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G.R. No.

175356 December 3, 2013


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.
DECISION
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 Prohibition2 under Rule 65 of the Rules of Court filed by
petitioners Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic
corporations engaged in the business of providing funeral and burial services, against
public respondents Secretaries of the Department of Social Welfare and Development
(DSWD) and the Department of Finance (DOF).

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:
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;
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;
f) to the extent practicable and feasible, the continuance of the same benefits
and privileges given by the Government Service Insurance System (GSIS),
Social Security System (SSS) and PAG-IBIG, as the case may be, as are
enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA
7432. Sections 2(i) and 4 of RR No. 02-94 provide:
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.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 5 the Court
declared Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene
RA 7432,6 thus:
RA 7432 specifically allows private establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant
thereto, provide the procedures for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that mandate, is indefensible. First,
the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that "shall be deducted by the said establishments
from their gross income for income tax purposes and from their gross sales for value-
added tax or other percentage tax purposes." In ordinary business language, the tax
credit represents the amount of such discount. However, the manner by which the
discount shall be credited against taxes has not been clarified by the revenue
regulations. By ordinary acceptation, a discount is an "abatement or reduction made
from the gross amount or value of anything." To be more precise, it is in business
parlance "a deduction or lowering of an amount of money;" or "a reduction from the full
amount or value of something, especially a price." In business there are many kinds of
discount, the most common of which is that affecting the income statement or financial
report upon which the income tax is based.
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.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that
"operates to create a rule out of harmony with the statute is a mere nullity;" it cannot
prevail. It is a cardinal rule that courts "will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is to enforce it
x x x." In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the
details that "Congress may not have the opportunity or competence to provide." The
regulations these authorities issue are relied upon by taxpayers, who are certain that
these will be followed by the courts. Courts, however, will not uphold these authorities
interpretations when clearly absurd, erroneous or improper. In the present case, the tax
authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their interpretation has muddled x x x the
intent of Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or restrict the
provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.
In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law."
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law
and has neither the force nor the effect of law.7
On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:
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 the
utilization of services in hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial services for the death of
senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That
the cost of the discount shall be allowed as 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.
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:
(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.
(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.
(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:
xxxx
(i) Funeral parlors and similar establishments The beneficiary or any person who shall
shoulder the funeral and burial expenses of the deceased senior citizen shall claim the
discount, such as casket, embalmment, cremation cost and other related services for
the senior citizen upon payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to
wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
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.
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).
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.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
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
Petitioners Arguments
Petitioners emphasize that they are not questioning the 20% discount granted to senior
citizens but are only assailing the constitutionality of the tax deduction scheme
prescribed under RA 9257 and the implementing rules and regulations issued by the
DSWD and the DOF.10
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
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
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
421 and Article XIII, Section 1122of the Constitution because it shifts the States
constitutional mandate or duty of improving the welfare of the elderly to the private
sector.23
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
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
Respondents Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with
the Supreme Court as this disregards the hierarchy of courts.28
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
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
Our Ruling
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
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
The Petition must therefore show that "the governmental act being challenged has a
direct adverse effect on the individual challenging it."34
In this case, the tax deduction scheme challenged by petitioners has a direct adverse
effect on them. Thus, it cannot be denied that there exists an actual case or
controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under
RA 9257, as an exercise of police power of the State, has already been settled in
Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the
legally mandated 20% senior citizen discount is an exercise of police power or eminent
domain. If it is police power, no just compensation is warranted. But if it is eminent
domain, the tax deduction scheme is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking
of private property without payment of just compensation. At the outset, we note that
this question has been settled in Carlos Superdrug Corporation.35
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 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.1wphi1 Thus, the Act provides: SEC. 2. Republic Act No. 7432
is hereby amended to read as follows:
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:
xxx xxx xxx
(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 1.00 senior citizen discount that petitioners would give, P0.68
will be shouldered by them as only P0.32 will be refunded by the government by way of
a tax deduction. To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example. According to the latter, it
acquires Norvasc from the distributors at 37.57 per tablet, and retails it at 39.60 (or at
a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to
7.92, then it would have to sell Norvasc at 31.68 which translates to a loss from
capital of 5.89 per tablet. Even if the government will allow a tax deduction, only 2.53
per tablet will be refunded and not the full amount of the discount which is 7.92. In
short, only 32% of the 20% discount will be reimbursed to the drugstores. Petitioners
computation is flawed. For purposes of reimbursement, the law states that the cost of
the discount shall be deducted from gross income, the amount of income derived from
all sources before deducting allowable expenses, which will result in net income. Here,
petitioners tried to show a loss on a per transaction basis, which should not be the case.
An income statement, showing an accounting of petitioners' sales, expenses, and net
profit (or loss) for a given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss should they give the
discount. In addition, the computation was erroneously based on the assumption that
their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be
imposed on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the
prices of their medicines given the cutthroat nature of the players in the industry. It is a
business decision on the part of petitioners to peg the mark-up at 5%. Selling the
medicines below acquisition cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for
being oppressive, simply because they cannot afford to raise their prices for fear of
losing their customers to competition. The Court is not oblivious of the retail side of the
pharmaceutical industry and the competitive pricing component of the business. While
the Constitution protects property rights, petitioners must accept the realities of
business and the State, in the exercise of police power, can intervene in the operations
of a business which may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the regulation of contracts and public
utilities, continuously serve as x x x reminder[s] that the right to property can be
relinquished upon the command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support
imparted by petitioners and the other private establishments concerned. This being the
case, the means employed in invoking the active participation of the private sector, in
order to achieve the purpose or objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act. 36 (Bold in the original;
underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid
exercise of the police power of the State.
No compelling reason has been proffered to overturn, modify or abandon the
ruling in Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug 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 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.1wphi1 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)
The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when
we stated preliminarily that
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to
grant the discount will result in a loss of profit and capital because 1) drugstores impose
a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a
scheme whereby drugstores will be justly compensated for the discount. Examining
petitioners arguments, it is apparent that what petitioners are ultimately questioning is
the validity of the tax deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens. Based on the afore-stated
DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the discount is treated as
a deduction, a tax-deductible expense that is subtracted from the gross income and
results in a lower taxable income. Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of the tax rate to compute the amount
of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on
a peso for peso basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of
the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not for
R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit. This constitutes
compensable taking for which petitioners would ordinarily become entitled to a just
compensation. Just compensation is defined as the full and fair equivalent of the
property taken from its owner by the expropriator. The measure is not the takers gain
but the owners loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be rendered for the
property to be taken shall be real, substantial, full and ample. A tax deduction does not
offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation. Having said that, this raises the question of whether the
State, in promoting the health and welfare of a special group of citizens, 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 Corporation 50 in our ruling in Carlos
Superdrug Corporation,51 this referred only to preliminary matters. A fair reading of
Carlos Superdrug Corporation52would show that we categorically ruled therein that the
20% discount is a valid exercise of police power. Thus, even if the current law, through
its tax deduction scheme (which abandoned the tax credit scheme under the previous
law), does not provide for a peso for peso reimbursement of the 20% discount given by
private establishments, no constitutional infirmity obtains because, being a valid
exercise of police power, payment of just compensation is not warranted. We have
carefully reviewed the basis of our ruling in Carlos Superdrug Corporation 53 and we find
no cogent reason to overturn, modify or abandon it. We also note that petitioners
arguments are a mere reiteration of those raised and resolved in Carlos Superdrug
Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55
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
Eminent domain, on the other hand, is the inherent power of the State to take or
appropriate private property for public use.63
The Constitution, however, requires that private property shall not be taken without due
process of law and the payment of just compensation.64
Traditional distinctions exist between police power and eminent domain. In the exercise
of police power, a property right is impaired by regulation, 65 or the use of property is
merely prohibited, regulated or restricted66 to promote public welfare. In such cases,
there is no compensable taking, hence, payment of just compensation is not required.
Examples of these regulations are property condemned for being noxious or intended
for noxious purposes (e.g., a building on the verge of collapse to be demolished for
public safety, or obscene materials to be destroyed in the interest of public morals) 67 as
well as zoning ordinances prohibiting the use of property for purposes injurious to the
health, morals or safety of the community (e.g., dividing a citys territory into residential
and industrial areas).68
It has, thus, been observed that, in the exercise of police power (as distinguished from
eminent domain), although the regulation affects the right of ownership, none of the
bundle of rights which constitute ownership is appropriated for use by or for the benefit
of the public.69
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
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 conditions73 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. The judicious approach, therefore, is to look at the
nature and effects of the challenged governmental act and decide, on the basis thereof,
whether the act is the exercise of police power or eminent domain. Thus, we now look
at the nature and effects of the 20% discount to determine if it constitutes an exercise of
police power or eminent domain. The 20% discount is intended to improve the welfare
of senior citizens who, at their age, are less likely to be gainfully employed, more prone
to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor
senior citizens who presumably spent the productive years of their lives on contributing
to the development and progress of the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law. As to its nature and effects, the 20%
discount is a regulation affecting the ability of private establishments to price their
products and services relative to a special class of individuals, senior citizens, for which
the Constitution affords preferential concern.76
In turn, this affects the amount of profits or income/gross sales that a private
establishment can derive from senior citizens. In other words, the subject regulation
affects the pricing, and, hence, the profitability of a private establishment. However, it
does not purport to appropriate or burden specific properties, used in the operation or
conduct of the business of private establishments, for the use or benefit of the public, or
senior citizens for that matter, but merely regulates the pricing of goods and services
relative to, and the amount of profits or income/gross sales that such private
establishments may derive from, senior citizens. The subject regulation may be said to
be similar to, but with substantial distinctions from, price control or rate of return on
investment control laws which are traditionally regarded as police power measures. 77
These laws generally regulate public utilities or industries/enterprises imbued with public
interest in order to protect consumers from exorbitant or unreasonable pricing as well as
temper corporate greed by controlling the rate of return on investment of these
corporations considering that they have a monopoly over the goods or services that
they provide to the general public. The subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from adjusting the level of prices of their
goods and services, and (2) the discount does not apply to all customers of a given
establishment but only to the class of senior citizens. Nonetheless, to the degree
material to the resolution of this case, the 20% discount may be properly viewed as
belonging to the category of price regulatory measures which affect the profitability of
establishments subjected thereto. On its face, therefore, the subject regulation is a
police power measure. The obiter in Central Luzon Drug Corporation, 78 however,
describes the 20% discount as an exercise of the power of eminent domain and the tax
credit, under the previous law, equivalent to the amount of discount given as the just
compensation therefor. The reason is that (1) the discount would have formed part of
the gross sales of the establishment were it not for the law prescribing the 20%
discount, and (2) the permanent reduction in total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit. The flaw in this
reasoning is in its premise. It presupposes that the subject regulation, which impacts the
pricing and, hence, the profitability of a private establishment, automatically amounts to
a deprivation of property without due process of law. If this were so, then all price and
rate of return on investment control laws would have to be invalidated because they
impact, at some level, the regulated establishments profits or income/gross sales, yet
there is no provision for payment of just compensation. It would also mean that
overnment cannot set price or rate of return on investment limits, which reduce the
profits or income/gross sales of private establishments, if no just compensation is paid
even if the measure is not confiscatory. The obiter is, thus, at odds with the settled
octrine that the State can employ police power measures to regulate the pricing of
goods and services, and, hence, the profitability of business establishments in order to
pursue legitimate State objectives for the common good, provided that the regulation
does not go too far as to amount to "taking."79
In City of Manila v. Laguio, Jr.,80 we recognized that x x x a taking also could be found
if government regulation of the use of property went "too far." When regulation reaches
a certain magnitude, in most if not in all cases there must be an exercise of eminent
domain and compensation to support the act. While property may be regulated to a
certain extent, if regulation goes too far it will be recognized as a taking. No formula or
rule can be devised to answer the questions of what is too far and when 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
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or
confiscatory.
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 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 Corporation 86 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 Corporation 88 that
the 20% senior citizen discount and tax deduction scheme are valid exercises of police
power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory.
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.
As already mentioned, Congress may be reasonably assumed to have foreseen this
eventuality. But, more importantly, this goes into the wisdom, efficacy and expediency of
the subject law which is not proper for judicial review. In a way, this law pursues its
social equity objective in a non-traditional manner unlike past and existing direct subsidy
programs of the government for the poor and marginalized sectors of our society. Verily,
Congress must be given sufficient leeway in formulating welfare legislations given the
enormous challenges that the government faces relative to, among others, resource
adequacy and administrative capability in implementing social reform measures which
aim to protect and uphold the interests of those most vulnerable in our society. In the
process, the individual, who enjoys the rights, benefits and privileges of living in a
democratic polity, must bear his share in supporting measures intended for the common
good. This is only fair. In fine, without the requisite showing of a clear and unequivocal
breach of the Constitution, the validity of the assailed law must be sustained.
Refutation of the Dissent
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 990 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 necessary to resolve the
issue as to whether the revenue regulation contravenes the law. Hence, the discussion
on eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that
impelled the enactment of a particular statute or legal provision. However, statements
made relative thereto are not always necessary in resolving the actual controversies
presented before it. This was the case in Central Luzon Drug Corporation96resulting 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
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 10.00 to the general public, then it shall
be sold at 8.00 ( i.e., 10.00 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 20.00 but is required to sell it at 16.00 (i.e. , 20.00 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
5.00 to produce and is sold at 10.00, then the profit 98 is 5.0099 or a profit
margin100 of 50%.101
Under the assailed law, the aforesaid product would have to be sold at 8.00 to senior
citizens yet the business would still earn 3.00102 or a 30%103 profit margin. On the
other hand, if the product costs 9.00 to produce and is required to be sold at 8.00 to
senior citizens, then the business would experience a loss of 1.00.104
But note that since not all customers of a business establishment are senior citizens,
the business establishment may continue to earn 1.00 from non-senior citizens which,
in turn, can offset any loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not
prevent the business establishment from revising its pricing strategy.
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 10.00 a piece to X and Y
resulting in income/gross sales of 20.00 (10.00 + 10.00). With the passage of the
law, A must now sell his product to X at 8.00 (i.e., 10.00 less 20%) so that his
income/gross sales would be 18.00 (8.00 + 10.00) or lower by 2.00. To prevent
this from happening, A decides to increase the price of his products to 11.11 per
piece. Thus, he sells his product to X at 8.89 (i.e. , 11.11 less 20%) and to Y at
11.11. As a result, his income/gross sales would still be 20.00 105 (8.89 + 11.11).
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.
The Dissent, however, states that The explanation by the majority that private
establishments can always increase their prices to recover the mandatory discount will
only encourage private establishments to adjust their prices upwards to the prejudice of
customers who do not enjoy the 20% discount. It was likewise suggested that if a
company increases its prices, despite the application of the 20% discount, the
establishment becomes more profitable than it was before the implementation of R.A.
7432. Such an economic justification is self-defeating, for more consumers will suffer
from the price increase than will benefit from the 20% discount. Even then, such ability
to increase prices cannot legally validate a violation of the eminent domain clause. 106
But, if it is possible that the business establishment, by adjusting its prices, will suffer no
reduction in its profits or income/gross sales (or suffer some reduction but continue to
operate profitably) despite giving the discount, what would be the basis to strike down
the law? If it is possible that the business establishment, by adjusting its prices, will not
be unduly burdened, how can there be a finding that the assailed law is an
unconstitutional exercise of police power or eminent domain? That there may be a
burden placed on business establishments or the consuming public as a result of the
operation of the assailed law is not, by itself, a ground to declare it unconstitutional for
this goes into the wisdom and expediency of the law.
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
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.
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
In fine, because of the possible scenarios discussed above, we cannot assume that the
20% discount results in a permanent reduction in profits or income/gross sales, much
less that business establishments are forced to operate at a loss under the assailed law.
And, even if we gratuitously assume that the 20% discount results in some degree of
reduction in profits or income/gross sales, we cannot assume that such reduction is
arbitrary, oppressive or confiscatory. To repeat, there is no actual proof to back up this
claim, and it could be that the loss suffered by a business establishment was
occasioned through its fault or negligence in not adapting to the effects of the assailed
law. The law uniformly applies to all business establishments covered thereunder.
There is, therefore, no unjust discrimination as the aforesaid business establishments
are faced with the same constraints. The necessity of proof is all the more pertinent in
this case because, as similarly observed by Justice Velasco in his Concurring Opinion,
the law has been in operation for over nine years now. However, the grim picture
painted by petitioners on the 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:
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
Two things may be said of this argument. First, it contradicts the rest of the arguments
of the Dissent. After it states that the issue of profit or loss is immaterial, the Dissent
proceeds to argue that the 20% discount is not a minimal loss111 and that the 20%
discount forces business establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation, 113 which the Dissent essentially
adopts and relies on, is premised on the permanent reduction of total revenues and the
loss that business establishments will be forced to suffer in arguing that the 20%
discount constitutes a "taking" under the power of eminent domain. Thus, when the
Dissent now argues that the issue of profit or loss is immaterial, it contradicts itself
because it later argues, in order to justify that there is a "taking" under the power of
eminent domain in this case, that the 20% discount forces business establishments to
suffer a significant loss or to operate at a loss. Second, this argument suffers from the
same flaw as the Dissent's original arguments. It is an erroneous characterization of the
20% discount. According to the Dissent, the 20% discount is part of the gross sales and,
hence, private property belonging to business establishments. However, as previously
discussed, the 20% discount is not private property actually owned and/or used by the
business establishment. It should be distinguished from properties like lands or
buildings actually used in the operation of a business establishment which, if
appropriated for public use, would amount to a "taking" under the power of eminent
domain. Instead, the 20% discount is a regulatory measure which impacts the pricing
and, hence, the profitability of business establishments. At the time the discount is
imposed, no particular property of the business establishment can be said to be "taken."
That is, the State does not acquire or take anything from the business establishment in
the way that it takes a piece of private land to build a public road. While the 20%
discount may form part of the potential profits or income/gross sales 114 of the business
establishment, as similarly characterized by Justice Bersamin in his Concurring Opinion,
potential profits or income/gross sales are not private property, specifically cash or
money, already belonging to the business establishment. They are a mere expectancy
because they are potential fruits of the successful conduct of the business. Prior to the
sale of goods or services, a business establishment may be subject to State
regulations, such as the 20% senior citizen discount, which may impact the level or
amount of profits or income/gross sales that can be generated by such establishment.
For this reason, the validity of the discount is to be determined based on its overall
effects on the operations of the business establishment.
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
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
eventually leads to the destruction of the business and the total loss of the capital
invested therein. But, again, petitioners in this case failed to prove that the subject
regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return on
investment control laws to justify the senior citizen discount law. According to the
Dissent, only profits from industries imbued with public interest may be regulated
because this is a condition of their franchises. Profits of establishments without
franchises cannot be regulated permanently because there is no law regulating their
profits. The Dissent concludes that the permanent reduction of total revenues or gross
sales of business establishments without franchises is a taking of private property under
the power of eminent domain. In making this argument, it is unfortunate that the Dissent
quotes only a portion of the ponencia The subject regulation may be said to be similar
to, but with substantial distinctions from, price control or rate of return on investment
control laws which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with public interest in
order to protect consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of these corporations
considering that they have a monopoly over the goods or services that they provide to
the general public. The subject regulation differs therefrom in that (1) the discount does
not prevent the establishments from adjusting the level of prices of their goods and
services, and (2) the discount does not apply to all customers of a given establishment
but only to the class of senior citizens. x x x116
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. As previously discussed, the ability to adjust prices allows
the establishment subject to the senior citizen discount to prevent or mitigate any
reduction of profits or income/gross sales arising from the giving of the discount. In
contrast, establishments subject to price and rate of return on investment control laws
cannot adjust prices accordingly. Certainly, there is no intention to say that price and
rate of return on investment control laws are the justification for the senior citizen
discount law. Not at all. The justification for the senior citizen discount law is the plenary
powers of Congress. The legislative power to regulate business establishments is broad
and covers a wide array of areas and subjects. It is well within Congress legislative
powers to regulate the profits or income/gross sales of industries and enterprises, even
those without franchises. For what are franchises but mere legislative enactments?
There is nothing in the Constitution that prohibits Congress from regulating the profits or
income/gross sales of industries and enterprises without franchises. On the contrary,
the social justice provisions of the Constitution enjoin the State to regulate the
"acquisition, ownership, use, and disposition" of property and its increments. 117
This may cover the regulation of profits or income/gross sales of all businesses, without
qualification, to attain the objective of diffusing wealth in order to protect and enhance
the right of all the people to human dignity.118
Thus, under the social justice policy of the Constitution, business establishments may
be compelled to contribute to uplifting the plight of vulnerable or marginalized groups in
our society provided that the regulation is not arbitrary, oppressive or confiscatory, or is
not in breach of some specific constitutional limitation. When the Dissent, therefore,
states that the "profits of private establishments which are 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 5.00 to produce a product and it sells the same
at 10.00 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 7.00 to produce the
same product. The profit per product of the company would be reduced to 3.00 with a
profit margin of 30%. The net effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen, the minimum wage law could,
likewise, lead to a permanent reduction of profits. Does this mean that the minimum
wage law should, likewise, be declared unconstitutional on the mere plea that it results
in a permanent reduction of profits? Taking it a step further, suppose the company
decides to increase the price of its product in order to offset the effects of the increase
in labor cost; does this mean that the minimum wage law, following the reasoning of the
Dissent, is unconstitutional because the consuming public is effectively made to
subsidize the wage of a group of laborers, i.e., minimum wage earners? The same
reasoning can be adopted relative to the examples cited by the Dissent which,
according to it, are valid police power regulations. Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law
would effectively increase the labor cost of a business establishment.1wphi1 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 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
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 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.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23645 October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications,
and DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C.
Zaballero and Solicitor Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by
Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts
shall order for the period from August nineteen to September thirty every year the
printing and issue of semi-postal stamps of different denominations with face
value showing the regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps: Provided, That no
such additional charge of five centavos shall be imposed on newspapers. The
additional proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National Treasury to be
expended by the Philippine Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued
four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9
(August 28, 1958), and 10 (July 15, 1960). All these administrative orders were issued
with the approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from
August 19 to September 30, 1957, for lack of time. However, two denominations
of such stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will
soon be released for use by the public on their mails to be posted during the
same period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year starting in 1958, no
mail matter of whatever class, and whether domestic or foreign, posted at any
Philippine Post Office and addressed for delivery in this country or abroad, shall
be accepted for mailing unless it bears at least one such semi-postal stamp
showing the additional value of five centavos intended for the Philippine
Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one
such semi-postal stamp if posted during the period above stated starting with the
year 1958, in addition to being charged the usual postage prescribed by existing
regulations. In the case of business reply envelopes and cards mailed during
said period, such stamp should be collected from the addressees at the time of
delivery. Mails entitled to franking privilege like those from the office of the
President, members of Congress, and other offices to which such privilege has
been granted, shall each also bear one such semi-postal stamp if posted during
the said period.
Mails posted during the said period starting in 1958, which are found in street or
post-office mail boxes without the required semi-postal stamp, shall be returned
to the sender, if known, with a notation calling for the affixing of such stamp. If
the sender is unknown, the mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to
franking privilege which are not exempted from the payment of the five centavos
intended for the Philippine Tuberculosis Society, such extra charge may be
collected in cash, for which official receipt (General Form No. 13, A) shall be
issued, instead of affixing the semi-postal stamp in the manner hereinafter
indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the
extra charge of five centavos for the Philippine Tuberculosis Society shall be
collected on each separately-addressed piece of second-class mail matter, and
the total sum thus collected shall be entered in the same official receipt to be
issued for the postage at the second-class rate. In making such entry, the total
number of pieces of second-class mail posted shall be stated, thus: "Total charge
for TB Fund on 100 pieces . .. P5.00." The extra charge shall be entered
separate from the postage in both of the official receipt and the Record of
Collections.
2. First-class and third-class mail permits. Mails to be posted without postage
affixed under permits issued by this Bureau shall each be charged the usual
postage, in addition to the five-centavo extra charge intended for said society.
The total extra charge thus received shall be entered in the same official receipt
to be issued for the postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter
under metered mail permit issued by this Bureau, the extra charge of five
centavos for said society shall be collected in cash and an official receipt issued
for the total sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards
and envelopes to holders of business reply permits, the five-centavo charge
intended for said society shall be collected in cash on each reply card or
envelope delivered, in addition to the required postage which may also be paid in
cash. An official receipt shall be issued for the total postage and total extra
charge received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and
other persons entitled to the franking privilege under existing laws may pay in
cash such extra charge intended for said society, instead of affixing the semi-
postal stamps to their mails, provided that such mails are presented at the post-
office window, where the five-centavo extra charge for said society shall be
collected on each piece of such mail matter. In such case, an official receipt shall
be issued for the total sum thus collected, in the manner stated in subparagraph
1.
Mail under permits, metered mails and franked mails not presented at the post-
office window shall be affixed with the necessary semi-postal stamps. If found in
mail boxes without such stamps, they shall be treated in the same way as herein
provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications
received for mailing under any class of mail matter, including newspapers and
magazines admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter
at the post office in San Fernando, Pampanga. Because this letter, addressed to a
certain Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the
special anti-TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court
of First Instance of Pampanga, to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it violates the equal
protection clause of the Constitution as well as the rule of uniformity and equality of
taxation. The lower court declared the statute and the orders unconstitutional; hence
this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents'
contention that declaratory relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While conceding that the mailing by
the petitioner of a letter without the additional anti-TB stamp was a violation of Republic
Act 1635, as amended, the trial court nevertheless refused to dismiss the action on the
ground that under section 6 of Rule 64 of the Rules of Court, "If before the final
termination of the case a breach or violation of ... a statute ... should take place, the
action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought
"before breach or violation" of the statute has been committed. Rule 64, section 1 so
provides. Section 6 of the same rule, which allows the court to treat an action for
declaratory relief as an ordinary action, applies only if the breach or violation occurs
after the filing of the action but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before
the firing of this action, then indeed the remedy of declaratory relief cannot be availed
of, much less can the suit be converted into an ordinary action.

