G.R. No.

175356

December 3, 2013

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.

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.

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:

DECISION

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% 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.

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof rests upon him.
Before us is a Petition for Prohibition 2 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).
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.
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:

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:

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;

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.

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;
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;
d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part
of its work;
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;

xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT

or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to
a sales discount. This contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing the income tax. When the law
says that the cost of the discount may be claimed as a tax credit, it means that the amount
when claimed shall be treated as a reduction from any tax liability, plain and simple. The
option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit
the benefit to a sales discount which is not even identical to the discount privilege that is
granted by law does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.

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.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006,
the pertinent provision of which provides:
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:

Laws Not Amended by Regulations

(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.

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.

(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.
(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.

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

(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:

On February 26, 2004, RA 92578 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:

(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.

(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and recreation
centers, and purchase of medicines in all establishments for the exclusive use or enjoyment
of senior citizens, including funeral and burial services for the death of senior citizens;

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

xxxx

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.

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net

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).

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
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 4 21 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

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.

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
Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of
RA 9257 affects the businesses of petitioners. 26

Issues

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 raise the following issues:

Respondents Arguments

A.

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

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

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

B.
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

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 Arguments

Our Ruling

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

The Petition lacks merit.

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 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
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

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

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation 16 that the
tax deduction scheme adopted by the government is justified by police power.17

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

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.

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:

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
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 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

(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 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 antihypertensive 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.

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 Corporation 37 that the
20% discount is an exercise of the power of eminent domain, thus, requiring the payment of
just compensation. They urge us to re-examine our ruling in Carlos Superdrug
Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation. 39
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
Corporation41 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

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

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 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)

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.44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation 45 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
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 Corporation 52 would 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

The above was partly incorporated in our ruling in Carlos Superdrug Corporation 43 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

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

Superdrug Corporation56 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
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
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
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

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

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 restricted 66 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

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
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

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
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

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

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
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 conditions 73 as well as the evolving meaning and scope of public
use74 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.

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

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
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
Corporation88 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.

80

In City of Manila v. Laguio, Jr., 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 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
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
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.

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

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

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
We adopted a similar line of reasoning in Carlos Superdrug Corporation 85 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

requisite showing of a clear and unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.

necessary to resolve the issue as to whether the revenue regulation contravenes the law.
Hence, the discussion on eminent domain is obiter dicta.

Refutation of the Dissent

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 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

The main points of Justice Carpios Dissent may be summarized as follows: (1) the
discussion on eminent domain in Central Luzon Drug Corporation 89 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 Corporation91 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
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 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

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

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.
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 that the Constitution is a social contract whereby the people have surrendered
their sovereign powers to the State for the common good. 107

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

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.

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.

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 toP11.11 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.

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

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

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

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.

10

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 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:

Instead, the 20% discount is a regulatory measure which impacts the pricing and, hence, the
profitability of business establishments. At the 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 sales114 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.

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

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

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 loss 111 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.

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 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

11

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.

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

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

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 non-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,

The above paragraph, in full, states

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.
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.

12

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 Pag-IBIG 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

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

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

SO ORDERED.

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.
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

13

On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of
the Mayor of the Municipality an assessment letter with a schedule of payment for the total
amount of P389,950.00 for Smarts telecommunications tower. The letter reads as follows:
This is to formally submit to your good office your schedule of payments in the Municipal
Treasury of the Local Government Unit of Malvar, province of Batangas which corresponds to
the tower of your company built in the premises of the municipality, to wit:
TOTAL PROJECT COST:

PHP 11,000,000.00

For the Year 2001-2003

G.R. No. 204429

50% of 1% of the total project cost

Php55,000.00

Add: 45% surcharge

24,750.00

February 18, 2014

SMART
COMMUNICATIONS,
vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

Php79,750.00

INC., Petitioner,
Multiply by 3 yrs. (2001, 2002, 2003)

DECISION

Php239,250.00

For the year 2004

CARPIO, J.:
The Case
This petition for review1 challenges the 26 June 2012 Decision 2 and 13 November 2012
Resolution3 of the Court of Tax. Appeals (CTA) En Banc.
Th e CTA En Banc affirmed the 17 December 2010 Decision 4 and 7 April 2011 Resolution5 of
the CTA First Division, which in turn affirmed the 2 December 2008 Decision 6 and 21 May
2009 Order7 of the Regional Trial Court of Tanauan City, Batangas, Branch 6. The trial court
declared void the assessment imposed by respondent Municipality of Malvar, Batangas
against petitioner Smart Communications, Inc. for its telecommunications tower for 2001 to
July 2003 and directed respondent to assess petitioner only for the period starting 1 October
2003.

1% of the total project cost

Php110,000.00

37% surcharge

40,700.00
==========
Php150,700.00

TOTAL
Hoping that you will give this matter your preferential attention.

Php389,950.00
8

Due to the alleged arrears in the payment of the assessment, the Municipality also caused
the posting of a closure notice on the telecommunications tower.
On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of
the assessment and closure notice. In the same protest, Smart challenged the validity of
Ordinance No. 18 on which the assessment was based.

The Facts
Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the
business of providing telecommunications services to the general public while respondent
Municipality of Malvar, Batangas (Municipality) is a local government unit created by law.

In a letter dated 28 September 2004, the Municipality denied Smarts protest.

