2006 MIAA case cited Section 234(a) of the Local
Government Code and held that said provision exempts from real estate
tax any [r]eal property owned by the Republic of the Philippines. 79The
Court emphasized, however, that portions of the Airport Lands and
Buildings that MIAA leases to private entities are not exempt from real
estate tax. The Court further held:chanRoblesvirtualLawlibrary
This exemption should be read in relation with Section 133(o) of the same
Code, which prohibits local governments from imposing [t]axes, fees or
charges of any kind on the National Government, its agencies and
instrumentalities x x x. The real properties owned by the Republic are
titled either in the name of the Republic itself or in the name of agencies
or instrumentalities of the National Government. The Administrative Code
allows real property owned by the Republic to be titled in the name of
agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from
real
estate
tax.

The definition of instrumentality under Section 2(10) of the Introductory

Provisions of the Administrative Code of 1987 uses the phrase includes x
x x government-owned or controlled corporations which means that a
government instrumentality may or may not be a government-owned
or
controlled
corporation.
Obviously,
the
term
government
instrumentality is broader than the term government-owned or
controlled
corporation.
x
x
x.
x

The fact that two terms have separate definitions means that while a
government instrumentality may include a government-owned or
controlled corporation, there may be a government instrumentality
that will not qualify as a government-owned or controlled corporation.
A close scrutiny of the definition of government-owned or controlled
corporation in Section 2(13) will show that MIAA would not fall under
such definition. MIAA is a government instrumentality that does
not qualify as a government-owned or controlled corporation. x
x
x.

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

Thus, MIAA is not a government-owned or controlled corporation but a

government instrumentality which is exempt from any kind of tax from
the local governments. Indeed, the exercise of the taxing power of local
97

government units is subject to the limitations enumerated in Section 133

of the Local Government Code. Under Section 133(o) of the Local
Government Code, local government units have no power to tax
instrumentalities of the national government like the MIAA. Hence, MIAA is
not liable to pay real property tax for the NAIA Pasay properties.

carry out the governments policy to promote the development of the

countrys fishing industry and improve the efficiency in handling,
preserving, marketing, and distribution of fish and other aquatic
products, exercises the governmental powers of eminent domain, and
the power to levy fees and charges. At the same time, the Authority
exercises the general corporate powers conferred by laws upon private
and
government-owned
or
controlled
corporations.

Furthermore, the airport lands and buildings of MIAA are properties of

public dominion intended for public use, and as such are exempt from real
property tax under Section 234(a) of the Local Government Code.
However, under the same provision, if MIAA leases its real property to a
taxable person, the specific property leased becomes subject to real
property tax. In this case, only those portions of the NAIA Pasay properties
which are leased to taxable persons like private parties are subject to real
property tax by the City of Pasay. (Emphases added, citations omitted.)
The Court not only mentioned petitioner MCIAA as similarly situated as
MIAA. It also mentioned several other government instrumentalities,
among which was the Philippine Fisheries Development Authority. Thus,
applying the 2006 MIAA ruling, the Court, in Philippine Fisheries
Development
Authority
v.
Court
of
Appeals,82 held:chanRoblesvirtualLawlibrary
On the basis of the parameters set in the MIAA case, the Authority should
be classified as an instrumentality of the national government. As such, it
is generally exempt from payment of real property tax, except those
portions
which
have
been
leased
to
private
entities.

In light of the foregoing, the Authority should be classified as an

instrumentality of the national government which is liable to pay taxes
only with respect to the portions of the property, the beneficial use of
which were vested in private entities. When local governments invoke the
power to tax on national government instrumentalities, such power is
construed strictly against local governments. The rule is that a tax is
never presumed and there must be clear language in the law imposing
the tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
Thus, the real property tax assessments issued by the City of Iloilo should
be upheld only with respect to the portions leased to private persons. In
case the Authority fails to pay the real property taxes due thereon, said
portions cannot be sold at public auction to satisfy the tax delinquency. x
x
x.