Nor is there merit in the petitioner's argument that the mailing of the letter in question
did not constitute a breach of the statute because the statute appears to be addressed
only to postal authorities. The statute, it is true, in terms provides that "no mail matter
shall be accepted in the mails unless it bears such semi-postal stamps." It does not
follow, however, that only postal authorities can be guilty of violating it by accepting
mails without the payment of the anti-TB stamp. It is obvious that they can be guilty of
violating the statute only if there are people who use the mails without paying for the
additional anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the
law, so in the matter of the anti-TB stamp the mere attempt to use the mails without the
stamp constitutes a violation of the statute. It is not required that the mail be accepted
by postal authorities. That requirement is relevant only for the purpose of fixing the
liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct
because this suit was filed not only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other mail that he might send in the
future. Thus, in his complaint, the petitioner prayed that due course be given to "other
mails without the semi-postal stamps which he may deliver for mailing ... if any, during
the period covered by Republic Act 1635, as amended, as well as other mails hereafter
to be sent by or to other mailers which bear the required postage, without collection of
additional charge of five centavos prescribed by the same Republic Act." As one whose
mail was returned, the petitioner is certainly interested in a ruling on the validity of the
statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution.
More specifically the claim is made that it constitutes mail users into a class for the
purpose of the tax while leaving untaxed the rest of the population and that even among
postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar
exemption to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails.
As such the objections levelled against it must be viewed in the light of applicable
principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the
subjects of taxation and to grant exemptions.4 This power has aptly been described as
"of wide range and flexibility."5 Indeed, it is said that in the field of taxation, more than in
other areas, the legislature possesses the greatest freedom in classification. 6 The
reason for this is that traditionally, classification has been a device for fitting tax
programs to local needs and usages in order to achieve an equitable distribution of the
tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some
reasonable relationship to the end sought to be attained, and that absent such
relationship the selection of mail users is constitutionally impermissible. This is
altogether a different proposition. As explained in Commonwealth v. Life Assurance
Co.:8
While the principle that there must be a reasonable relationship between
classification made by the legislation and its purpose is undoubtedly true in some
contexts, it has no application to a measure whose sole purpose is to raise
revenue ... So long as the classification imposed is based upon some standard
capable of reasonable comprehension, be that standard based upon ability to
produce revenue or some other legitimate distinction, equal protection of the law
has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at
527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S.
56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the
clearest demonstration that it sanctions invidious discrimination, which is all that the
Constitution forbids. The remedy for unwise legislation must be sought in the legislature.
Now, the classification of mail users is not without any reason. It is based on ability to
pay, let alone the enjoyment of a privilege, and on administrative convinience. In the
allocation of the tax burden, Congress must have concluded that the contribution to the
anti-TB fund can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience.
For it is now a settled principle of law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class."9 In the case of the anti-TB
stamps, undoubtedly, the single most important and influential consideration that led the
legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through the
regular means of collection. On the other hand, by placing the duty of collection on
postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a
class. Mail users were already a class by themselves even before the enactment of the
statue and all that the legislature did was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences
that exist in fact is living law; to disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant
exemption must likewise be conceded as a necessary corollary. Tax exemptions are too
common in the law; they have never been thought of as raising issues under the equal
protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are
exempted from the levy the law and administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The application of the lower courts theory
would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of
equality.
As the United States Supreme Court has said, the legislature may withhold the burden
of the tax in order to foster what it conceives to be a beneficent enterprise. 11 This is the
case of newspapers which, under the amendment introduced by Republic Act 2631, are
exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and
such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which lists
the various offices and instrumentalities of the Government exempt from the payment of
the anti-TB stamp, is but a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis
to the exclusion of other diseases which, it is said, are equally a menace to public
health. But it is never a requirement of equal protection that all evils of the same genus
be eradicated or none at all.13 As this Court has had occasion to say, "if the law
presumably hits the evil where it is most felt, it is not to be overthrown because there
are other instances to which it might have been applied." 14
2. The petitioner further argues that the tax in question is invalid, first, because it is not
levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is
that derived from his enjoyment of the privileges of living in an organized society,
established and safeguarded by the devotion of taxes to public purposes. Any other
view would preclude the levying of taxes except as they are used to compensate for the
burden on those who pay them and would involve the abandonment of the most
fundamental principle of government that it exists primarily to provide for the common
good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail
or the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge
for the transaction, operating equally on all persons within the class regardless of the
amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other
$172. The inequality of the tax, so far as actual values are concerned, is
manifest. But, here again equality in this sense has to yield to practical
considerations and usage. There must be a fixed and indisputable mode of
ascertaining a stamp tax. In another sense, moreover, there is equality. When
the taxes on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent. Valuation is
not the only thing to be considered. As was pointed out by the court of appeals,
the familiar stamp tax of 2 cents on checks, irrespective of income or earning
capacity, and many others, illustrate the necessity and practice of sometimes
substituting count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is
spent for the benefit of the Philippine Tuberculosis Society, a private organization,
without appropriation by law. But as the Solicitor General points out, the Society is not
really the beneficiary but only the agency through which the State acts in carrying out
what is essentially a public function. The money is treated as a special fund and as such
need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is
one of the grounds on which the lower court invalidated Republic Act 1631, as
amended, namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that
for certain classes of mail matters (such as mail permits, metered mails, business reply
cards, etc.), the five-centavo charge may be paid in cash instead of the purchase of the
anti-TB stamp. It further states that mails deposited during the period August 19 to
September 30 of each year in mail boxes without the stamp should be returned to the
sender, if known, otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may
be necessary to prevent a failure of the undertaking. The authority given to the
Postmaster General to raise funds through the mails must be liberally construed,
consistent with the principle that where the end is required the appropriate means are
given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of
the additional charge but also that of the regular postage. In the case of business reply
cards, for instance, it is obvious that to require mailers to affix the anti-TB stamp on their
cards would be to make them pay much more because the cards likewise bear the
amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do
not bear the anti-TB stamp, but a declaration therein that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamp" is a declaration that such
mail matter is nonmailable within the meaning of section 1952 of the Administrative
Code. Administrative Order 7 of the Postmaster General is but a restatement of the law
for the guidance of postal officials and employees. As for Administrative Order 9, we
have already said that in listing the offices and entities of the Government exempt from
the payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed,
without pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