In the course of its business, Smart constructed a telecommunications tower within the
territorial jurisdiction of the Municipality. The construction of the tower was for the purpose of
receiving and transmitting cellular communications within the covered area.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas,
Branch 6, an "Appeal/Petition" assailing the validity of Ordinance No. 18. The case was
docketed as SP Civil Case No. 04-11-1920.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An
Ordinance Regulating the Establishment of Special Projects."

On 2 December 2008, the trial court rendered a Decision partly granting Smarts
Appeal/Petition. The trial court confined its resolution of the case to the validity of the
assessment, and did not rule on the legality of Ordinance No. 18. The trial court held that the
assessment covering the period from 2001 to July 2003 was void since Ordinance No. 18

14

was approved only on 30 July 2003. However, the trial court declared valid the assessment
starting 1 October 2003, citing Article 4 of the Civil Code of the Philippines, 9 in relation to the
provisions of Ordinance No. 18 and Section 166 of Republic Act No. 7160 or the Local
Government Code of 1991 (LGC).10 The dispositive portion of the trial courts Decision reads:

jurisdiction to review on appeal, decisions, orders or resolutions of the Regional Trial Courts
in local tax cases originally resolved by them in the exercise of their original or appellate
jurisdiction. However, the same provision does not confer on the CTA jurisdiction to resolve
cases where the constitutionality of a law or rule is challenged.

WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment
dated August 24, 2004 against petitioner is hereby declared null and void insofar as the
assessment made from year 2001 to July 2003 and respondent is hereby prohibited from
assessing and collecting, from petitioner, fees during the said period and the Municipal
Government of Malvar, Batangas is directed to assess Smart Communications, Inc. only for
the period starting October 1, 2003.

The Issues
The petition raises the following arguments:
1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the CTA En Banc should have exercised
its jurisdiction and declared the Ordinance as illegal.
2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the doctrine of exhaustion of administrative
remedies does not apply in [this case].

No costs.
SO ORDERED.11
The trial court denied the motion for reconsideration in its Order of 21 May 2009.

3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being
contrary to law and jurisprudence considering that the respondent has no authority to impose
the so-called "fees" on the basis of the void ordinance. 14

On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA
AC No. 58.
On 17 December 2010, the CTA First Division denied the petition for review. The dispositive
portion of the decision reads:

The Ruling of the Court

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the
assailed Decision dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of
the Regional Trial Court of Tanauan City, Batangas in SP. Civil Case No. 04-11-1920 entitled
"Smart Communications, Inc. vs. Municipality of Malvar, Batangas" are AFFIRMED.

On whether the CTA has jurisdiction over the present case

The Court denies the petition.

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart
maintains that the CTA has jurisdiction over the present case considering the "unique" factual
circumstances involved.

SO ORDERED.12

The CTA refuses to take cognizance of this case since it challenges the constitutionality of
Ordinance No. 18, which is outside the province of the CTA.

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for
reconsideration.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No.
9282, created the Court of Tax Appeals. Section 7, paragraph (a), sub-paragraph (3) 15 of the
law vests the CTA with the exclusive appellate jurisdiction over "decisions, orders or
resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by
them in the exercise of their original or appellate jurisdiction."

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Divisions
decision and resolution. The dispositive portion of the CTA En Bancs 26 June 2012 decision
reads:
WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED
for lack of merit.1wphi1

The question now is whether the trial court resolved a local tax case in order to fall within the
ambit of the CTAs appellate jurisdiction This question, in turn, depends ultimately on whether
the fees imposed under Ordinance No. 18 are in fact taxes.

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7,
2011 are hereby AFFIRMED.
SO ORDERED.13

Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not
regulatory, but revenue-raising. Citing Philippine Airlines, Inc. v. Edu, 16 Smart contends that
the designation of "fees" in Ordinance No. 18 is not controlling.

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

The Ruling of the CTA En Banc

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall
have the power to create its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may provide, consistent with the

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En
Banc declared that it is a court of special jurisdiction and as such, it can take cognizance only
of such matters as are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of
Republic Act No. 9282, the CTA En Banc held that the CTA has exclusive appellate

15

basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
local government."

We accordingly say that the designation given by the municipal authorities does not decide
whether the imposition is properly a license tax or a license fee. The determining factors are
the purpose and effect of the imposition as may be apparent from the provisions of the
ordinance. Thus, "[w]hen no police inspection, supervision, or regulation is provided, nor any
standard set for the applicant to establish, or that he agrees to attain or maintain, but any and
all persons engaged in the business designated, without qualification or hindrance, may
come, and a license on payment of the stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but according to the unrestrained
judgment or fancy of the applicant and licensee, the presumption is strong that the power of
taxation, and not the police power, is being exercised."

Consistent with this constitutional mandate, the LGC grants the taxing powers to each local
government unit. Specifically, Section 142 of the LGC grants municipalities the power to levy
taxes, fees, and charges not otherwise levied by provinces. Section 143 of the LGC provides
for the scale of taxes on business that may be imposed by municipalities 17 while Section
14718 of the same law provides for the fees and charges that may be imposed by
municipalities on business and occupation.
The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against
persons or property, while the term "fee" means "a charge fixed by law or ordinance for the
regulation or inspection of a business or activity." 19

Contrary to Smarts contention, Ordinance No. 18 expressly provides for the standards which
Smart must satisfy prior to the issuance of the specified permits, clearly indicating that the
fees are regulatory in nature.