In the MIAA case, petitioner Philippine Fisheries Development Authority

was cited as among the instrumentalities of the national government. x x
x.
x

In sum, the Court finds that the Authority is an instrumentality of the

national government, hence, it is liable to pay real property taxes
assessed by the City of Iloilo on the IFPC only with respect to those
portions which are leased to private entities. Notwithstanding said tax
delinquency on the leased portions of the IFPC, the latter or any part
thereof, being a property of public domain, cannot be sold at public
auction. This means that the City of Iloilo has to satisfy the tax
delinquency through means other than the sale at public auction of the
IFPC. (Citations omitted.)
Another government instrumentality specifically mentioned in the
2006 MIAA case was the Philippine Ports Authority (PPA). Hence, in Curata
v. Philippine Ports Authority,83 the Court held that the PPA is similarly
situated as MIAA, and ruled in this wise:chanRoblesvirtualLawlibrary
This Courts disquisition in Manila International Airport Authority v. Court
of Appeals ruling that MIAA is not a government-owned and/or
controlled corporation (GOCC), but an instrumentality of the National
Government and thus exempt from local taxation, and that its real
properties are owned by the Republic of the Philippines is instructive. x
x x. These findings are squarely applicable to PPA, as it is similarly
situated as MIAA. First, PPA is likewise not a GOCC for not having shares of

Indeed, the Authority is not a GOCC but an instrumentality of the

government. The Authority has a capital stock but it is not divided into
shares of stocks. Also, it has no stockholders or voting shares. Hence, it is
not a stock corporation. Neither [is it] a non-stock corporation because it
has
no
members.
The Authority is actually a national government instrumentality which is
defined as an agency of the national government, not integrated within
the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special
funds, and enjoying operational autonomy, usually through a charter.
When the law vests in a government instrumentality corporate powers,
the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
governmental
but
also
corporate
powers.
Thus, the Authority which is tasked with the special public function to
98

stocks or members. Second, the docks, piers and buildings it administers

are likewise owned by the Republic and, thus, outside the commerce of
man. Third, PPA is a mere trustee of these properties. Hence, like MIAA,
PPA is clearly a government instrumentality, an agency of the government
vested with corporate powers to perform efficiently its governmental
functions.

Second, the subject properties under GSISs name are likewise owned by
the Republic. The GSIS is but a mere trustee of the subject properties
which have either been ceded to it by the Government or acquired for the
enhancement of the system. This particular property arrangement is
clearly shown by the fact that the disposal or conveyance of said subject
properties are either done by or through the authority of the President of
the Philippines. x x x. (Emphasis added, citations omitted.)
All the more do we find that petitioner MCIAA, with its many similarities to
the MIAA, should be classified as a government instrumentality, as its
properties are being used for public purposes, and should be exempt from
real estate taxes. This is not to derogate in any way the delegated
authority of local government units to collect realty taxes, but to uphold
the fundamental doctrines of uniformity in taxation and equal protection
of the laws, by applying all the jurisprudence that have exempted from
said taxes similar authorities, agencies, and instrumentalities, whether
covered
by
the
2006 MIAA ruling
or
not.

Therefore, an undeniable conclusion is that the funds of PPA partake of

government funds, and such may not be garnished absent an allocation
by its Board or by statutory grant. If the PPA funds cannot be garnished
and its properties, being government properties, cannot be levied via a
writ of execution pursuant to a final judgment, then the trial court likewise
cannot grant discretionary execution pending appeal, as it would run afoul
of the established jurisprudence that government properties are exempt
from execution. What cannot be done directly cannot be done indirectly.
(Citations omitted.)
In Government Service Insurance System v. City Treasurer and City
Assessor of the City of Manila 84 the Court found that the GSIS was also a
government instrumentality and not a GOCC, applying the 2006MIAA case
even though the GSIS was not among those specifically mentioned by the
Court
as
similarly
situated
as
MIAA.
The
Court
said:chanRoblesvirtualLawlibrary
GSIS
an
instrumentality
of
the
National
Government

To reiterate, petitioner MCIAA is vested with corporate powers but it is not

a stock or non-stock corporation, which is a necessary condition before an
agency or instrumentality is deemed a government-owned or controlled
corporation. Like MIAA, petitioner MCIAA has capital under its charter but
it is not divided into shares of stock. It also has no stockholders or voting
shares. Republic Act No. 6958 provides:chanRoblesvirtualLawlibrary
Section 9. Capital. The [Mactan-Cebu International Airport] Authority
shall have an authorized capital stock equal to and consisting
of:ChanRoblesVirtualawlibrary

Apart from the foregoing consideration, the Courts fairly recent ruling
in Manila International Airport Authority v. Court of Appeals, a case
likewise involving real estate tax assessments by a Metro Manila city on
the real properties administered by MIAA, argues for the non-tax liability
of
GSIS
for
real
estate
taxes.
x
x
x.
x

(a) The value of fixed assets (including airport facilities, runways and
equipment) and such other properties, movable and immovable, currently
administered by or belonging to the airports as valued on the date of the
effectivity
of
this
Act;

While perhaps not of governing sway in all fours inasmuch as

what were involved in Manila International Airport Authority, e.g.,
airfields and runways, are properties of the public dominion and,
hence, outside the commerce of man, the rationale underpinning
the disposition in that case is squarely applicable to GSIS, both
MIAA and GSIS being similarly situated. First, while created under CA
186 as a non-stock corporation, a status that has remained unchanged
even when it operated under PD 1146 and RA 8291, GSIS is not, in the
context of the aforequoted Sec. 193 of the LGC, a GOCC following the
teaching of Manila International Airport Authority, for, like MIAA, GSISs
capital is not divided into unit shares. Also, GSIS has no members to
speak of. And by members, the reference is to those who, under Sec. 87
of the Corporation Code, make up the non-stock corporation, and not to
the compulsory members of the system who are government employees.
Its management is entrusted to a Board of Trustees whose members are
appointed
by
the
President.