Separate Opinions
FERNANDO, J., concurring:
I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635 as
amended by Republic Act No. 2631 and the majority opinion expounded with Justice
Castro's usual vigor and lucidity subject to one qualification. With all due recognition of
its inherently persuasive character, it would seem to me that the same result could be
achieved if reliance be had on police power rather than the attribute of taxation, as the
constitutional basis for the challenged legislation.
1. For me, the state in question is an exercise of the regulatory power connected with
the performance of the public service. I refer of course to the government postal
function, one of respectable and ancient lineage. The United States Constitution of 1787
vests in the federal government acting through Congress the power to establish post
offices.1 The first act providing for the organization of government departments in the
Philippines, approved Sept. 6, 1901, provided for the Bureau of Post Offices in the
Department of Commerce and Police.2 Its creation is thus a manifestation of one of the
many services in which the government may engage for public convenience and public
interest. Such being the case, it seems that any legislation that in effect would require
increase cost of postage is well within the discretionary authority of the government.
It may not be acting in a proprietary capacity but in fixing the fees that it collects for the
use of the mails, the broad discretion that it enjoys is undeniable. In that sense, the
principle announced in Esteban v. Cabanatuan City,3 in an opinion by our Chief Justice,
while not precisely controlling furnishes for me more than ample support for the validity
of the challenged legislation. Thus: "Certain exactions, imposable under an authority
other than police power, are not subject, however, to qualification as to the amount
chargeable, unless the Constitution or the pertinent laws provide otherwise. For
instance, the rates of taxes, whether national or municipal, need not be reasonable, in
the absence of such constitutional or statutory limitation. Similarly, when a municipal
corporation fixes the fees for the use of its properties, such as public markets, it does
not wield the police power, or even the power of taxation. Neither does it assert
governmental authority. It exercises merely a proprietary function. And, like any private
owner, it is in the absence of the aforementioned limitation, which does not exist in
the Charter of Cabanatuan City (Republic Act No. 526) free to charge such sums as
it may deem best, regardless of the reasonableness of the amount fixed, for the
prospective lessees are free to enter into the corresponding contract of lease, if they are
agreeable to the terms thereof or, otherwise, not enter into such contract."
2. It would appear likewise that an expression of one's personal view both as to
the attitude and awareness that must be displayed by inferior tribunals when the
"delicate and awesome" power of passing on the validity of a statute would not be
inappropriate. "The Constitution is the supreme law, and statutes are written and
enforced in submission to its commands."4 It is likewise common place in constitutional
law that a party adversely affected could, again to quote from Cardozo, "invoke, when
constitutional immunities are threatened, the judgment of the courts." 5
Since the power of judicial review flows logically from the judicial function of
ascertaining the facts and applying the law and since obviously the Constitution is the
highest law before which statutes must bend, then inferior tribunals can, in the
discharge of their judicial functions, nullify legislative acts. As a matter of fact, in clear
cases, such is not only their power but their duty. In the language of the present Chief
Justice: "In fact, whenever the conflicting claims of the parties to a litigation cannot
properly be settled without inquiring into the validity of an act of Congress or of either
House thereof, the courts have, not only jurisdiction to pass upon said issue but, also,
the duty to do so, which cannot be evaded without violating the fundamental law and
paving the way to its eventual destruction."6
Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must
ever be kept in mind. Thus: "It must be evident to any one that the power to declare a
legislative enactment void is one which the judge, conscious of the fallibility of the
human judgment, will shrink from exercising in any case where he can conscientiously
and with due regard to duty and official oath decline the responsibility." 7
There must be a caveat however to the above Cooley pronouncement. Such should not
be the case, to paraphrase Freund, when the challenged legislation imperils freedom of
the mind and of the person, for given such an undesirable situation, "it is freedom that
commands a momentum of respect." Here then, fidelity to the great ideal of liberty
enshrined in the Constitution may require the judiciary to take an uncompromising and
militant stand. As phrased by us in a recent decision, "if the liberty involved were
freedom of the mind or the person, the standard of its validity of governmental acts is
much more rigorous and exacting."8
So much for the appropriate judicial attitude. Now on the question of awareness of the
controlling constitutional doctrines.
There is nothing I can add to the enlightening discussion of the equal protection aspect
as found in the majority opinion. It may not be amiss to recall to mind, however, the
language of Justice Laurel in the leading case of People v. Vera,9 to the effect that the
basic individual right of equal protection "is a restraint on all the three grand
departments of our government and on the subordinate instrumentalities and
subdivisions thereof, and on many constitutional powers, like the police power, taxation
and eminent domain."10 Nonetheless, no jurist was more careful in avoiding the dire
consequences to what the legislative body might have deemed necessary to promote
the ends of public welfare if the equal protection guaranty were made to constitute an
insurmountable obstacle.
A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite
evident from the various citations from his pen found in the majority opinion. For him, it
would be a misreading of the equal protection clause to ignore actual conditions and
settled practices. Not for him the at times academic and sterile approach to
constitutional problems of this sort. Thus: "It would be a narrow conception of
jurisprudence to confine the notion of 'laws' to what is found written on the statute
books, and to disregard the gloss which life has written upon it. Settled state practice
cannot supplant constitutional guaranties, but it can establish what is state law. The
Equal Protection Clause did not write an empty formalism into the Constitution. Deeply
embedded traditional ways of carrying out state policy, such as those of which petitioner
complains, are often tougher and truer law than the dead words of the written
text."11 This too, from the same distinguished jurist: "The Constitution does not require
things which are different in fact or opinion to be treated in law as though they were the
same."12
Now, as to non-delegation. It is to be admitted that the problem of non-delegation of
legislative power at times occasions difficulties. Its strict view has been announced by
Justice Laurel in the aforecited case of People v. Verain this language. Thus: "In testing
whether a statute constitutes an undue delegation of legislative power or not, it is usual
to inquire whether the statute was complete in all its terms and provisions when it left
the hands of the legislature so that nothing was left to the judgment of any other
appointee or delegate of the legislature. .... In United States v. Ang Tang Ho ..., this
court adhered to the foregoing rule; it held an act of the legislature void in so far as it
undertook to authorize the Governor-General, in his discretion, to issue a proclamation
fixing the price of rice and to make the sale of it in violation of the proclamation a
crime."13
Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor
General,14 specially where the delegation deals not with an administrative function but
one essentially and eminently legislative in character. What could properly be
stigmatized though to quote Justice Cardozo, is delegation of authority that is
"unconfined and vagrant, one not canalized within banks which keep it from
overflowing."15
This is not the situation as it presents itself to us. What was delegated was power not
legislative in character. Justice Laurel himself, in a later case, People v.
Rosenthal,16 admitted that within certain limits, there being a need for coping with the
more intricate problems of society, the principle of "subordinate legislation" has been
accepted, not only in the United States and England, but in practically all modern
governments. This view was reiterated by him in a 1940 decision, Pangasinan
Transportation Co., Inc. v. Public Service Commission.17 Thus: "Accordingly, with the
growing complexity of modern life, the multiplication of the subjects of governmental
regulation, and the increased difficulty of administering the laws, there is a constantly
growing tendency toward the delegation of greater powers by the legislature, and
toward the approval of the practice by the courts."
In the light of the above views of eminent jurists, authoritative in character, of both the
equal protection clause and the non-delegation principle, it is apparent how far the lower
court departed from the path of constitutional orthodoxy in nullifying Republic Act No.
1635 as amended. Fortunately, the matter has been set right with the reversal of its
decision, the opinion of the Court, manifesting its fealty to constitutional law precepts,
which have been reiterated time and time again and for the soundest of reasons.

Republic of the Philippines


Supreme Court
Manila

THIRD DIVISION

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


Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008

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

DECISION
REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other
issuances. The Constitution vests that power not only in the Supreme Court but in all
Regional Trial Courts.

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

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations


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

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


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

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


fertilizer pricing formula a capital contribution component of not less
than P10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of fertilizers
in the Philippines.[5] (Underscoring supplied)

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

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

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

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

RTC Disposition

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

WHEREFORE, in view of the foregoing, the Court hereby renders


judgment in favor of the plaintiff and against the defendant Planters
Product, Inc., ordering the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the


time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.

SO ORDERED.[11]

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

It is apparent that the imposition of P10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the state is
plenary. Comprehensive and supreme, the principal check upon its abuse
resting in the responsibility of the members of the legislature to their
constituents. However, there are two kinds of limitations on the power of
taxation: the inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public
purposes:

The power to tax can be resorted to only for a


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

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

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


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

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

CA Decision

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

IN VIEW OF ALL THE FOREGOING, the decision appealed from is


hereby AFFIRMED, subject to the MODIFICATION that the award of
attorneys fees is hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:

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

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


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

However, the courts are not precluded from exercising such power when
the following requisites are obtaining in a controversy before it: First, there
must be before the court an actual case calling for the exercise of judicial
review. Second, the question must be ripe for adjudication. Third, the
person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised
at the earliest opportunity; and lastly, the issue of constitutionality must be
the very lis mota of the case (Integrated Bar of the Philippines v.
Zamora, 338 SCRA 81 [2000]).

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

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

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

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

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

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

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

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

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

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


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

The capital recovery component shall be in the minimum


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

The capital recovery component shall continue to be


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

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


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

PPI moved for reconsideration but its motion was denied.[19] It then filed the
present petition with this Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A
CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE
OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON
OR ENTITY WHICH HAS NO STANDING TO DO SO.

II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY
LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER
FOR PUBLIC PURPOSES.

III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE
GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO
AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED
DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE
OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.

IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring
supplied)

Our Ruling

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

Fertiphil has locus standi because it


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

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

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


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

In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public because of
conflicting public policy issues. [24] On one end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful government intrusion and illegal official
action. At the other end, there is the public policy precluding excessive judicial
interference in official acts, which may unnecessarily hinder the delivery of basic public
services.

In this jurisdiction, We have adopted the direct injury test to determine locus
standi in public suits. In People v. Vera,[25] it was held that a person who impugns the
validity of a statute must have a personal and substantial interest in the case such that
he has sustained, or will sustain direct injury as a result. The direct injury test in public
suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of
the 1997 Rules of Civil Procedure.[26]

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

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


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

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

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

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

RTC may resolve constitutional issues; the


constitutional issue was adequately raised
in the complaint; it is the lis mota of the
case.