In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance
Regulating the Establishment of Special Projects," to regulate the "placing, stringing,
attaching, installing, repair and construction of all gas mains, electric, telegraph and
telephone wires, conduits, meters and other apparatus, and provide for the correction,
condemnation or removal of the same when found to be dangerous, defective or otherwise
hazardous to the welfare of the inhabitant[s]." 20 It was also envisioned to address the
foreseen "environmental depredation" to be brought about by these "special projects" to the
Municipality.21 Pursuant to these objectives, the Municipality imposed fees on various
structures, which included telecommunications towers.

These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.
The following documents shall be submitted to the SB Secretary in triplicate:
a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership

As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to
regulate the "placing, stringing, attaching, installing, repair and construction of all gas mains,
electric, telegraph and telephone wires, conduits, meters and other apparatus" listed therein,
which included Smarts telecommunications tower. Clearly, the purpose of the assailed
Ordinance is to regulate the enumerated activities particularly related to the construction and
maintenance of various structures. The fees in Ordinance No. 18 are not impositions on the
building or structure itself; rather, they are impositions on the activity subject of government
regulation, such as the installation and construction of the structures. 22

e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or

telegraph line, ERB in case of gasoline station, power plant, and other concerned national
agencies
f) Conversion order from DAR is located within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision association or the residence of the area concerned if the
special projects is located within the residential zone.

Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of
the identified special projects, which included "cell sites" or telecommunications towers, the
fees imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily
revenue-raising. While the fees may contribute to the revenues of the Municipality, this effect
is merely incidental. Thus, the fees imposed in Ordinance No. 18 are not taxes.

i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit Upon the expiration of 180 days
and the proponents of special projects shall apply for final [development permit] and they are
require[d] to submit the following:

In Progressive Development Corporation v. Quezon City,23 the Court declared that "if the
generating of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is
also obtained does not make the imposition a tax."

a) evaluation from the committee where the Vice Mayor refers the special project
b) Certification that all local fees have been paid.
Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart
is questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition
for lack of jurisdiction. Likewise, Section 187 of the LGC, 25 which outlines the procedure for
questioning the constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the
resolution of the issue on non-exhaustion of administrative remedies.

In Victorias Milling Co., Inc. v. Municipality of Victorias, 24 the Court reiterated that the purpose
and effect of the imposition determine whether it is a tax or a fee, and that the lack of any
standards for such imposition gives the presumption that the same is a tax.

16

On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart argues that the
Municipality exceeded its power to impose taxes and fees as provided in Book II, Title One,
Chapter 2, Article II of the LGC. Smart maintains that the mayors permit fees in Ordinance
No. 18 (equivalent to 1% of the project cost) are not among those expressly enumerated in
the LGC.

The Housing and Land Use Regulatory Board in the performance of its functions shall collect
the locational clearance fee based on the revised schedule of fees under the special use
project as per Resolution No. 622, series of 1998 or by the concerned LGUs subject to EO
72.26

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not
appear in the enumeration of taxes under Section 143 of the LGC.

Smart contends that Ordinance No. 18 violates Sections 130(b)(3) 27 and 186 of the LGC
since the fees are unjust, excessive, oppressive and confiscatory. Aside from this bare
allegation, Smart did not present any evidence substantiating its claims. In Victorias Milling
Co., Inc. v. Municipality of Victorias,28 the Court rejected the argument that the fees imposed
by respondent therein are excessive for lack of evidence supporting such claim, to wit:

On whether Ordinance No. 18 is valid and constitutional

Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC,
the Municipality is empowered to impose taxes, fees and charges, not specifically
enumerated in the LGC or taxed under the Tax Code or other applicable law. Section 186 of
the LGC, granting local government units wide latitude in imposing fees, expressly provides:

An ordinance carries with it the presumption of validity. The question of reasonableness

though is open to judicial inquiry. Much should be left thus to the discretion of municipal
authorities. Courts will go slow in writing off an ordinance as unreasonable unless the amount
is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A
rule which has gained acceptance is that factors relevant to such an inquiry are the municipal
conditions as a whole and the nature of the business made subject to imposition.

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may
exercise the power to levy taxes, fees or charges on any base or subject not otherwise
specifically enumerated herein or taxed under the provisions of the National Internal Revenue
Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall
not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted
without any prior public hearing conducted for the purpose.

Plaintiff, has however not sufficiently proven that, taking these factors together, the license
taxes are unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to
insisting that the amounts levied exceed the cost of regulation and the municipality has
adequate funds for the alleged purposes as evidenced by the municipalitys cash surplus for
the fiscal year ending 1956.

Smart further argues that the Municipality is encroaching on the regulatory powers of the
National Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act
No. 7925 which provides that the National Telecommunications Commission (NTC), in the
exercise of its regulatory powers, shall impose such fees and charges as may be necessary
to cover reasonable costs and expenses for the regulation and supervision of the operations
of telecommunications entities. Thus, Smart alleges that the regulation of telecommunications
entities and all aspects of its operations is specifically lodged by law on the NTC.

On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality
of Ordinance No. 18 in the Prayer of the Petition, without any argument or evidence to
support its plea. Nowhere in the body of the Petition was this issue specifically raised and
discussed. Significantly, Smart failed to cite any constitutional provision allegedly violated by
respondent when it issued Ordinance No. 18.