(b) The value of such real estate owned and/or administered by the
airports;
and
(c) Government contribution in such amount as may be deemed an
appropriate initial balance. Such initial amount, as approved by the
President of the Philippines, which shall be more or less equivalent to six
(6) months working capital requirement of the Authority, is hereby
authorized to be appropriated in the General Appropriations Act of the
year following its enactment into law.chanroblesvirtuallawlibrary
Thereafter, the government contribution to the capital of the Authority
shall
be
provided
for
in
the
General
Appropriations
Act.
Like in MIAA, the airport lands and buildings of MCIAA are properties of
public dominion because they are intended for public use. As properties of
public dominion, they indisputably belong to the State or the Republic of
the Philippines, and are outside the commerce of man. This, unless
petitioner leases its real property to a taxable person, the specific
99

property leased becomes subject to real property tax; in which case, only
those portions of petitioners properties which are leased to taxable
persons like private parties are subject to real property tax by the City of
Lapu-Lapu.

Government Code, in which case the specific real property leased

becomes subject to real estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons like private parties
are subject to real estate tax by the City of Paraaque.

We hereby adopt and apply to petitioner MCIAA the findings and

conclusions
of
the
Court
in
the
2006MIAA case,
and
we
quote:chanRoblesvirtualLawlibrary
To summarize, MIAA is not a government-owned or controlled corporation
under Section 2(13) of the Introductory Provisions of the Administrative
Code because it is not organized as a stock or non-stock corporation.
Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not
required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential
public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not
subject to any kind of tax by local governments under Section 133(o) of
the Local Government Code. The exception to the exemption in Section
234(a) does not apply to MIAA because MIAA is not a taxable entity under
the Local Government Code. Such exception applies only if the beneficial
use of real property owned by the Republic is given to a taxable entity.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of
MIAA, being devoted to public use, are properties of public dominion and
thus owned by the State or the Republic of the Philippines. Article 420
specifically mentions ports x x x constructed by the State, which
includes public airports and seaports, as properties of public dominion
and owned by the Republic. As properties of public dominion owned by
the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 234(a)
of the Local Government Code. This Court has also repeatedly ruled
that properties of public dominion are not subject to execution or
foreclosure sale.85 (Emphases added.)
WHEREFORE, we hereby GRANT the petition. We REVERSE and SET
ASIDE the Decision datedOctober
8,
2007 and
the Resolution dated February 12, 2008 of the Court of Appeals
(Cebu City) in CA-G.R. SP No. 01360. Accordingly, we DECLARE:
1.

Petitioners properties that are actually, solely and exclusively

used for public purpose, consisting of the airport terminal
building, airfield, runway, taxiway and the lots on which they are
situated,EXEMPT from real property tax imposed by the City of
Lapu-Lapu.

2.

VOID all the real property tax assessments, including the

additional tax for the special education fund and the penalty
interest, as well as the final notices of real property tax
delinquencies, issued by the City of Lapu-Lapu on petitioners
properties, except the assessment covering the portions that
petitioner has leased to private parties.

3.

NULL and VOID the sale in public auction of 27 of petitioners

properties and the eventual forfeiture and purchase of the said
properties by respondent City of Lapu-Lapu. We likewise
declare VOID the corresponding Certificates of Sale of Delinquent
Property issued to respondent City of Lapu-Lapu.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to
public use and thus are properties of public dominion. Properties of public
dominion are owned by the State or the Republic. x x x.
x

The term ports x x x constructed by the State includes airports and

seaports. The Airport Lands and Buildings of MIAA are intended for
public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport
Lands and Buildings are properties of public dominion. As
properties of public dominion, the Airport Lands and Buildings
are owned by the Republic and thus exempt from real estate tax
under Section 234(a) of the Local Government Code.
4.

Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the

Administrative Code, which governs the legal relation and status of
government units, agencies and offices within the entire government
machinery, MIAA is a government instrumentality and not a governmentowned or controlled corporation. Under Section 133(o) of the Local
Government Code, MIAA as a government instrumentality is not a taxable
person because it is not subject to [t]axes, fees or charges of any kind
by local governments. The only exception is when MIAA leases its real
property to a taxable person as provided in Section 234(a) of the Local

SO ORDERED.cralawlawlibrary

Republic of the Philippines

SUPREME COURT
Manila
100

EN BANC

G.R. No. 115781 August 25, 1994

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,
FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO,
JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF
ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM,
INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC.,
PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO
TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER
OF CUSTOMS, respondents.

G.R. No. 115455 August 25, 1994

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 115525 August 25, 1994
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE
OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their AUTHORIZED
AGENTS OR REPRESENTATIVES, respondents.

G.R. No. 115852 August 25, 1994

PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 115543 August 25, 1994

RAUL S. ROCO and the INTEGRATED BAR OF THE
PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE
COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.

G.R. No. 115873 August 25, 1994

COOPERATIVE UNION OF THE PHILIPPINES, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of
Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary, and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115544 August 25, 1994

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.;
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE
L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of
Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary; and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 August 25, 1994

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and
ASSOCIATION OF PHILIPPINE BOOK-SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue
and HON. GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.

G.R. No. 115754 August 25, 1994

Arturo M. Tolentino for and in his behalf.

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,

(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Donna Celeste D. Feliciano and Juan T. David for petitioners in G.R. No.
115525.
101

Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner R.S. Roco.

II. Substantive Issues:

Villaranza and Cruz for petitioners in G.R. No. 115544.

A. Does the law violate the following provisions in the Bill

of Rights (Art. III)?

Carlos A. Raneses and Manuel M. Serrano for petitioner in G.R. No.

115754.

1. 1

Salonga, Hernandez & Allado for Freedon From Debts Coalition, Inc. &
Phil. Bible Society.

2. 4
3. 5

Estelito P. Mendoza for petitioner in G.R. No. 115852.

4. 10
Panganiban, Benitez, Parlade,
petitioners in G.R. No. 115873.

Africa

& Barinaga

Law

Offices

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

R.B. Rodriguez & Associates for petitioners in G.R. No. 115931.

1. Art. VI, 28(1)
Reve A.V. Saguisag for MABINI.
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.

MENDOZA, J.:
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.

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:

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?

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.

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

C. What is the extent of the power of the Bicameral
Conference Committee?
102

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 andnays entered in the Journal.

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."

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

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.

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.

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, 2 it is 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.

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

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
103

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.

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.

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 3 and thereby 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." 4 The exercise of the treaty-ratifying power is not the
exercise of legislative 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 5 has never been thought of as giving it more
legislative powers than the House of Representatives.

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.

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. 6 Nor is the power to
amend limited to adding a provision or two in a 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. 7 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.

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 8 because the second and third readings
were done on the same day, March 24, 1994. But this was because on
February 24, 1994 9 and again on March 22, 1994, 10 the President had
certified S. No. 1630 as urgent. The presidential certification 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.

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

In other words, the "unless" clause must be read in relation to the

"except" clause, because the two are really coordinate clauses of the
104

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

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.

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

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.

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?

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. 13 Only in November 1975 was a new 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:

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

Under congressional rules of procedure, conference

committees are not expected to make any material
change in the measure at issue, either by deleting
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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

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.

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

(Emphasis added)
Rules of the House of Representatives

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. 17 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. 18

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.

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:

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.

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 Houseswhich shall meet
within ten days after their composition.

(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 President shall designate the members of the

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

106

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.

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.

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. . . ."

Fourth. Whatever doubts there may be as to the formal validity of

Republic Act No. 7716 must be resolved in its favor. Our cases 20 manifest
firm adherence to the rule that an enrolled copy of a bill is 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 21 or that certain provisions
of a statute had been "smuggled" in the printing of the bill 22 have 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.

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." 19 Our concern is with 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.

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

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.

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.

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
107

The title of Republic Act No. 7716 is:

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.

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.

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:

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:
....

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.

(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%.

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

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

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:

103. Exempt transactions. The following shall be

exempt from the value-added tax:

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.

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

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, 25 it was held that an Act of the U.S. Congress, which provided
for the payment of tax on 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.

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.
108

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.

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.

II. SUBSTANTIVE ISSUES

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.

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.

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 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 26 and (2)
the Secretary's duty is to execute the law.

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

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
109

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.

More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held

that a law which taxed 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."

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., 28 the law imposed a license
tax equivalent to 2% of the 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." 29 The case is a classic illustration of the warning that the
power to tax is the power to destroy.