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

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

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


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

SECTION 5. The Supreme Court shall have the following powers:

xxxx

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


as the law or the Rules of Court may provide, final judgments and orders
of lower courts in:

(a) All cases in which the constitutionality or validity of


any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question. (Underscoring
supplied)

In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to
resolve constitutional issues, thus:

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

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


Affairs,[33] this Court reiterated:

There is no denying that regular courts have jurisdiction over cases


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

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


or availed of through any of the actions cognizable by courts of justice, not necessarily
in a suit for declaratory relief. Such review may be had in criminal actions, as in People
v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in
ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of
laws prohibiting aliens from acquiring public lands. The constitutional issue, however,
(a) must be properly raised and presented in the case, and (b) its resolution is
necessary to a determination of the case, i.e., the issue of constitutionality must be the
very lis motapresented.[37]

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

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

(c) It favors only one private domestic corporation,


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

xxxx

(e) It was a glaring example of crony capitalism, a


forced program through which the PPI, having been
presumptuously masqueraded as the fertilizer industry itself,
was the sole and anointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special


assessment and its imposition is tantamount to illegal exaction amounting
to a denial of due process since the persons of entities which had to bear
the burden of paying the CRC derived no benefit therefrom; that on the
contrary it was used by PPI in trying to regain its former despicable
monopoly of the fertilizer industry to the detriment of other distributors and
importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the
statute on the ground that the law imposing the levy is unconstitutional. The thesis is
that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no
legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle against unjust
enrichment. The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not
declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the
refund. The issue of constitutionality is the very lis mota of the complaint with the RTC.

The P10 levy under LOI No. 1465 is an


exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the
power of taxation. It claims that the LOI was implemented for the purpose of assuring
the fertilizer supply and distribution in the country and for benefiting a foundation
created by law to hold in trust for millions of farmers their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give
benefit to a private company. The levy was imposed to pay the corporate debt of
PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is
still unconstitutional because it did not promote the general welfare of the people or
public interest.

Police power and the power of taxation are inherent powers of the State. These
powers are distinct and have different tests for validity. Police power is the power of the
State to enact legislation that may interfere with personal liberty or property in order to
promote the general welfare,[39] while the power of taxation is the power to levy taxes to
be used for public purpose. The main purpose of police power is the regulation of a
behavior or conduct, while taxation is revenue generation. The lawful subjects and
lawful means tests are used to determine the validity of a law enacted under the police
power.[40] The power of taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the
State of its taxation power. While it is true that the power of taxation can be used as an
implement of police power,[41] the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.[42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle
registration fee is not an exercise by the State of its police power, but of its taxation
power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act


123 and Section 61 of the Land Transportation and Traffic Code that the
legislative intent and purpose behind the law requiring owners of vehicles
to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the
operating expenses of the administering agency. x x x Fees may be
properly regarded as taxes even though they also serve as an instrument
of regulation.

Taxation may be made the implement of the state's police power


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

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

Taxes are exacted only for a public


purpose. The P10 levy is unconstitutional
because it was not for a public purpose.
The levy was imposed to give undue benefit
to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are
exacted only for a public purpose. They cannot be used for purely private purposes or
for the exclusive benefit of private persons.[46] The reason for this is simple. The power
to tax exists for the general welfare; hence, implicit in its power is the limitation that it
should be used only for a public purpose. It would be a robbery for the State to tax its
citizens and use the funds generated for a private purpose. As an old United States
case bluntly put it: To lay with one hand, the power of the government on the property of
the citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done
under the forms of law and is called taxation.[47]

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

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

The purpose of a law is evident from its text or inferable from other secondary
sources. Here, We agree with the RTC and that CA that the levy imposed under LOI
No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:

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


fertilizer pricing formula a capital contribution component of not less
than P10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital
contribution shall be applied by FPA to all domestic sales of fertilizers
in the Philippines.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given
a literal meaning. In this case, the text of the LOI is plain that the levy was imposed in
order to raise capital for PPI. The framers of the LOI did not even hide the insidious
purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary
of the taxes levied under the LOI. We find it utterly repulsive that a tax law would
expressly name a private company as the ultimate beneficiary of the taxes to be levied
from the public. This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the P10 levy was conditional and
dependent upon PPI becoming financially viable. This suggests that the levy was
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when
PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic
sellers of fertilizer to pay the levy is made indefinite. They are required to continuously
pay the levy until adequate capital is raised for PPI.

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

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

Republic of the Philippines


Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS


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

Gentlemen:

This has reference to Planters which is the principal importer and


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

In connection with the foregoing, the Republic of the Philippines (the


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

xxxx

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


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

xxxx

The capital recovery component shall continue to be charged and


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

REPUBLIC OF THE PHILIPPINES


By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
It is clear from the Letter of Understanding that the levy was imposed precisely to
pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to
ensure the stability of the fertilizer industry in the country. The letter of understanding
and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of
a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under
LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the
public purpose requirement for tax laws.

The LOI is still unconstitutional even if


enacted under the police power; it did not
promote public interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it would
still be invalid for failing to comply with the test of lawful subjects and lawful
means. Jurisprudence states the test as follows: (1) the interest of the public generally,
as distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private
corporation. We quote with approval the CA ratiocination on this point, thus:

It is upon applying this established tests that We sustain the trial


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

The general rule is that an unconstitutional


law is void; the doctrine of operative fact is
inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which provides that
an unconstitutional law has an effect before being declared unconstitutional. PPI wants
to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be


entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not raise
the applicability of the doctrine of operative fact with the RTC and the CA. It cannot
belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords no
protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not
been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid
should be refunded in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their


violation or non-observance shall not be excused by disuse or custom or
practice to the contrary.

When the courts declare a law to be inconsistent with the


Constitution, the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only


applies as a matter of equity and fair play.[55] It nullifies the effects of an unconstitutional
law by recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot
always be ignored. The past cannot always be erased by a new judicial declaration.[56]

The doctrine is applicable when a declaration of unconstitutionality will impose an


undue burden on those who have relied on the invalid law. Thus, it was applied to a
criminal case when a declaration of unconstitutionality would put the accused in double
jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a law
creating it.[58]

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

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November
28, 2003 is AFFIRMED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of
Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for
appellee.

DECISION
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance
of Rizal, dismissing the above entitled case and dissolving the writ of preliminary
injunction therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with injunction, upon the ground that Republic
Act No. 920, entitled An Act Appropriating Funds for Public Works, approved on June
20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 for the
construction, reconstruction, repair, extension and improvement of Pasig feeder road
terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen.
Segundo Gen. Delgado Gen. Malvar Gen. Lim); that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were nothing but
projected and planned subdivision roads, not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal (according to the tracings attached to the
petition as Annexes A and B, near Shaw Boulevard, not far away from the intersection
between the latter and Highway 54), which projected feeder roads do not connect any
government property or any important premises to the main highway; that the
aforementioned Antonio Subdivision (as well as the lands on which said feeder roads
were to be construed) were private properties of respondent Jose C. Zulueta, who, at
the time of the passage and approval of said Act, was a member of the Senate of the
Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the
council, subject to the condition that the donor would submit a plan of the said roads
and agree to change the names of two of them; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to the approval of Republic
Act. No. 920, and the sum of P85,000.00 appropriated therein for the construction of the
projected feeder roads in question; that the municipal council of Pasig endorsed said
letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present has
not made any endorsement thereon that inasmuch as the projected feeder roads in
question were private property at the time of the passage and approval of Republic Act
No. 920, the appropriation of P85,000.00 therein made, for the construction,
reconstruction, repair, extension and improvement of said projected feeder roads, was
illegal and, therefore, void ab initio; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads in
question were public roads and not private streets of a private subdivision; that, in
order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation, respondents Zulueta executed on December 12, 1953,
while he was a member of the Senate of the Philippines, an alleged deed of donation
copy of which is annexed to the petition of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same date, accepted by the
then Executive Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation violated the provision of our
fundamental law prohibiting members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected
feeder roads in question with public funds would greatly enhance or increase the value
of the aforementioned subdivision of respondent Zulueta, aside from relieving him from
the burden of constructing his subdivision streets or roads at his own expense; that the
construction of said projected feeder roads was then being undertaken by the Bureau of
Public Highways; and that, unless restrained by the court, the respondents would
continue to execute, comply with, follow and implement the aforementioned illegal
provision of law, to the irreparable damage, detriment and prejudice not only to the
petitioner but to the Filipino nation.
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be
declared null and void; that the alleged deed of donation of the feeder roads in question
be declared unconstitutional and, therefore, illegal; that a writ of injunction be issued
enjoining the Secretary of Public Works and Communications, the Director of the
Bureau of Public Works and Highways and Jose C. Zulueta from ordering or allowing
the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No.
920, and the disbursing officers of the Department of Public Works and Highways from
making any further payments out of said funds provided for in Republic Act No. 920;
and that pending final hearing on the merits, a writ of preliminary injunction be issued
enjoining the aforementioned parties respondent from making and securing any new
and further releases on the aforesaid item of Republic Act No. 920 and from making any
further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had no
legal capacity to sue, and that the petition did not state a cause of action. In support
to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its
provincial governor, should represent the Province of Rizal, pursuant to section 1683 of
the Revised Administrative Code; that said respondent is not aware of any law which
makes illegal the appropriation of public funds for the improvements of . . . private
property; and that, the constitutional provision invoked by petitioner is inapplicable to
the donation in question, the same being a pure act of liberality, not a contract. The
other respondents, in turn, maintained that petitioner could not assail the appropriation
in question because there is no actual bona fide case . . . in which the validity of
Republic Act No. 920 is necessarily involved and petitioner has not shown that he has
a personal and substantial interest in said Act and that its enforcement has caused or
will cause him a direct injury.
Acting upon said motions to dismiss, the lower court rendered the aforementioned
decision, dated October 29, 1953, holding that, since public interest is involved in this
case, the Provincial Governor of Rizal and the provincial fiscal thereof who represents
him therein, have the requisite personalities to question the constitutionality of the
disputed item of Republic Act No. 920; that the legislature is without power appropriate
public revenues for anything but a public purpose, that the instructions and
improvement of the feeder roads in question, if such roads where private property,
would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street
purposes only and for no other purposes whatsoever; it being expressly understood that
should the Government of the Republic of the Philippines violate the condition hereby
imposed upon it, the title to the land hereby donated shall, upon such violation, ipso
facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is
absolutely forbidden by the Constitution and consequently illegal, for Article 1409 of
the Civil Code of the Philippines, declares in existence and void from the very beginning
contracts whose cause, objector purpose is contrary to law, morals . . . or public
policy; that the legality of said donation may not be contested, however, by petitioner
herein, because his interest are not directly affected thereby; and that, accordingly, the
appropriation in question should be upheld and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein. According
to said petition, respondent Zulueta is the owner of several parcels of residential land
situated in Pasig, Rizal, and known as the Antonio Subdivision, certain portions of which
had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating
P85,000.00 for the construction, reconstruction, repair, extension and improvement of
said roads, was passed by Congress, as well as when it was approved by the President
on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect
of relieving respondent Zulueta of the burden of constructing his subdivision streets or
roads at his own expenses, 1 and would greatly enhance or increase the value of the
subdivision of said respondent. The lower court held that under these circumstances,
the appropriation in question was clearly for a private, not a public purpose.
Respondents do not deny the accuracy of this conclusion, which is self-
evident. 2 However, respondent Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of
any law which makes illegal the appropriation of public funds for the improvement of
what we, in the meantime, may assume as private property . . . (Record on Appeal, p.
33.)
The first proposition must be rejected most emphatically, it being inconsistent with the
nature of the Government established under the Constitution of the Republic of the
Philippines and the system of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating legislative enactments
deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the
principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude
of the interest to be affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the promotion of
private interest and the prosperity of private enterprises or business, does not justify
their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes
only, discussed supra sec. 14, money raised by taxation can be expended only for
public purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646;
emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may
be used only for public purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for one purpose and
the devotion thereof to another purpose, no appropriation of state funds can be made
for other than for a public purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the use of public funds is whether
the statute is designed to promote the public interest, as opposed to the furtherance of
the advantage of individuals, although each advantage to individuals
might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from
being patently sound, are a necessary corollary to our democratic system of
government, which, as such, exists primarily for the promotion of the general welfare.
Besides, reflecting as they do, the established jurisprudence in the United States, after
whose constitutional system ours has been patterned, said views and jurisprudence are,
likewise, part and parcel of our own constitutional law.
This notwithstanding, the lower court felt constrained to uphold the appropriation in
question, upon the ground that petitioner may not contest the legality of the donation
above referred to because the same does not affect him directly. This conclusion is,
presumably, based upon the following premises, namely: (1) that, if valid, said donation
cured the constitutional infirmity of the aforementioned appropriation; (2) that the latter
may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and
admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its
passage or approval, not upon events occurring, or acts performed, subsequently
thereto, unless the latter consists of an amendment of the organic law, removing, with
retrospective operation, the constitutional limitation infringed by said statute. Referring
to the P85,000.00 appropriation for the projected feeder roads in question, the legality
thereof depended upon whether said roads were public or private property when the bill,
which, latter on, became Republic Act 920, was passed by Congress, or, when said bill
was approved by the President and the disbursement of said sum became effective, or
on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed belonged then to respondent Zulueta, the
result is that said appropriation sought a private purpose, and hence, was null and
void. 4 The donation to the Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the purpose of giving a
semblance of legality, or legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification of said donation need
not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including therefore, his right to
the annulment of said contract, even though such creditors are not affected by the
same, except indirectly, in the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who
will sustain a direct injury in consequence of its enforcement. Yet, there are many
decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of
public funds, 5 upon the theory that the expenditure of public funds by an officer of the
State for the purpose of administering an unconstitutional act constitutes
a misapplication of such funds, which may be enjoined at the request of a
taxpayer. 6 Although there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute, the general rule is that not only persons
individually affected, but also taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham
vs. Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that
the relationship of a taxpayer of the U.S. to its Federal Government is different from that
of a taxpayer of a municipal corporation to its government. Indeed, under
the composite system of government existing in the U.S., the states of the Union are
integral part of the Federation from an international viewpoint, but, each state enjoys
internally a substantial measure of sovereignty, subject to the limitations imposed by the
Federal Constitution. In fact, the same was made by representatives of each state of the
Union, not of the people of the U.S., except insofar as the former represented the
people of the respective States, and the people of each State has, independently of that
of the others, ratified said Constitution. In other words, the Federal Constitution and the
Federal statutes have become binding upon the people of the U.S. in consequence of
an act of, and, in this sense, through the respective states of the Union of which they
are citizens. The peculiar nature of the relation between said people and the Federal
Government of the U.S. is reflected in the election of its President, who is chosen
directly, not by the people of the U.S., but by electors chosen by each State, in such
manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).
The relation between the people of the Philippines and its taxpayers, on the other hand,
and the Republic of the Philippines, on the other, is not identical to that obtaining
between the people and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people and taxpayers of each
state and the government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that of the states
of the Union, insofar as the simple and unitary type of our national government is not
subject to limitations analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state public funds which has
been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601)
has greater application in the Philippines than that adopted with respect to acts of
Congress of the United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation
of a land by the Province of Tayabas, two (2) taxpayers thereof were allowed to
intervene for the purpose of contesting the price being paid to the owner thereof, as
unduly exorbitant. It is true that in Custodio vs. President of the Senate (42 Off. Gaz.,
1243), a taxpayer and employee of the Government was not permitted to question the
constitutionality of an appropriation for backpay of members of Congress. However,
in Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on
Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers
impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2)
cases the importance of the issues therein raised is present in the case at bar.
Again, like the petitioners in the Rodriguez and Barredo cases, petitioner herein is not
merely a taxpayer. The Province of Rizal, which he represents officially as its Provincial
Governor, is our most populated political subdivision, 8 and, the taxpayers therein bear a
substantial portion of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case
sufficiently justify petitioners action in contesting the appropriation and donation in
question; that this action should not have been dismissed by the lower court; and that
the writ of preliminary injunction should have been maintained.
WHEREFORE, the decision appealed from is hereby REVERSED, and the records are
remanded to the lower court for further proceedings not inconsistent with this decision,
with the costs of this instance against respondent Jose C. Zulueta. It is SO ORDERED.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera,
Gutierrez David, Paredes, and Dizon, JJ., concur.