To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing,
repair and construction of all gas mains, electric, telegraph and telephone wires, conduits,
meters and other apparatus" within the Municipality. The fees are not imposed to regulate the
administrative, technical, financial, or marketing operations of telecommunications entities,
such as Smarts; rather, to regulate the installation and maintenance of physical structures
Smarts cell sites or telecommunications tower. The regulation of the installation and
maintenance of such physical structures is an exercise of the police power of the Municipality.
Clearly, the Municipality does not encroach on NTCs regulatory powers.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down
a law as unconstitutional, Smart has the burden to prove a clear and unequivocal breach of
the Constitution, which Smart miserably failed to do. In Lawyers Against Monopoly and
Poverty (LAMP) v. Secretary of Budget and Management, 29 the Court held, thus:
To justify the nullification of the law or its implementation, there must be a clear and
unequivocal, not a doubtful, breach of the Constitution. In case of doubt in the sufficiency of
proof establishing unconstitutionality, the Court must sustain legislation because "to invalidate
[a law] based on xx x baseless supposition is an affront to the wisdom not only of the
legislature that passed it but also of the executive which approved it." This presumption of
constitutionality can be overcome only by the clearest showing that there was indeed an
infraction of the Constitution, and only when such a conclusion is reached by the required
majority may the Court pronounce, in the discharge of the duty it cannot escape, that the
challenged act must be struck down.

The Court likewise rejects Smarts contention that the power to fix the fees for the issuance of
development permits and locational clearances is exercised by the Housing and Land Use
Regulatory Board (HLURB). Suffice it to state that the HLURB itself recognizes the local
government units power to collect fees related to land use and development. Significantly,
the
HLURB
issued
locational
guidelines
governing
telecommunications
infrastructure.1wphi1 Guideline No. VI relates to the collection of locational clearance fees
either by the HLURB or the concerned local government unit, to wit:

WHEREFORE, the Court DENIES the petition.

VI. Fees

SO ORDERED.

17

Office, Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as
Locational Clearance Fee.5
In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet
G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that it is
exempt from the payment of the building permit and locational clearance fees, citing legal
opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the
respondents that they have previously issued building permits acknowledging such
exemption from payment of building permit fees on the construction of petitioners 4-storey
AUF Information Technology Center building and the AUF Professional Schools building on
July 27, 2000 and March 15, 2004, respectively.6

G.R. No. 189999

Respondent City Treasurer referred the matter to the Bureau of Local Government Finance
(BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then
Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited
previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982)
declaring petitioner to be exempt from the payment of building permit fees. Under the 1st
Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating
further that "xxx the Department of Finance, thru this Bureau, has no authority to review the
resolution or the decision of the DOJ."7

June 27, 2012

ANGELES
UNIVERSITY
FOUNDATION, Petitioner,
vs.
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer of Angeles City
and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles City Building
Official, Respondents.

Petitioner wrote the respondents reiterating its request to reverse the disputed assessments
and invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez.
Despite petitioners plea, however, respondents refused to issue the building permits for the
construction of the AUF Medical Center in the main campus and renovation of a school
building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo
F. Lazatin but no written response was received by petitioner.8

DECISION
VILLARAMA, JR., J.:

Consequently, petitioner paid under protest9 the following:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse and set aside the Decision 1 dated July 28,
2009 and Resolution2 dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV
No. 90591. The CA reversed the Decision3 dated September 21, 2007 of the Regional Trial
Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the
payment of building permit and other fees and ordering respondents to refund the same with
interest at the legal rate.

Medical Center (new construction)

Building Permit and Electrical Fee

P 217,475.20

Locational Clearance Fee

283,741.64

Fire Code Fee

144,690.00

The factual antecedents:

Total - P 645,906.84

Petitioner Angeles University Foundation (AUF) is an educational institution established on

May 25, 1962 and was converted into a non-stock, non-profit education foundation under the
provisions of Republic Act (R.A.) No. 60554on December 4, 1975.

School Building (renovation)

Sometime in August 2005, petitioner filed with the Office of the City Building Official an
application for a building permit for the construction of an 11-storey building of the Angeles
University Foundation Medical Center in its main campus located at MacArthur Highway,
Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in the amount
of P126,839.20. An Order of Payment was also issued by the City Planning and Development

Building Permit and Electrical Fee

P 37,857.20

Locational Clearance Fee

6,000.57

Fire Code Fee

5,967.74
Total - P 49,825.51

18

Petitioner likewise paid the following sums as required by the City Assessors Office:
Real Property Tax Basic Fee

P 86,531.10

SEF

43,274.54

Locational Clearance Fee

1,125.00

twelve percent (12%) per annum commencing on the date of extra-judicial demand or June
14, 2006, until the aforesaid amount is fully paid.
b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of the suit.

Total P130,930.6410

SO ORDERED.17

[GRAND TOTAL - P 826,662.99]

Respondents appealed to the CA which reversed the trial court, holding that while petitioner is
a tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that
under R.A. No. 6055, petitioner was granted exemption only from income tax derived from its
educational activities and real property used exclusively for educational purposes.
Regardless of the repealing clause in the National Building Code, the CA held that petitioner
is still not exempt because a building permit cannot be considered as the other "charges"
mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import
duties, assessments and other collections for revenue purposes, following the ejusdem
generisrule. The CA further stated that petitioner has not shown that the fees collected were
excessive and more than the cost of surveillance, inspection and regulation. And while
petitioner may be exempt from the payment of real property tax, petitioner in this case merely
alleged that "the subject property is to be used actually, directly and exclusively for
educational purposes," declaring merely that such premises is intended to house the sports
and other facilities of the university but by reason of the occupancy of informal settlers on the
area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner
is not entitled to the refund of building permit and related fees, as well as real property tax it
paid under protest.