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 33 is without merit 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." 34 On the other hand, Minneapolis Star acknowledged that "The
First Amendment does not 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

In the other case 30 invoked by the PPI, the press was also found to have
been singled out because 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." 31 The discriminatory purpose was thus very clear.

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, 36 the Free 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, 37 although of general applicability, nonetheless is invalid when
applied to the press because it lays a prior restraint on its essential
freedom. The case ofAmerican Bible Society v. City of Manila 38 is cited by
both the PBS and the PPI in support of their contention that the law
110

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, 39 in which it was held that, as a 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

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.

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.

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." 42Petitioners in G.R. No. 115781 quote from a paper, entitled
"VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan
A. Tait of the International Monetary Fund, that "VAT payment by lowincome 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 higherincome 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.

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

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 43 of the Center for Research and

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
111

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%.

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

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

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. 47 Such is not the
case of PAL in G.R. No. 115852, and we do not understand it to 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.

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.

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" 48 or ideological plaintiffs are now cognizable
provided 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 49 to insure
that decision-making is informed and well grounded. 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.

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.

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:

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

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.
112

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:

(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;

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

(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.

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

WHEREFORE, the petitions in these cases are DISMISSED.

Bidin, Quiason, and Kapunan, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

This conception of the judicial power has been affirmed in several

cases 52 of this Court following Angara.

EN BANC

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.

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE
OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their AUTHORIZED
AGENTS OR REPRESENTATIVES, respondents.

_______________________________
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:

G.R. No. 115543 October 30, 1995

(1) That the procedural requirements of the Constitution have been

complied with by Congress in the enactment of the statute;
113

RAUL S. ROCO and the INTEGRATED BAR OF THE

PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE
COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 115544 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner,

vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of
Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary, and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115873 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.;

KAMAHALAN PUBLISHING CORPORATION; PHILIPPINE
JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of
Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary; and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and
ASSOCIATION OF PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON.
LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue;
and HON. GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

RESOLUTION

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,
FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO,
JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF
ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM,
INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO
TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER
OF CUSTOMS, respondents.

MENDOZA, J.:
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.

G.R. No. 115852 October 30, 1995

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

114

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."

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 VALUEADDED 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)

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:

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

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.

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)

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.

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649

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:

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
115

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)

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.

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

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."

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)

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

House Bill No. 11024, November 3, 1993

RULE XXIX

Senate Bill No. 1168, November 3, 1993

AMENDMENTS

6. R.A. NO. 7660

xxx xxx xxx

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)

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.

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

69. No amendment which seeks the inclusion of a

legislative provision foreign to the subject matter of a bill
(rider) shall be entertained.

7. R.A. NO. 7717

xxx xxx xxx

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)

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

House Bill No. 9187, November 3, 1993

116

because of textual differences between constitutional provisions giving

them the power to propose or concur with amendments.

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 twothirds 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.

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.

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.

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.

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.

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:

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].

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

(L. TAADA AND F. CARREON, POLITICAL LAW OF THE

PHILIPPINES 247 (1961))
117

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.

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."

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.

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.

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

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.

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:

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:

(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.

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

(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.
118

bills differ in their subject matter, I believe that no law can

be enacted.

(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.

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.

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.

(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.

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.

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.

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

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

119

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.

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.

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.

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.

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 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:

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.

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.

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.

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.

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.

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.

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
120

After some interruption, he continued:

(Id. at 710. (emphasis added))

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.

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.

(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."

(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.

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.

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,
121

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 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.

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

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:

(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:

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:

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:

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)

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 VALUEADDED 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.
122

(227 SCRA at 707-708)

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.

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.

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:

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.

(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).

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.

(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.

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)

(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
international agreements.
123

under

special

laws,

or

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

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.

(h) Goods or services with gross annual sale or receipt not

exceeding P500,000.00.

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.

(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.

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."

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."

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.

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 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

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
124

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)).

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. . . .

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 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.

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)).

(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.

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."

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

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)
125

Constitution from which the present Art. VI, 28(1) was taken. Sales taxes
are also regressive.

(h) Goods or services with gross annual sale or receipt not

exceeding P500,000.00.

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).

(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.

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).

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.

(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.

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.

(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.

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

(f) Transactions exempted
international agreements.

under

special

laws,

or
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

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

126

actual case and not an abstract or hypothetical one, may thus be

presented.

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:

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.

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.

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.

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.

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.

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

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
127

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.

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.

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.

WHEREFORE, the motions for reconsideration are denied with finality and
the temporary restraining order previously issued is hereby lifted.
SO ORDERED.

We have carefully read the various arguments raised against the

constitutional validity of R.A. No. 7716. We have in fact taken the

128