EN BANC

ABAKADA GURO PARTY LIST G.R. No. 168056


(Formerly AASJAS) OFFICERS
SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO,
Petitioners, Present:

DAVIDE, JR., C.J.,


PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE
SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,
Respondents.

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

AQUILINO Q. PIMENTEL, JR., LUISA P. G.R. No. 168207


EJERCITO-ESTRADA, JINGGOY E.
ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA III,
Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.


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

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

ASSOCIATION OF PILIPINAS SHELL G.R. No. 168461


DEALERS, INC. represented by its
President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION
represented by its President, RUTH E.
BARBIBI; ASSOCIATION OF CALTEX
DEALERS OF THE PHILIPPINES
represented by its President,
MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the
name and style of ANB NORTH SHELL
SERVICE STATION; LOURDES
MARTINEZ doing business under the
name and style of SHELL GATE N.
DOMINGO; BETHZAIDA TAN doing
business under the name and style of
ADVANCE SHELL STATION;
REYNALDO P. MONTOYA doing
business under the name and style of
NEW LAMUAN SHELL SERVICE
STATION; EFREN SOTTO doing
business under the name and style of
RED FIELD SHELL SERVICE STATION;
DONICA CORPORATION represented
by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business
under the name and style of R&R
PETRON STATION; PETER M. UNGSON
doing business under the name and
style of CLASSIC STAR GASOLINE
SERVICE STATION; MARIAN SHEILA A.
LEE doing business under the name
and style of NTE GASOLINE & SERVICE
STATION; JULIAN CESAR P. POSADAS
doing business under the name and
style of STARCARGA ENTERPRISES;
ADORACION MAEBO doing business
under the name and style of CMA
MOTORISTS CENTER; SUSAN M.
ENTRATA doing business under the
name and style of LEONAS GASOLINE
STATION and SERVICE CENTER;
CARMELITA BALDONADO doing
business under the name and style of
FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing
business under the name and style of
LORPED SERVICE CENTER; RHEAMAR
A. RAMOS doing business under the
name and style of RJRAM PTT GAS
STATION; MA. ISABEL VIOLAGO doing
business under the name and style of
VIOLAGO-PTT SERVICE CENTER;
MOTORISTS HEART CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE
CORPORATION represented by its
Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE
STANDARD OIL CORPORATION
represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA;
ROMEO MANUEL doing business under
the name and style of ROMMAN
GASOLINE STATION; ANTHONY
ALBERT CRUZ III doing business under
the name and style of TRUE SERVICE
STATION,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as


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

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

FRANCIS JOSEPH G. ESCUDERO, G.R. No. 168463


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

- versus -

CESAR V. PURISIMA, in his capacity as


Secretary of Finance, GUILLERMO L.
PARAYNO, JR., in his capacity as
Commissioner of Internal Revenue, and
EDUARDO R. ERMITA, in his capacity
as Executive Secretary,
Respondents.

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

BATAAN GOVERNOR ENRIQUE T. G.R. No. 168730


GARCIA, JR.
Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his


capacity as the Executive Secretary;
HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON.
JOSE MARIO BUNAG, in his capacity
as the OIC Commissioner of the Bureau
of Internal Revenue; and HON.
ALEXANDER AREVALO, in his capacity
as the OIC Commissioner of the Bureau Promulgated:
of Customs,
Respondents. September 1, 2005

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

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of


all, should be borne by everyone, and the more man enjoys the
advantages of society, the more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for


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

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

LEGISLATIVE HISTORY

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

House Bill No. 3555[2] was introduced on first reading on January 7, 2005. The
House Committee on Ways and Means approved the bill, in substitution of House Bill
No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004.
The President certified the bill on January 7, 2005 for immediate enactment.
On January 27, 2005, the House of Representatives approved the bill on second and
third reading.

House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105
introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep.
Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee on Ways
and Means approved the bill on February 2, 2005. The President also certified it as
urgent on February 8, 2005. The House of Representatives approved the bill on second
and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill
No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838 and 1873,
taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto
sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The
President certified the bill on March 11, 2005, and was approved by the Senate on
second and third reading on April 13, 2005.

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

Before long, the Conference Committee on the Disagreeing Provisions of House


Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having met and
discussed in full free and conference, recommended the approval of its report, which
the Senate did on May 10, 2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate
version was transmitted to the President, who signed the same into law on May 24,
2005. Thus, came R.A. No. 9337.

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

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the
Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its
issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation,
let me just tell you a little background. You know
when the law took effect on July 1, 2005, the Court
issued a TRO at about 5 oclock in the afternoon. But
before that, there was a lot of complaints aired on
television and on radio. Some people in a gas station
were complaining that the gas prices went up by 10%.
Some people were complaining that their electric bill
will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices
that theyll have to pay would have to go up by 10%.
While all that was being aired, per your presentation
and per our own understanding of the law, thats not
true. Its not true that the e-vat law necessarily
increased prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive


Order that granted the Petroleum companies some
subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

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


impact . . . interrupted

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

ATTY. BANIQUED : Yes, Your Honor.


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

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the


retail price by 10% to cover the E-Vat tax. If you
consider the excise tax and the import duties, the Net
Tax would probably be in the neighborhood of 7%?
We are not going into exact figures I am just trying to
deliver a point that different industries, different
products, different services are hit differently. So its
not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr.


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

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

J. PANGANIBAN : There are other products that the people were


complaining on that first day, were being increased
arbitrarily by 10%. And thats one reason among many
others this Court had to issue TRO because of the
confusion in the implementation. Thats why we added
as an issue in this case, even if its tangentially taken
up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were
subjected to the mercy of that confusion of an across
the board increase of 10%, which you yourself now
admit and I think even the Government will admit is
incorrect. In some cases, it should be 3% only, in
some cases it should be 6% depending on these
mitigating measures and the location and situation of
each product, of each service, of each company, isnt
it?

ATTY. BANIQUED : Yes, Your Honor.


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

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

G.R. No. 168056

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

. . . That the President, upon the recommendation of the Secretary


of Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic


Product (GDP) of the previous year exceeds two and four-fifth percent (2
4/5%); or

(ii) National government deficit as a percentage of GDP of the


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

Petitioners argue that the law is unconstitutional, as it constitutes abandonment


by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section
28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

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


for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No.
9337.
Aside from questioning the so-called stand-by authority of the President to
increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of
legislative power, petitioners also contend that the increase in the VAT rate to 12%
contingent on any of the two conditions being satisfied violates the due process clause
embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and
additional tax burden on the people, in that: (1) the 12% increase is ambiguous because
it does not state if the rate would be returned to the original 10% if the conditions are no
longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the VAT collection to at least
2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

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

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the
Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of
R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the
input tax on depreciable goods shall be amortized over a 60-month
period, if the acquisition, excluding the VAT components, exceeds
One Million Pesos (P1, 000,000.00);

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

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

Petitioners contend that these provisions are unconstitutional for being arbitrary,
oppressive, excessive, and confiscatory.

Petitioners argument is premised on the constitutional right of non-deprivation of


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

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

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

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph


G. Escudero filed this petition for certiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of


legislative power, in violation of Article VI, Section 28(2) of the
Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in


deleting the no pass on provisions present in Senate Bill No. 1950
and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28,


34, 116, 117, 119, 121, 125,[7] 148, 151, 236, 237 and 288, which
were present in Senate Bill No. 1950, violates Article VI, Section
24(1) of the Constitution, which provides that all appropriation,
revenue or tariff bills shall originate exclusively in the House of
Representatives

G.R. No. 168730

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


for certiorari and prohibition on July 20, 2005, alleging unconstitutionality of the law on
the ground that the limitation on the creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect, thus violating the principle
that tax collection and revenue should be solely allocated for public purposes and
expenditures. Petitioner Garcia further claims that allowing these establishments to
pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1)
of the Constitution.
RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of


respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the
presumption of constitutionality and petitioners failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA


630 (1994), respondents argue that the procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive origination of revenue measures and
the power of the Senate concomitant thereto, have already been settled. With regard to
the issue of undue delegation of legislative power to the President, respondents
contend that the law is complete and leaves no discretion to the President but to
increase the rate to 12% once any of the two conditions provided therein arise.

Respondents also refute petitioners argument that the increase to 12%, as well
as the 70% limitation on the creditable input tax, the 60-month amortization on the
purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final
withholding tax by government agencies, is arbitrary, oppressive, and confiscatory, and
that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the
governments fiscal reform agenda. A reform in the value-added system of taxation is
the core revenue measure that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the


Constitution:

a. Article VI, Section 24, and


b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,


107 and 108 of the NIRC, violate the following provisions of the
Constitution:

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


b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and
110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following provisions of the Constitution:

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


b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and
concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds
from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter,


exchange or lease of goods or properties and services. [8] Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid to the
buyer,[9] with the seller acting merely as a tax collector.[10] The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in, without transferring the burden to someone
else.[11]Examples are individual and corporate income taxes, transfer taxes, and
residence taxes.[12]

In the Philippines, the value-added system of sales taxation has long been in
existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax
computed under the cost deduction method and was payable only by the original
sellers. The single-stage system was subsequently modified, and a mixture of the cost
deduction method and tax credit method was used to determine the value-added tax
payable.[13] Under the tax credit method, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and
imports.[14]

It was only in 1987, when President Corazon C. Aquino issued Executive Order
No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0%
or 10% on all sales using the tax credit method.[15]

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,[16] R.A.
No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or the Tax Reform Act of
1997,[18] and finally, the presently beleaguered R.A. No. 9337, also referred to by
respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.


PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and


b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral
Conference Committee exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4,


5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and
Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax
to be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950


regarding other kinds of taxes in addition to the value-added tax.

Petitioners now beseech the Court to define the powers of the Bicameral
Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are
intrinsic in any legislative body for, as unerringly elucidated by Justice Story, [i]f the
power did not exist, it would be utterly impracticable to transact the business of
the nation, either at all, or at least with decency, deliberation, and order. [19] Thus,
Article VI, Section 16 (3) of the Constitution provides that each House may determine
the rules of its proceedings. Pursuant to this inherent constitutional power to promulgate
and implement its own rules of procedure, the respective rules of each house of
Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives


provides as follows:

Sec. 88. Conference Committee. In the event that the House does
not agree with the Senate on the amendment to any bill or joint resolution,
the differences may be settled by the conference committees of both
chambers.
In resolving the differences with the Senate, the House panel shall,
as much as possible, adhere to and support the House Bill. If the
differences with the Senate are so substantial that they materially impair
the House Bill, the panel shall report such fact to the House for the latters
appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall


contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure.

...

The Chairman of the House panel may be interpellated on the


Conference Committee Report prior to the voting thereon. The House
shall vote on the Conference Committee Report in the same manner and
procedure as it votes on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the
House of Representatives on the provision of any bill or joint resolution,
the differences shall be settled by a conference committee of both Houses
which shall meet within ten (10) days after their composition. The
President shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and


sufficiently explicit statement of the changes in, or amendments to the
subject measure, and shall be signed by a majority of the members of
each House panel, voting separately.

A comparative presentation of the conflicting House and Senate


provisions and a reconciled version thereof with the explanatory statement
of the conference committee shall be attached to the report.

...

The creation of such conference committee was apparently in response to a


problem, not addressed by any constitutional provision, where the two houses of
Congress find themselves in disagreement over changes or amendments introduced by
the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to
discipline its members, may the Court then delve into the details of how Congress
complies with its internal rules or how it conducts its business of passing legislation?
Note that in the present petitions, the issue is not whether provisions of the rules of both
houses creating the bicameral conference committee are unconstitutional, but whether
the bicameral conference committee has strictly complied with the rules of both
houses, thereby remaining within the jurisdiction conferred upon it by Congress.