By reason of the above payments, petitioner was issued the corresponding Building Permit,
Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner
formally requested the respondents to refund the fees it paid under protest. Under letters
dated June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for
refund.11
On August 31, 2006, petitioner filed a Complaint 12 before the trial court seeking the refund of
P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of
attorneys fees in the amount of P300,000.00 and litigation expenses.
In its Answer,13 respondents asserted that the claim of petitioner cannot be granted because
its structures are not among those mentioned in Sec. 209 of the National Building Code as
exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be
considered repealed on the basis of Sec. 2104 of the National Building Code. Since the
disputed assessments are regulatory in nature, they are not taxes from which petitioner is
exempt. As to the real property taxes imposed on petitioners property located in Marisol
Village, respondents pointed out that said premises will be used as a school dormitory which
cannot be considered as a use exclusively for educational activities.

Petitioner filed a motion for reconsideration which was denied by the CA.
Hence, this petition raising the following grounds:

Petitioner countered that the subject building permit are being collected on the basis of Art.
244 of theImplementing Rules and Regulations of the Local Government Code, which
impositions are really taxes considering that they are provided under the chapter on "Local
Government Taxation" in reference to the "revenue raising power" of local government units
(LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu, 14 fees
may be regarded as taxes depending on the purpose of its exaction. In any case, petitioner
pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-stock and
non-profit educational institutions like petitioner retained the tax exemptions or incentives
which have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable
jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building
permit fees.15

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A

QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE
APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM
THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING
THE HONORABLE COURTS EXERCISE OF ITS POWER OF SUPERVISION
CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE
COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE
OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF
APPEALS TO DO.

On September 21, 2007, the trial court rendered judgment in favor of the petitioner and
against the respondents. The dispositive portion of the trial courts decision 16 reads:

A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE,
THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION
THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.

WHEREFORE, premises considered, judgment is rendered as follows:

a. Plaintiff is exempt from the payment of building permit and other fees Ordering the
Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred
Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of

B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS

IN RULING IN THE QUESTIONED DECISION THAT THE TERM "OTHER CHARGES

19

IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055 DOES NOT

INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS
BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES,
IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED
TO COLLECTIONS FOR REVENUE PURPOSES.

exempt from the payment of building permit fee, it is therefore subject to the regulatory fees
imposed under the National Building Code.
Respondents assert that the CA correctly distinguished a building permit fee from those
"other charges" mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges
refer to pecuniary liability, as rents, and fees against persons or property. Respondents point
out that a building permit is classified under the term "fee." A fee is generally imposed to
cover the cost of regulation as activity or privilege and is essentially derived from the exercise
of police power; on the other hand, impositions for services rendered by the local government
units or for conveniences furnished, are referred to as "service charges".

C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES
AND/OR CHARGES ARE NOT INCLUDED IN THE TERM "OTHER CHARGES IMPOSED
BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS
GENERALLY A TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE
PRIVILEGE OF EXEMPTION.

Respondents also disagreed with petitioners contention that the fees imposed and collected
are exorbitant and exceeded the probable expenses of regulation. These fees are based on
computations and assessments made by the responsible officials of the City Engineers
Office in accordance with the Schedule of Fees and criteria provided in the National Building
Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses of
transportation and preparation and reproduction of documents) refer to charges and fees on
business and occupation under Sec. 147 of the Local Government Code, which do not apply
to building permit fees. The parameters set by the National Building Code can be considered
as complying with the reasonable cost of regulation in the assessment and collection of
building permit fees. Respondents likewise contend that the presumption of regularity in the
performance of official duty applies in this case. Petitioner should have presented evidence to
prove its allegations that the amounts collected are exorbitant or unreasonable.

II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.18
Petitioner stresses that the tax exemption granted to educational stock corporations which
have converted into non-profit foundations was broadened to include any other charges
imposed by the Government as one of the incentives for such conversion. These incentives
necessarily included exemption from payment of building permit and related fees as
otherwise there would have been no incentives for educational foundations if the privilege
were only limited to exemption from taxation, which is already provided under
the Constitution.

For resolution are the following issues: (1) whether petitioner is exempt from the payment of
building permit and related fees imposed under the National Building Code; and (2) whether
the parcel of land owned by petitioner which has been assessed for real property tax is
likewise exempt.

Petitioner further contends that this Court has consistently held in several cases that the
primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which
bears no relation to the cost of inspection and which is payable into the general revenue of
the state is a tax rather than an exercise of the police power. The standard set by law in the
determination of the amount that may be imposed as license fees is such that is
commensurate with the cost of regulation, inspection and licensing. But in this case, the
amount representing the building permit and related fees and/or charges is such an
exorbitant amount as to warrant a valid imposition; such amount exceeds the probable cost of
regulation. Even with the alleged criteria submitted by the respondents (e.g., character of
occupancy or use of building/structure, cost of construction, floor area and height), and the
construction by petitioner of an 11-storey building, the costs of inspection will not amount to
P645,906.84, presumably for the salary of inspectors or employees, the expenses of
transportation for inspection and the preparation and reproduction of documents. Petitioner
thus concludes that the disputed fees are substantially and mainly for purposes of revenue
rather than regulation, so that even these fees cannot be deemed "charges" mentioned in
Sec. 8 of R.A. No. 6055, they should properly be treated as tax from which petitioner is
exempt.

R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which
converted to non-stock, non-profit educational foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties,
assessments, and other charges imposed by the Government onall income derived from or
property, real or personal, used exclusively for the educational activities of the Foundation.
(Emphasis supplied.)
On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National
Building Code of the Philippines. The said Code requires every person, firm or corporation,
including any agency or instrumentality of the government to obtain a building permit for any
construction, alteration or repair of any building or structure. 19Building permit refers to "a
document issued by the Building Official x x x to an owner/applicant to proceed with the
construction, installation, addition, alteration, renovation, conversion, repair, moving,
demolition or other work activity of a specific project/building/structure or portions thereof after
the accompanying principal plans, specifications and other pertinent documents with the duly
notarized application are found satisfactory and substantially conforming with the National
Building Code of the Philippines x x x and its Implementing Rules and Regulations

In their Comment, respondents maintain that petitioner is not exempt from the payment of
building permit and related fees since the only exemptions provided in the National Building
Code are public buildings and traditional indigenous family dwellings. Inclusio unius est
exclusio alterius. Because the law did not include petitioners buildings from those structures

20

(IRR)."20 Building permit fees refers to the basic permit fee and other charges imposed under
theNational Building Code.

That a building permit fee is a regulatory imposition is highlighted by the fact that in
processing an application for a building permit, the Building Official shall see to it that the
applicant satisfies and conforms with approved standard requirements on zoning and land
use, lines and grades, structural design, sanitary and sewerage, environmental health,
electrical and mechanical safety as well as with other rules and regulations implementing the
National Building Code.24 Thus, ancillary permits such as electrical permit, sanitary permit
and zoning clearance must also be secured and the corresponding fees paid before a
building permit may be issued. And as can be gleaned from the implementing rules and
regulations of the National Building Code, clearances from various government authorities
exercising and enforcing regulatory functions affecting buildings/structures, like local
government units, may be further required before a building permit may be issued. 25

Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional
indigenous family dwellings.21 Not being expressly included in the enumeration of structures
to which the building permit fees do not apply, petitioners claim for exemption rests solely on
its interpretation of the term "other charges imposed by the National Government" in the tax
exemption clause of R.A. No. 6055.
A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee"
pertains to a "charge fixed by law for services of public officers or for use of a privilege under
control of government."22 As used in the Local Government Code of 1991 (R.A. No. 7160),
charges refers to pecuniary liability, as rents or fees against persons or property, while fee
means a charge fixed by law or ordinance for the regulation or inspection of a business or
activity.23

Since building permit fees are not charges on property, they are not impositions from which
petitioner is exempt.

That "charges" in its ordinary meaning appears to be a general term which could cover a
specific "fee" does not support petitioners position that building permit fees are among those
"other charges" from which it was expressly exempted. Note that the "other charges"
mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words "imposed by the Government
on all x x x property used exclusively for the educational activities of the foundation." Building
permit fees are not impositions on property but on the activity subject of government
regulation. While it may be argued that the fees relate to particular properties, i.e., buildings
and structures, they are actually imposed on certain activities the owner may conduct either
to build such structures or to repair, alter, renovate or demolish the same. This is evident from
the following provisions of the National Building Code:

As to petitioners argument that the building permit fees collected by respondents are in
reality taxes because the primary purpose is to raise revenues for the local government unit,
the same does not hold water.

Section 102. Declaration of Policy

2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)

It is hereby declared to be the policy of the State to safeguard life, health, property, and public
welfare, consistent with theprinciples of sound environmental management and control; and
tothis end, make it the purpose of this Code to provide for allbuildings and structures, a
framework of minimum standards and requirements to regulate and control their location, site,
design quality of materials, construction, use, occupancy, and maintenance.

3. Floor area

A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation
may be held to be a tax rather than an exercise of the police power. 26 In this case, the
Secretary of Public Works and Highways who is mandated to prescribe and fix the amount of
fees and other charges that the Building Official shall collect in connection with the
performance of regulatory functions,27 has promulgated and issued the Implementing Rules
and Regulations28 which provide for the bases of assessment of such fees, as follows:
1. Character of occupancy or use of building

4. Height
Petitioner failed to demonstrate that the above bases of assessment were arbitrarily
determined or unrelated to the activity being regulated. Neither has petitioner adduced
evidence to show that the rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation and inspection.

Section 103. Scope and Application

(a) The provisions of this Code shall apply to the design,location, sitting, construction,
alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and
addition to public and private buildings andstructures, except traditional indigenous family
dwellingsas defined herein.

In Chevron Philippines, Inc. v. Bases Conversion Development Authority, 29 this Court

explained:
In distinguishing tax and regulation as a form of police power, the determining factor is the
purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will
be deemed a tax even though the measure results in some form of regulation. On the other
hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of
the police power of the state, even though incidentally, revenue is generated. Thus, in
Gerochi v. Department of Energy, the Court stated:

xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency orinstrumentality of the government
shall erect, construct, alter, repair, move, convert or demolish any building or structure or
causethe same to be done without first obtaining a building permittherefor from the Building
Official assigned in the place where thesubject building is located or the building work is to be
done. (Italics supplied.)

"The conservative and pivotal distinction between these two (2) powers rests in the purpose
for which the charge is made. If generation of revenue is the primary purpose and regulation

21

is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact
that revenue is incidentally raised does not make the imposition a tax." 30 (Emphasis
supplied.)

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

Concededly, in the case of building permit fees imposed by the National Government under
the National Building Code, revenue is incidentally generated for the benefit of local
government units. Thus:

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,

non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes;

Section 208. Fees

x x x x (Emphasis supplied.)

Every Building Official shall keep a permanent record and accurate account of all fees and
other charges fixed and authorized by the Secretary to be collected and received under this
Code.