In the recent case of Farias vs. The Executive Secretary,[20] the Court En
Banc, unanimously reiterated and emphasized its adherence to the enrolled bill
doctrine, thus, declining therein petitioners plea for the Court to go behind the enrolled
copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said committees proceedings, the alleged
violation of said committees of the rules of both houses, and the disappearance or
deletion of one of the provisions in the compromise bill submitted by the bicameral
conference committee. It was argued that such irregularities in the passage of the law
nullified R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held thus:

Under the enrolled bill doctrine, the signing of a bill by the Speaker
of the House and the Senate President and the certification of the
Secretaries of both Houses of Congress that it was passed are conclusive
of its due enactment. A review of cases reveals the Courts consistent
adherence to the rule. The Court finds no reason to deviate from the
salutary rule in this case where the irregularities alleged by the
petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the
House. This Court is not the proper forum for the enforcement of
these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance
the courts have no concern. Whatever doubts there may be as to the
formal validity of Rep. Act No. 9006 must be resolved in its favor. The
Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying


forms of expression, all deny to the courts the power to
inquire into allegations that, in enacting a law, a House
of Congress failed to comply with its own rules, in the
absence of showing that there was a violation of a
constitutional provision or the rights of private
individuals. In Osmea v. Pendatun, it was held: At any rate,
courts have declared that the rules adopted by deliberative
bodies are subject to revocation, modification or waiver at
the pleasure of the body adopting them. And it has been
said that Parliamentary rules are merely procedural, and
with their observance, the courts have no concern. They
may be waived or disregarded by the legislative body.
Consequently, mere failure to conform to parliamentary
usage will not invalidate the action (taken by a
deliberative body) when the requisite number of
members have agreed to a particular
[21]
measure. (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where
petitioners allege irregularities committed by the conference committee in introducing
changes or deleting provisions in the House and Senate bills. Akin to
the Farias case,[22] the present petitions also raise an issue regarding the actions taken
by the conference committee on matters regarding Congress compliance with its own
internal rules. As stated earlier, one of the most basic and inherent power of the
legislature is the power to formulate rules for its proceedings and the discipline of its
members. Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference
committee if it believes that said members violated any of its rules of proceedings. Even
the expanded jurisdiction of this Court cannot apply to questions regarding only the
internal operation of Congress, thus, the Court is wont to deny a review of the internal
proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case
of Tolentino vs. Secretary of Finance,[23] the Court already made the pronouncement
that [i]f a change is desired in the practice [of the Bicameral Conference
Committee] it must be sought in Congress since this question is not covered by
any constitutional provision but is only an internal rule of each house. [24] To date,
Congress has not seen it fit to make such changes adverted to by the Court. It seems,
therefore, that Congress finds the practices of the bicameral conference committee to
be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the
proceedings of the bicameral conference committees, the Court deems it necessary to
dwell on the issue. The Court observes that there was a necessity for a conference
committee because a comparison of the provisions of House Bill Nos. 3555 and 3705
on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT Provides for 12% VAT in Provides for a single rate of
on every sale of goods general on sales of goods 10% VAT on sale of goods
or properties or properties and reduced or properties (amending
(amending Sec. 106 of rates for sale of certain Sec. 106 of NIRC), 10%
NIRC); 12% VAT on locally manufactured VAT on sale of services
importation of goods goods and petroleum including sale of electricity
(amending Sec. 107 of products and raw materials by generation companies,
NIRC); and 12% VAT to be used in the transmission and
on sale of services and manufacture thereof distribution companies, and
use or lease of (amending Sec. 106 of use or lease of properties
properties (amending NIRC); 12% VAT on (amending Sec. 108 of
Sec. 108 of NIRC) importation of goods and NIRC)
reduced rates for certain
imported products
including petroleum
products (amending Sec.
107 of NIRC); and 12%
VAT on sale of services
and use or lease of
properties and a reduced
rate for certain services
including power generation
(amending Sec. 108 of
NIRC)

With regard to the no pass-on provision

No similar provision Provides that the VAT Provides that the VAT
imposed on power imposed on sales of
generation and on the sale electricity by generation
of petroleum products shall companies and services of
be absorbed by generation transmission companies
companies or sellers, and distribution companies,
respectively, and shall not as well as those of
be passed on to franchise grantees of
consumers electric utilities shall not
apply to residential
end-users. VAT shall be
absorbed by generation,
transmission, and
distribution companies.
With regard to 70% limit on input tax credit

Provides that the input No similar provision Provides that the input tax
tax credit for capital credit for capital goods on
goods on which a VAT which a VAT has been paid
has been paid shall be shall be equally distributed
equally distributed over over 5 years or the
5 years or the depreciable life of such
depreciable life of such capital goods; the input tax
capital goods; the input credit for goods and
tax credit for goods services other than capital
and services other than goods shall not exceed
capital goods shall not 90% of the output VAT.
exceed 5% of the total
amount of such goods
and services; and for
persons engaged in
retail trading of goods,
the allowable input tax
credit shall not exceed
11% of the total
amount of goods
purchased.

With regard to amendments to be made to NIRC provisions regarding income


and excise taxes

No similar provision No similar provision Provided for amendments


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

The disagreements between the provisions in the House bills and the Senate bill
were with regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT
imposed on electricity generation, transmission and distribution companies should not
be passed on to consumers, as proposed in the Senate bill, or both the VAT imposed
on electricity generation, transmission and distribution companies and the VAT imposed
on sale of petroleum products should not be passed on to consumers, as proposed in
the House bill; (3) in what manner input tax credits should be limited; (4) and whether
the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes
should be amended.

There being differences and/or disagreements on the foregoing provisions of the


House and Senate bills, the Bicameral Conference Committee was mandated by the
rules of both houses of Congress to act on the same by settling said differences and/or
disagreements. The Bicameral Conference Committee acted on the disagreeing
provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would


appear from the Conference Committee Report that the Bicameral Conference
Committee tried to bridge the gap in the difference between the 10% VAT rate
proposed by the Senate, and the various rates with 12% as the highest VAT rate
proposed by the House, by striking a compromise whereby the present 10% VAT
rate would be retained until certain conditions arise, i.e., the value-added tax
collection as a percentage of gross domestic product (GDP) of the previous year
exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the
previous year exceeds 1%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on


electricity generation, transmission and distribution companies should not be passed on
to consumers or whether both the VAT imposed on electricity generation, transmission
and distribution companies and the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be


limited or not, the Bicameral Conference Committee decided to adopt the position of
the House by putting a limitation on the amount of input tax that may be credited
against the output tax, although it crafted its own language as to the amount of the
limitation on input tax credits and the manner of computing the same by providing
thus:

(A) Creditable Input Tax. . . .

...

Provided, The input tax on goods purchased or imported in a


calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition and the fifty-
nine (59) succeeding months if the aggregate acquisition
cost for such goods, excluding the VAT component thereof,
exceeds one million Pesos (P1,000,000.00): PROVIDED,
however, that if the estimated useful life of the capital good
is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period:
...

(B) Excess Output or Input Tax. If at the end of any taxable


quarter the output tax exceeds the input tax, the excess shall
be paid by the VAT-registered person. If the input tax
exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters: PROVIDED that the
input tax inclusive of input VAT carried over from the
previous quarter that may be credited in every quarter shall
not exceed seventy percent (70%) of the output VAT:
PROVIDED, HOWEVER, THAT any input tax attributable to
zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal revenue
taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate


income tax, franchise, percentage and excise taxes, the conference committee decided
to include such amendments and basically adopted the provisions found in Senate Bill
No. 1950, with some changes as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and
Senate Rules, the Bicameral Conference Committee is mandated to settle the
differences between the disagreeing provisions in the House bill and the Senate bill.
The term settle is synonymous to reconcile and harmonize.[25] To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a)
adopt the specific provisions of either the House bill or Senate bill, (b) decide that
neither provisions in the House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between
the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference


Committee on disagreeing provisions were meant only to reconcile and harmonize the
disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the
subject embraced by the original provisions.

The so-called stand-by authority in favor of the President, whereby the rate of
10% VAT wanted by the Senate is retained until such time that certain conditions arise
when the 12% VAT wanted by the House shall be imposed, appears to be a
compromise to try to bridge the difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such compromise is still totally within the subject of
what rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the


proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph
Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-
on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple.
And we were thinking that no sector should be a beneficiary of legislative
grace, neither should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not
confuse the bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have yet to see a
VAT with a no pass-though provision. So, the thinking of the Senate is
basically simple, lets keep the VAT simple.[26] (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-
on provision never really enjoyed the support of either House.[27]

With regard to the amount of input tax to be credited against output tax, the
Bicameral Conference Committee came to a compromise on the percentage rate of the
limitation or cap on such input tax credit, but again, the change introduced by the
Bicameral Conference Committee was totally within the intent of both houses to put a
cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the
House of Representatives, one of the major objectives was to plug a glaring loophole in
the tax policy and administration by creating vital restrictions on the claiming of input
VAT tax credits . . . and [b]y introducing limitations on the claiming of tax credit, we are
capping a major leakage that has placed our collection efforts at an apparent
disadvantage.[28]

As to the amendments to NIRC provisions on taxes other than the value-added


tax proposed in Senate Bill No. 1950, since said provisions were among those referred
to it, the conference committee had to act on the same and it basically adopted the
version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference


Committee were germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of
discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine Judges Association vs.
Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court recognized the long-
standing legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House. Thus, in
the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its


report an entirely new provision that is not found either in the House bill or
in the Senate bill. If the committee can propose an amendment consisting
of one or two provisions, there is no reason why it cannot propose several
provisions, collectively considered as an amendment in the nature of a
substitute, so long as such amendment is germane to the subject of the
bills before the committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act of the
legislative department. The charge that in this case the Conference
Committee acted as a third legislative chamber is thus without any
basis.[31] (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2)
of the Constitution on the No-Amendment Rule

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has


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

Petitioners argument that the practice where a bicameral conference committee


is allowed to add or delete provisions in the House bill and the Senate bill after these
had passed three readings is in effect a circumvention of the no amendment rule (Sec.
26 (2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its
ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committees Report in
these cases must have undergone three readings in each of the two
houses. If that be the case, there would be no end to negotiation since
each house may seek modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as referring only to


bills introduced for the first time in either house of Congress, not to
the conference committee report.[32](Emphasis supplied)

The Court reiterates here that the no-amendment rule refers only to the
procedure to be followed by each house of Congress with regard to bills initiated
in each of said respective houses, before said bill is transmitted to the other
house for its concurrence or amendment. Verily, to construe said provision in a way
as to proscribe any further changes to a bill after one house has voted on it would lead
to absurdity as this would mean that the other house of Congress would be deprived of
its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26
(2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in
bills that have been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of


the Constitution on Exclusive Origination of Revenue
Bills
Coming to the issue of the validity of the amendments made regarding the NIRC
provisions on corporate income taxes and percentage, excise taxes. Petitioners refer to
the following provisions, to wit:

Section
27 Rates of Income Tax on Domestic
Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and
keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial
Intermediaries
148 Excise Tax on manufactured oils and
other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or
commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at
all originate from the House. They aver that House Bill No. 3555 proposed amendments
only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No.
3705 proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the Senate amended but which
amendments were not found in the House bills are not intended to be amended by the
House of Representatives. Hence, they argue that since the proposed amendments did
not originate from the House, such amendments are a violation of Article VI, Section 24
of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing


increase of the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555
and 3705 that initiated the move for amending provisions of the NIRC dealing mainly
with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate
came out with Senate Bill No. 1950 proposing amendments not only to NIRC provisions
on the value-added tax but also amendments to NIRC provisions on other kinds of
taxes. Is the introduction by the Senate of provisions not dealing directly with the value-
added tax, which is the only kind of tax being amended in the House bills, still within the
purview of the constitutional provision authorizing the Senate to propose or concur with
amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case,
wherein the Court held, thus:

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

Given, then, the power of the Senate to propose amendments,


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

Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of the public
debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the
districts, the members of the House can be expected to be more
sensitive to the local needs and problems. On the other hand, the
senators, who are elected at large, are expected to approach the
same problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.[33] (Emphasis
supplied)
Since there is no question that the revenue bill exclusively originated in the
House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes, percentage,
excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions


that had not been touched in the House bills are still in furtherance of the intent of the
House in initiating the subject revenue bills. The Explanatory Note of House Bill No.
1468, the very first House bill introduced on the floor, which was later substituted by
House Bill No. 3555, stated:

One of the challenges faced by the present administration is the


urgent and daunting task of solving the countrys serious financial
problems. To do this, government expenditures must be strictly monitored
and controlled and revenues must be significantly increased. This may be
easier said than done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget by the year 2009. In
fact, several measures that will result to significant expenditure savings
have been identified by the administration. It is supported with a
credible package of revenue measures that include measures to
improve tax administration and control the leakages in revenues
from income taxes and the value-added tax (VAT). (Emphasis
supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555,
declared that:

In the budget message of our President in the year 2005, she


reiterated that we all acknowledged that on top of our agenda must be the
restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit


and eventually achieve a balanced budget by the year 2009, we need to
seize windows of opportunities which might seem poignant in the
beginning, but in the long run prove effective and beneficial to the
overall status of our economy. One such opportunity is a review of
existing tax rates, evaluating the relevance given our present
conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration
and control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the measures
from the point of national perspective, can introduce amendments within the purposes
of those bills. It can provide for ways that would soften the impact of the VAT measure
on the consumer, i.e., by distributing the burden across all sectors instead of putting it
entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph
Recto on why the provisions on income tax on corporation were included is worth
quoting:

All in all, the proposal of the Senate Committee on Ways and


Means will raise P64.3 billion in additional revenues annually even while
by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only P48.7
billion amount is from the VAT on twelve goods and services. The rest of
the tab P10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between


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

The corporate worlds equity is in form of the increase in the


corporate income tax from 32 to 35 percent, but up to 2008 only. This will
raise P10.5 billion a year. After that, the rate will slide back, not to its old
rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations,


to bear with this emergency provision that will be in effect for 1,200 days,
while we put our fiscal house in order. This fiscal medicine will have an
expiry date.

For their assistance, a reward of tax reduction awaits them. We


intend to keep the length of their sacrifice brief. We would like to assure
them that not because there is a light at the end of the tunnel, this
government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the
small man. Big business will be there to share the burden.[35]

As the Court has said, the Senate can propose amendments and in fact, the
amendments made on provisions in the tax on income of corporations are germane to
the purpose of the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise
taxes germane to the reforms to the VAT system, as these sections would cushion the
effects of VAT on consumers. Considering that certain goods and services which were
subject to percentage tax and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be paying the VAT in addition to
these taxes. Thus, there is a need to amend these sections to soften the impact of VAT.
Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the
present excise tax on bunker fuel, to lessen the effect of a VAT on this
product.

For electric utilities like Meralco, we will wipe out the franchise tax
in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil
products, so as not to destroy the VAT chain, we will however bring down
the excise tax on socially sensitive products such as diesel, bunker, fuel
and kerosene.