In Lung Center of the Philippines v. Quezon City,31 this Court held that only portions of the
hospital actually, directly and exclusively used for charitable purposes are exempt from real
property taxes, while those portions leased to private entities and individuals are not exempt
from such taxes. We explained the condition for the tax exemption privilege of charitable and
educational institutions, as follows:

xxxx

Subject to existing budgetary, accounting and auditing rules and regulations, the Building
Official is hereby authorized to retain not more than twenty percent of his collection for the
operating expenses of his office.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable
institution;
and
(b)
its
real
properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more commercial purposes, it is not exclusively
used for the exempted purposes but is subject to taxation. The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing violence
to the Constitutions and the law. Solely is synonymous with exclusively.1wphi1

The remaining eighty percent shall be deposited with the provincial, city or municipal
treasurer and shall accrue to the General Fund of the province, city or municipality
concerned.
Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise
misplaced. Said provision states:
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the effectivity of this Code.
(Emphasis supplied.)

What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for which
the charitable institution is organized. It is not the use of the income from the real property
that is determinative of whether the property is used for tax-exempt purposes. 32 (Emphasis
and underscoring supplied.)

Considering that exemption from payment of regulatory fees was not among those
"incentives" granted to petitioner under R.A. No. 6055, there is no such incentive that is
retained under the Local Government Code of 1991. Consequently, no reversible error was
committed by the CA in ruling that petitioner is liable to pay the subject building permit and
related fees.

Petitioner failed to discharge its burden to prove that its real property is actually, directly and
exclusively used for educational purposes. While there is no allegation or proof that petitioner
leases the land to its present occupants, still there is no compliance with the constitutional
and statutory requirement that said real property is actually, directly and exclusively used for
educational purposes. The respondents correctly assessed the land for real property taxes for
the taxable period during which the land is not being devoted solely to petitioners educational
activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a
refund of the real property tax it paid under protest.

Now, on petitioners claim that it is exempted from the payment of real property tax assessed
against its real property presently occupied by informal settlers.
Section 28(3), Article VI of the 1987 Constitution provides:
xxxx
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly
and exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.

WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution
dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.
No pronouncement as to costs.

x x x x (Emphasis supplied.)

SO ORDERED.

Section 234(b) of the Local Government Code of 1991 implements the foregoing
constitutional provision by declaring that --

22

pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code
in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for
the property.
Francia was not present during the auction sale since he was in Iligan City at that time
helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation
of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon
verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in
favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of
the defendant Ho Fernandez over the parcel of land including the improvements thereon,
subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.

G.R. No. L-67649 June 28, 1988

ENGRACIO
FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p.
30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.

GUTIERREZ, JR., J.:

Francia prefaced his arguments with the following assignments of grave errors of law:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at
public auction to Ho Fernandez and ordered titled in the latter's name.

I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF
LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon
it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot,
with an area of about 328 square meters, is described and covered by Transfer Certificate of
Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND
DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON
DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by
the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.

III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City

23

P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS

TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

making and enforcing of which, the personal consent of individual taxpayers is not
required. ..."

We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that the price
paid for the property was shockingly inadequate, amounting to fraud and deprivation without
due process of law.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated
that: "... internal revenue taxes can not be the subject of compensation: Reason: government
and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the
Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised
in his petition upon himself. While we commiserate with him at the loss of his property, the
law and the facts militate against the grant of his petition. We are constrained to dismiss it.

There are other factors which compel us to rule against the petitioner. The tax was due to the
city government while the expropriation was effected by the national government. Moreover,
the amount of P4,116.00 paid by the national government for the 125 square meter portion of
his lot was deposited with the Philippine National Bank long before the sale at public auction
of his remaining property. Notice of the deposit dated September 28, 1977 was received by
the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew
about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an
easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation
thus aborting the sale at public auction.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:

Petitioner had one year within which to redeem his property although, as well be shown later,
he claimed that he pocketed the notice of the auction sale without reading it.

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of
proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition
for Review, Rollo p. 18; emphasis supplied)

xxx xxx xxx

(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax cannot
await the results of a lawsuit against the government.

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale,
has the burden of proof to show that there was compliance with all the prescribed requisites
for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof and
thegeneral rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who
is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The
general rule based on grounds of public policy is well-settled that no set-off admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of duty to, and are the positive acts of the government to the

There is no presumption of the regularity of any administrative action which results in

depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437);
Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that
administrative proceedings are presumed to be regular.

24

But even if the burden of proof lies with the purchaser to show that all legal prerequisites
have been complied with, the petitioner can not, however, deny that he did receive the notice
for the auction sale. The records sustain the lower court's finding that:

his right to redeem and thus recover the loss he claims to have suffered by reason of the
price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De
Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he
received the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit
"I-A") thereof. He claimed further that he was not present on December 5, 1977 the date of
the auction sale because he went to Iligan City. As long as there was substantial compliance
with the requirements of the notice, the validity of the auction sale can not be assailed ... .

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable.
In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold
for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule
arises from necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually paid by
purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros.
v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the
property in question shall be sold at public auction to the highest bidder on December 5, 1977
pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this
letter?

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al.
(267 P. 555):

A. I just signed it because I was not able to read the same. It was just sent by mail carrier.

Like most cases of this character there is here a certain element of hardship from which we
would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are
convinced that the present rules are just, and that they bring hardship only to those who have
invited it by their own neglect.

Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof
but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?