...

What do all these exercises point to? These are not contortions of
giving to the left hand what was taken from the right. Rather, these sprang
from our concern of softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to pay as a result of
VAT.[36]

The other sections amended by the Senate pertained to matters of tax


administration which are necessary for the implementation of the changes in the VAT
system.

To reiterate, the sections introduced by the Senate are germane to the subject
matter and purposes of the house bills, which is to supplement our countrys fiscal
deficit, among others. Thus, the Senate acted within its power to propose those
amendments.

SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of
the NIRC, violate the following provisions of the Constitution:

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


b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and
Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the NIRC giving the President
the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition
is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further


amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties.

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


and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: provided, that the
President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.

(i) value-added tax collection as a percentage


of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or

(ii) national government deficit as a percentage of GDP


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

SEC. 5. Section 107 of the same Code, as amended, is hereby


further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods.


(A) In General. There shall be levied, assessed and
collected on every importation of goods a value-added tax
equivalent to ten percent (10%) based on the total value
used by the Bureau of Customs in determining tariff and
customs duties, plus customs duties, excise taxes, if any,
and other charges, such tax to be paid by the importer prior
to the release of such goods from customs custody:
Provided, That where the customs duties are determined on
the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise
taxes, if any: provided, further, that the President, upon
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%) after any of the following
conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross


Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP
of the previous year exceeds one and one-half
percent (1 %).

SEC. 6. Section 108 of the same Code, as amended, is hereby


further amended to read as follows:

SEC. 108. Value-added Tax on Sale of Services and Use or


Lease of Properties

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


and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the
recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following
conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross


Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP
of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to
increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax
because such delegation is not within the purview of Section 28 (2), Article VI of the
Constitution, which provides:

The Congress may, by law, authorize the President to fix within


specified limits, and may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods
and properties as well as on the sale or exchange of services, which cannot be included
within the purview of tariffs under the exempted delegation as the latter refers to
customs duties, tolls or tribute payable upon merchandise to the government and
usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to
the President the legislative power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate the actions of Congress
and they should not pass to the President the decision to impose taxes. They also
argue that the law also effectively nullified the Presidents power of control, which
includes the authority to set aside and nullify the acts of her subordinates like the
Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause,
influence or create the conditions provided by the law to bring about either or both the
conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the
situation that the imposition of the 12% rate would be subject to the whim of the
Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation
without representation. They submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even give his recommendation.
Moreover, they allege that no guiding standards are provided in the law on what basis
and as to how he will make his recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.

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

The principle of separation of powers ordains that each of the three great
branches of government has exclusive cognizance of and is supreme in matters falling
within its own constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of
powers, as expressed in the Latin maxim: potestas delegata non delegari potest which
means what has been delegated, cannot be delegated. [38] This doctrine is based on the
ethical principle that such as delegated power constitutes not only a right but a duty to
be performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of the Constitution
provides that the Legislative power shall be vested in the Congress of
the Philippines which shall consist of a Senate and a House of Representatives. The
powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make a complete law complete as
to the time when it shall take effect and as to whom it shall be applicable and to
determine the expediency of its enactment.[40] Thus, the rule is that in order that a
court may be justified in holding a statute unconstitutional as a delegation of legislative
power, it must appear that the power involved is purely legislative in nature that is, one
appertaining exclusively to the legislative department. It is the nature of the power, and
not the liability of its use or the manner of its exercise, which determines the validity of
its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject


to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of


Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2)
of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the


delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth
therein the policy to be executed, carried out, or implemented by the delegate; [41] and
(b) fixes a standard the limits of which are sufficiently determinate and determinable to
which the delegate must conform in the performance of his functions. [42] A sufficient
standard is one which defines legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it. It indicates the circumstances under which
the legislative command is to be effected.[43] Both tests are intended to prevent a total
transference of legislative authority to the delegate, who is not allowed to step into the
shoes of the legislature and exercise a power essentially legislative. [44]

In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel,
expounded on the concept and extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of


legislative power or not, it is usual to inquire whether the statute was
complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other appointee
or delegate of the legislature.
...

The true distinction, says Judge Ranney, is between the


delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring an authority or
discretion as to its execution, to be exercised under and in
pursuance of the law. The first cannot be done; to the latter no valid
objection can be made.

...

It is contended, however, that a legislative act may be made to the


effect as law after it leaves the hands of the legislature. It is true that laws
may be made effective on certain contingencies, as by proclamation of the
executive or the adoption by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of the United States ruled that
the legislature may delegate a power not legislative which it may itself
rightfully exercise. The power to ascertain facts is such a power which
may be delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis of the
taking into effect of a law. That is a mental process common to all
branches of the government.Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative authority on
account of the complexity arising from social and economic forces at work
in this modern industrial age, the orthodox pronouncement of Judge
Cooley in his work on Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in the
following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to
provide that the administrative agent may determine when the
circumstances are such as require the application of a law is
defended upon the ground that at the time this authority is granted,
the rule of public policy, which is the essence of the legislative act, is
determined by the legislature. In other words, the legislature, as it is
its duty to do, determines that, under given circumstances, certain
executive or administrative action is to be taken, and that, under
other circumstances, different or no action at all is to be taken. What
is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the
ascertainment of what the facts of the case require to be done
according to the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative will must, of
course, come from Congress, but the ascertainment of the
contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that
a law shall take effect upon the happening of future specified
contingencies leaving to some other person or body the power to
determine when the specified contingency has arisen. (Emphasis
supplied).[46]

In Edu vs. Ericta,[47] the Court reiterated:

What cannot be delegated is the authority under the Constitution to


make laws and to alter and repeal them; the test is the completeness of
the statute in all its terms and provisions when it leaves the hands of the
legislature. To determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and
definiteness of the measure enacted. The legislative does not abdicate
its functions when it describes what job must be done, who is to do
it, and what is the scope of his authority. For a complex economy, that
may be the only way in which the legislative process can go forward. A
distinction has rightfully been made between delegation of power to
make the laws which necessarily involves a discretion as to what it
shall be, which constitutionally may not be done, and delegation of
authority or discretion as to its execution to be exercised under and
in pursuance of the law, to which no valid objection can be
made. The Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and practicability.
(Emphasis supplied).[48]

Clearly, the legislature may delegate to executive officers or bodies the power to
determine certain facts or conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the legislature must
prescribe sufficient standards, policies or limitations on their authority. [49] While the
power to tax cannot be delegated to executive agencies, details as to the enforcement
and administration of an exercise of such power may be left to them, including the
power to determine the existence of facts on which its operation depends.[50]

The rationale for this is that the preliminary ascertainment of facts as basis for
the enactment of legislation is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and making recommendations is the
kind of subsidiary activity which the legislature may perform through its members, or
which it may delegate to others to perform. Intelligent legislation on the complicated
problems of modern society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such information is
proper.[51] The Constitution as a continuously operative charter of government does not
require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself
detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself
properly to investigate.[52]

In the present case, the challenged section of R.A. No. 9337 is the
common proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of


Finance, shall, effective January 1, 2006, raise the rate of value-added tax
to twelve percent (12%), after any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of


Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of


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

The case before the Court is not a delegation of legislative power. It is simply
a delegation of ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified fact
or condition. It leaves the entire operation or non-operation of the 12% rate upon
factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of


discretion is the fact that the word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion.[53] Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice
but to see to it that the mandate is obeyed.[54]

Thus, it is the ministerial duty of the President to immediately impose the 12%
rate upon the existence of any of the conditions specified by Congress. This is a duty
which cannot be evaded by the President. Inasmuch as the law specifically uses the
word shall, the exercise of discretion by the President does not come into play. It is a
clear directive to impose the 12% VAT rate when the specified conditions are present.
The time of taking into effect of the 12% VAT rate is based on the happening of a
certain specified contingency, or upon the ascertainment of certain facts or conditions
by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party
List, et al. that the law effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance. The Court cannot also subscribe to the
position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the
phrase upon the recommendation of the Secretary of Finance. Neither does the Court
find persuasive the submission of petitioners Escudero, et al. that any recommendation
by the Secretary of Finance can easily be brushed aside by the President since the
former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it
simply means that as head of the Department of Finance he is the assistant and agent
of the Chief Executive. The multifarious executive and administrative functions of the
Chief Executive are performed by and through the executive departments, and the acts
of the secretaries of such departments, such as the Department of Finance, performed
and promulgated in the regular course of business, are, unless disapproved or
reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The
Secretary of Finance, as such, occupies a political position and holds office in an
advisory capacity, and, in the language of Thomas Jefferson, "should be of the
President's bosom confidence" and, in the language of Attorney-General Cushing, is
subject to the direction of the President."[55]

In the present case, in making his recommendation to the President on the


existence of either of the two conditions, the Secretary of Finance is not acting as the
alter ego of the President or even her subordinate. In such instance, he is not subject to
the power of control and direction of the President. He is acting as the agent of the
legislative department, to determine and declare the event upon which its expressed will
is to take effect.[56] The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present. His
personality in such instance is in reality but a projection of that of Congress. Thus, being
the agent of Congress and not of the President, the President cannot alter or modify or
nullify, or set aside the findings of the Secretary of Finance and to substitute the
judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1%). If
either of these two instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the 12% VAT rate must
be imposed by the President effective January 1, 2006. There is no undue delegation
of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.[57] Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only way in
which the legislative process can go forward.[58]

As to the argument of petitioners ABAKADA GURO Party List, et al. that


delegating to the President the legislative power to tax is contrary to the principle of
republicanism, the same deserves scant consideration. Congress did not delegate the
power to tax but the mere implementation of the law. The intent and will to increase the
VAT rate to 12% came from Congress and the task of the President is to simply execute
the legislative policy. That Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret the law.[59]

The insinuation by petitioners Pimentel, et al. that the President has ample powers to
cause, influence or create the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is highly speculative. The Court
does not rule on allegations which are manifestly conjectural, as these may not exist at
all.The Court deals with facts, not fancies; on realities, not appearances. When the
Court acts on appearances instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair


and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate
imposes an unfair and additional tax burden on the people. Petitioners also argue
that the 12% increase, dependent on any of the 2 conditions set forth in the
contested provisions, is ambiguous because it does not state if the VAT rate would
be returned to the original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the
two conditions set forth therein are satisfied, the President shall increase the VAT rate
to 12%. The provisions of the law are clear. It does not provide for a return to the 10%
rate nor does it empower the President to so revert if, after the rate is increased to 12%,
the VAT collection goes below the 24/5 of the GDP of the previous year or that the
national government deficit as a percentage of GDP of the previous year does not
exceed 1%.

Therefore, no statutory construction or interpretation is needed. Neither can


conditions or limitations be introduced where none is provided for. Rewriting the law is
a forbidden ground that only Congress may tread upon.[60]

Thus, in the absence of any provision providing for a return to the 10% rate,
which in this case the Court finds none, petitioners argument is, at best, purely
speculative. There is no basis for petitioners fear of a fluctuating VAT rate because the
law itself does not provide that the rate should go back to 10% if the conditions provided
in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the
law is clear and unambiguous, so that there is no occasion for the court's seeking the
legislative intent, the law must be taken as it is, devoid of judicial addition or
subtraction.[61]

Petitioners also contend that the increase in the VAT rate, which was allegedly
an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of
the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not


the only condition. There is another condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1 %).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that government
has weak or no capability of implementing the VAT or that VAT is not
effective in the function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.

2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or


less means the fiscal condition of government has reached a relatively
sound position or is towards the direction of a balanced budget position.
Therefore, there is no need to increase the VAT rate since the fiscal house
is in a relatively healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.[62]

That the first condition amounts to an incentive to the President to increase the
VAT collection does not render it unconstitutional so long as there is a public purpose
for which the law was passed, which in this case, is mainly to raise revenue. In
fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was


originally stated by Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out
of the pockets of the people as little as possible over and above
what it brings into the public treasury of the state.[63]
It simply means that sources of revenues must be adequate to meet government
expenditures and their variations.[64]

The dire need for revenue cannot be ignored. Our country is in a quagmire of
financial woe. During the Bicameral Conference Committee hearing, then Finance
Secretary Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in
right now. We are in a position where 90 percent of our revenue is used
for debt service. So, for every peso of revenue that we currently raise, 90
goes to debt service. Thats interest plus amortization of our debt. So
clearly, this is not a sustainable situation. Thats the first fact.

The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that
international financial markets. Our debt to GDP is approximately equal to
our GDP. Again, that shows you that this is not a sustainable situation.

The third thing that Id like to point out is the environment that we
are presently operating in is not as benign as what it used to be the past
five years.

What do I mean by that?

In the past five years, weve been lucky because we were operating
in a period of basically global growth and low interest rates. The past few
months, we have seen an inching up, in fact, a rapid increase in the
interest rates in the leading economies of the world. And, therefore, our
ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the
environment was not as bad as it is now, at least based on the forecast of
most financial institutions. So, we were assuming that raising 80 billion
would put us in a position where we can then convince them to improve
our ability to borrow at lower rates. But conditions have changed on us
because the interest rates have gone up. In fact, just within this room, we
tried to access the market for a billion dollars because for this year alone,
the Philippines will have to borrow 4 billion dollars. Of that amount, we
have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7
percent cost. We were trying to access last week and the market was not
as favorable and up to now we have not accessed and we might pull back
because the conditions are not very good.