We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City,
which necessitated the expropriation of adjoining areas, real estate values have gone up in
the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us
to deny the petition.

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when
he ignored such notice. By his very own admission that he received the notice, his now
coming to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged
gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it
is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there
are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his
taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed
the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He
did not withdraw from the expropriation payment deposited with the Philippine National Bank
an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another
notice sent by the City Treasurer on November 3, 1978, during the period of redemption,
regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in
his attempt to regain the property by belatedly asking for the annulment of the sale.

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for reasons
of equity a transaction may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow
when the law gives to the owner the right to redeem, as when a sale is made at public
auction, upon the theory that the lesser the price the easier it is for the owner to effect the
redemption. And so it was aptly said: "When there is the right to redeem, inadequacy of price
should not be material, because the judgment debtor may reacquire the property or also sell

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.
SO ORDERED.

25

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the
estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55,
issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims
against the estate the fiscal presented a petition dated June 21, 1961, to the court below for
the execution of the judgment. The petition was, however, denied by the court which held that
the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below dated August 20,
1960 and September 28, 1960, respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated
December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K.
Price, as directed in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order
of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)

G.R. No. L-18994

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government
shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not
be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September
28, 1960)

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance
of
Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter
Scott Price,respondents.
Office of the Solicitor General and
Benedicto and Martinez for respondents.

Atty.

G.

H.

Mantolino

for

The petition to set aside the above orders of the court below and for the execution of the
claim of the Government against the estate must be denied for lack of merit. The ordinary
procedure by which to settle claims of indebtedness against the estate of a deceased person,
as an inheritance tax, is for the claimant to present a claim before the probate court so that
said court may order the administrator to pay the amount thereof. To such effect is the
decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No.
L-2360, Dec. 29, 1949, thus:

petitioner.

LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance
of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and
for an order in this Court directing the respondent court below to execute the judgment in
favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to

26

order the sale of personal estate or the sale or mortgage of real property of the deceased and
all debts or expenses of administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2.
And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90,
section 7, should be complied with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered into possession
of their respective portions in the estate prior to settlement and payment of the debts and
expenses of administration and it is later ascertained that there are such debts and expenses
to be paid, in which case "the court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of their several liabilities, and order how much and
in what manner each person shall contribute, and mayissue execution if circumstances
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to
settle the estate of a deceased person, the properties belonging to the estate are under the
jurisdiction of the court and such jurisdiction continues until said properties have been
distributed among the heirs entitled thereto. During the pendency of the proceedings all the
estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the
court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has
been recognized and an amount of P262,200 has already been appropriated for the purpose
by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim
of the Government for inheritance taxes and the claim of the intestate for services rendered
have already become overdue and demandable is well as fully liquidated. Compensation,
therefore, takes place by operation of law, in accordance with the provisions of Articles 1279
and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent amount,
eventhough the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.

27

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992
in the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these
claims for tax credit/refund should be applied against the tax liabilities, citing our ruling
inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand that
Philex settle the amount plus interest within 30 days from the receipt of the letter.

G.R. No. 125704 August 28, 1998

PHILEX
MINING
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF
TAX APPEALS,respondents.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against
its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6,
1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in
the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.

ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA
Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as
excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus
20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of
the Tax Code of 1977.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. "Liquidated" debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259).
In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and

28

18

still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated
debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated
claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs.
French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

taxes are due to the Government in its sovereign capacity.

deviate from the aforementioned distinction.

We find no cogent reason to

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the
CTA decision 10 provides:

We have consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the government.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically

held that taxes cannot be subject to set-off or compensation, thus:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner
is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing
excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus
20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of
the Tax Code, as amended.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed
as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed
the Court of Tax Appeals observation. The pertinent portion of which reads: 12

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing
tax liability even though the refund has not yet been approved by the Commissioner, 21 is no
longer without any support in statutory law.

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996. 13

It is important to note, that the premise of our ruling in the aforementioned case was
anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.

However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992
and 1994, computed as follows: 14
Period Covered Tax Credit Date

Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition
of surcharge and interest for the non-payment of the excise taxes within the time prescribed
was unjustified. Philex posits the theory that it had no obligation to pay the excise tax
liabilities within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR. 23

By Claims For Certificate of

VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle
in tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render
ineffective our tax collection system. Too simplistic, it finds no support in law or in
jurisprudence.

1990-1991 007751 16 July 1996 P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take
place.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not yet
been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the
taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has
a claim against the government or that the collection of the tax is contingent on the result of

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that
taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. 17 There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity, while

29

the lawsuit it filed against the government. 27 Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.

Art. 27. Any person suffering material or moral loss because a public servant or employee
refuses or neglects, without just cause, to perform his official duty may file an action for
damages and other relief against the latter, without prejudice to any disciplinary action that
may be taken.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. 28 The same
cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying
its non-payment of its tax liabilities.

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in
the performance of official duties. 39 In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.

30

Finally, Philex asserts that the BIR violated Section 106 (e) of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it
took five years for the latter to grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden
of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however,
once the claimant has submitted all the required documents it is the function of the BIR to
assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to
government it is but just that government render fair service to the taxpayers. 34

In sum, while we can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one
should take the law into his own hands" should have guided Philex's action.

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of
its function. As aptly held inRoxas v. Court of Tax Appeals: 36

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.

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.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it
is a settled rule that in the performance of governmental function, the State is not bound by
the neglect of its agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the
same is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their
feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the
latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by
law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:

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