So given this situation, we at the Department of Finance believe


that we really need to front-end our deficit reduction. Because it is deficit
that is causing the increase of the debt and we are in what we call a debt
spiral. The more debt you have, the more deficit you have because
interest and debt service eats and eats more of your revenue. We need to
get out of this debt spiral. And the only way, I think, we can get out of this
debt spiral is really have a front-end adjustment in our revenue base.[65]

The image portrayed is chilling. Congress passed the law hoping for rescue from
an inevitable catastrophe. Whether the law is indeed sufficient to answer the states
economic dilemma is not for the Court to judge. In the Farias case, the Court refused to
consider the various arguments raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government


policy is within the exclusive dominion of the political branches of the
government. It is not for this Court to look into the wisdom or propriety of
legislative determination. Indeed, whether an enactment is wise or unwise,
whether it is based on sound economic theory, whether it is the best
means to achieve the desired results, whether, in short, the legislative
discretion within its prescribed limits should be exercised in a particular
manner are matters for the judgment of the legislature, and the serious
conflict of opinions does not suffice to bring them within the range of
judicial cognizance.[66]

In the same vein, the Court in this case will not dawdle on the purpose of
Congress or the executive policy, given that it is not for the judiciary to "pass upon
questions of wisdom, justice or expediency of legislation.[67]

II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:

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


b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8
of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No.
9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and
confiscatory. Their argument is premised on the constitutional right against deprivation
of life, liberty of property without due process of law, as embodied in Article III, Section 1
of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee
of equal protection of the law.
The doctrine is that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.[68]

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output tax. It
states, in part: [P]rovided, that the input tax inclusive of the input VAT carried over from
the previous quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT:

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the
value-added tax due from or paid by a VAT-registered person on the importation of
goods or local purchase of good and services, including lease or use of property, in the
course of trade or business, from a VAT-registered person, and Output Tax is the value-
added tax due on the sale or lease of taxable goods or properties or services by any
person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of
input tax that may be claimed. In effect, a portion of the input tax that has already been
paid cannot now be credited against the output tax.

Petitioners argument is not absolute. It assumes that the input tax exceeds 70%
of the output tax, and therefore, the input tax in excess of 70% remains uncredited.
However, to the extent that the input tax is less than 70% of the output tax, then 100%
of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesss books of
accounts and remains creditable in the succeeding quarter/s. This is explicitly allowed
by Section 110(B), which provides that if the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. In addition, Section
112(B) allows a VAT-registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent that such input taxes have
not been applied against the output taxes. Such unused input tax may be used in
payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad


infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70%
limitation is incomplete and one-sided. It ends at the net effect that there will be
unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to the
fact that such unapplied/unutilized input tax may be credited in the subsequent periods
as allowed by the carry-over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the
operation of the 70% limitation on the input tax. According to petitioner, the limitation on
the creditable input tax in effect allows VAT-registered establishments to retain a portion
of the taxes they collect, which violates the principle that tax collection and revenue
should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by
the seller, when he buys goods. Output tax meanwhile is the tax due to the person
when he sells goods. In computing the VAT payable, three possible scenarios may
arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are
equal to the input taxes that he paid and passed on by the suppliers, then no payment is
required;

Second, when the output taxes exceed the input taxes, the person shall be liable
for the excess, which has to be paid to the Bureau of Internal Revenue (BIR); [69] and

Third, if the input taxes exceed the output taxes, the excess shall be carried over
to the succeeding quarter or quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes, at the
taxpayers option.[70]

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax.
Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In
laymans term, the value-added taxes that a person/taxpayer paid and passed on to him
by a seller can only be credited up to 70% of the value-added taxes that is due to him
on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will
subsequently remit such input tax to the BIR. The party directly liable for the payment of
the tax is the seller.[71] What only needs to be done is for the person/taxpayer to apply or
credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the
input tax partakes the nature of a property that may not be confiscated, appropriated, or
limited without due process of law.
The input tax is not a property or a property right within the constitutional purview
of the due process clause. A VAT-registered persons entitlement to the creditable input
tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in
mind for persons have no vested rights in statutory privileges. The state may change or
take away rights, which were created by the law of the state, although it may not take
away property, which was vested by virtue of such rights.[72]

Under the previous system of single-stage taxation, taxes paid at every level of
distribution are not recoverable from the taxes payable, although it becomes part of the
cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No.
273 imposing a 10% multi-stage tax on all sales, it was then that the crediting of the
input tax paid on purchase or importation of goods and services by VAT-registered
persons against the output tax was introduced.[73] This was adopted by the Expanded
VAT Law (R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).[75] The
right to credit input tax as against the output tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory,


Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar


month for use in trade or business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000.00): Provided, however, That if
the estimated useful life of the capital goods is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be creditable to the
purchaser, lessee or license upon payment of the compensation, rental,
royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the
creditable input tax on purchase or importation of capital goods with acquisition cost
of P1 Million pesos, exclusive of the VAT component. Such spread out only poses a
delay in the crediting of the input tax. Petitioners argument is without basis because the
taxpayer is not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the
creditable input tax in this case amounts to a 4-year interest-free loan to the
government.[76] In the same breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6 billion.[77] The legislature
also dispelled the fear that the provision will fend off foreign investments, saying that
foreign investors have other tax incentives provided by law, and citing the case of
China, where despite a 17.5% non-creditable VAT, foreign investments were not
deterred.[78] Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot
intervene.

With regard to the 5% creditable withholding tax imposed on payments made by


the government for taxable transactions, Section 12 of R.A. No. 9337, which amended
Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Value-added Tax. The Government or any of its


political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment
on account of each purchase of goods and services which are subject to
the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five percent (5%)
of the gross payment thereof: Provided, That the payment for lease or use
of properties or property rights to nonresident owners shall be subject to
ten percent (10%) withholding tax at the time of payment. For purposes of
this Section, the payor or person in control of the payment shall be
considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted


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

Section 114(C) merely provides a method of collection, or as stated by


respondents, a more simplified VAT withholding system. The government in this case is
constituted as a withholding agent with respect to their payments for goods and
services.

Prior to its amendment, Section 114(C) provided for different rates of value-
added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on
gross payments for services supplied by contractors other than by public works
contractors; 8.5% on gross payments for services supplied by public work contractors;
or 10% on payment for the lease or use of properties or property rights to nonresident
owners. Under the present Section 114(C), these different rates, except for the 10% on
lease or property rights payment to nonresidents, were deleted, and a uniform rate of
5% is applied.

The Court observes, however, that the law the used the word final. In tax
usage, final, as opposed to creditable, means full. Thus, it is provided in Section 114(C):
final value-added tax at the rate of five percent (5%).

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax
Reform Act of 1997), the concept of final withholding tax on income was explained, to
wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. Under the final withholding tax system
the amount of income tax withheld by the withholding agent is constituted
as full and final payment of the income tax due from the payee on the
said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the
tax or in case of underwithholding, the deficiency tax shall be collected
from the payor/withholding agent.

(B) Creditable Withholding Tax. Under the creditable withholding


tax system, taxes withheld on certain income payments are intended to
equal or at least approximate the tax due of the payee on said income.
Taxes withheld on income payments covered by the expanded withholding
tax (referred to in Sec. 2.57.2 of these regulations) and compensation
income (referred to in Sec. 2.78 also of these regulations) are creditable in
nature.

As applied to value-added tax, this means that taxable transactions with the
government are subject to a 5% rate, which constitutes as full payment of the tax
payable on the transaction. This represents the net VAT payable of the seller. The other
5% effectively accounts for the standard input VAT (deemed input VAT), in lieu of the
actual input VAT directly or attributable to the taxable transaction. [79]

The Court need not explore the rationale behind the provision. It is clear that
Congress intended to treat differently taxable transactions with the government. [80] This
is supported by the fact that under the old provision, the 5% tax withheld by the
government remains creditable against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Creditable Value-added Tax. The


Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each purchase of
goods from sellers and services rendered by contractors which are subject
to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax due at the rate of three percent
(3%) of the gross payment for the purchase of goods and six percent (6%)
on gross receipts for services rendered by contractors on every sale or
installment payment which shall be creditable against the value-added
tax liability of the seller or contractor: Provided, however, That in the
case of government public works contractors, the withholding rate shall be
eight and one-half percent (8.5%): Provided, further, That the payment for
lease or use of properties or property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at the time of payment. For
this purpose, the payor or person in control of the payment shall be
considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted


within ten (10) days following the end of the month the withholding was
made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the
word creditable exhibits Congresss intention to treat transactions with the government
differently. Since it has not been shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed, there is no reason to invalidate the
provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5%
final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners
believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax
Regulations 2005 issued by the BIR, provides that should the actual input tax exceed
5% of gross payments, the excess may form part of the cost. Equally, should the actual
input tax be less than 5%, the difference is treated as income.[81]

Petitioners also argue that by imposing a limitation on the creditable input tax, the
government gets to tax a profit or value-added even if there is no profit or value-added.

Petitioners stance is purely hypothetical, argumentative, and again, one-sided.


The Court will not engage in a legal joust where premises are what ifs, arguments,
theoretical and facts, uncertain. Any disquisition by the Court on this point will only be,
as Shakespeare describes life in Macbeth,[82] full of sound and fury, signifying nothing.

Whats more, petitioners contention assumes the proposition that there is no profit
or value-added. It need not take an astute businessman to know that it is a matter of
exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that no person or
class of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances. [83]

The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the
methods of assessment, valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent
a clear showing of unreasonableness, discrimination, or arbitrariness.[84]

Petitioners point out that the limitation on the creditable input tax if the entity has
a high ratio of input tax, or invests in capital equipment, or has several transactions with
the government, is not based on real and substantial differences to meet a valid
classification.

The argument is pedantic, if not outright baseless. The law does not make any
classification in the subject of taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear different consequences. While the
implementation of the law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the legislature has laid down
and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws
on all persons or things without distinction. This might in fact sometimes result in
unequal protection. What the clause requires is equality among equals as determined
according to a valid classification. By classification is meant the grouping of persons or
things similar to each other in certain particulars and different from all others in these
same particulars.[85]

Petitioners brought to the Courts attention the introduction of Senate Bill No.
2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6,
2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation
seeks to amend the 70% limitation by increasing the same to 90%. This, according
to petitioners, supports their stance that the 70% limitation is arbitrary and
confiscatory. On this score, suffice it to say that these are still proposed legislations.
Until Congress amends the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress


shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same class everywhere with all people
at all times.[86]

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or
12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or
12%) on sale of goods and properties, importation of goods, and sale of services and
use or lease of properties. These same sections also provide for a 0% rate on certain
sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that
will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax
paid on purchase of capital goods or the 5% final withholding tax by the government. It
must be stressed that the rule of uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only demands uniformity within the particular
class.[87]

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin.
The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with
gross annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and
agricultural food products in their original state are still not subject to the tax, [89] thus
ensuring that prices at the grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

The disputed sales tax is also equitable. It is imposed only on sales


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

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit
margins, and unduly favors those with high profit margins. Congress was not oblivious
to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt persons under Section 109(v), i.e.,
transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This
acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage
and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the
imposition of the tax on those previously exempt. Excise taxes on petroleum
products[91]and natural gas[92] were reduced. Percentage tax on domestic carriers was
removed.[93] Power producers are now exempt from paying franchise tax.[94]

Aside from these, Congress also increased the income tax rates of corporations,
in order to distribute the burden of taxation. Domestic, foreign, and non-resident
corporations are now subject to a 35% income tax rate, from a previous
32%.[95] Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporations domicile was
increased to 20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR) is
not exempt from income taxes anymore.[97] Even the sale by an artist of his works or
services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation,
which would otherwise rest largely on the consumers. It cannot therefore be gainsaid
that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is
anything but regressive. It is the smaller business with higher input tax-output tax ratio
that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This
principle was also lifted from Adam Smiths Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of


the government, as nearly as possible, in proportion to their
respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the
person affected.[98]

The VAT is an antithesis of progressive taxation. By its very nature, it is


regressive. The principle of progressive taxation has no relation with the VAT system
inasmuch as the VAT paid by the consumer or business for every goods bought or
services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small.
The disparity lies in the income earned by a person or profit margin marked by a
business, such that the higher the income or profit margin, the smaller the portion of the
income or profit that is eaten by VAT. A converso, the lower the income or profit margin,
the bigger the part that the VAT eats away. At the end of the day, it is really the lower
income group or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect
taxes, like the VAT. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect


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

Resort to indirect taxes should be minimized but not avoided


entirely because it is difficult, if not impossible, to avoid them by imposing
such taxes according to the taxpayers' ability to pay. In the case of the
VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, 3,
amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4 amending 103 of the NIRC)[99]

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is
just an enema, a first-aid measure to resuscitate an economy in distress. The Court is
neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have
the panacea for the malady that the law seeks to remedy. As in other cases, the Court
cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong
there is a remedy, and that the judiciary should stand ready to afford relief.
There are undoubtedly many wrongs the judicature may not correct, for
instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary
is the repository of remedies for all political or social ills; We should not
forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the
three, and a zealous regard of the prerogatives of each, knowing full well
that one is not the guardian of the others and that, for official wrong-doing,
each may be brought to account, either by impeachment, trial or by the
ballot box.[100]

The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds true
now. All things considered, there is no raison d'tre for the unconstitutionality of R.A. No.
9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in
G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and


implementation of R.A. No. 9337, the temporary restraining order issued by the Court
on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.
MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY
(MCIAA), Petitioner, v. CITY OF LAPU-LAPU AND ELENA T.
PACALDO, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
This is a clear opportunity for this Court to clarify the effects of our two previous
decisions, issued a decade apart, on the power of local government units to collect real
property taxes from airport authorities located within their area, and the nature or the
juridical personality of said airport authorities.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to reverse and set aside the October 8, 2007 Decision1 of the Court
of Appeals (Cebu City) in CA-G.R. SP No. 01360 and the February 12,
2008 Resolution2 denying petitioners motion for reconsideration.

THE FACTS

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was created by


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

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


created and existing under its own charter with capacity to sue and be sued.
Respondent Elena T. Pacaldo was impleaded in her capacity as the City Treasurer of
respondent City.
Upon its creation, petitioner enjoyed exemption from realty taxes under the following
provision of Republic Act No. 6958:chanRoblesvirtualLawlibrary
Section 14. Tax Exemptions. The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions, agencies and
instrumentalities: Provided, That no tax exemption herein granted shall extend to any
subsidiary which may be organized by the Authority.chanroblesvirtuallawlibrary

On September 11, 1996, however, this Court rendered a decision in Mactan-Cebu


International Airport Authority v. Marcos4 (the 1996 MCIAA case) declaring that upon
the effectivity of Republic Act No. 7160 (The Local Government Code of 1991),
petitioner was no longer exempt from real estate taxes. The Court
held:chanRoblesvirtualLawlibrary

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real property taxes granted to natural or juridical
persons, including government-owned or controlled corporations, except as provided in
the said section, and the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section 14 of its
Charter, R.A. No. 6958, has been withdrawn. x x x.chanroblesvirtuallawlibrary

On January 7, 1997, respondent City issued to petitioner a Statement of Real Estate


Tax assessing the lots comprising the Mactan International Airport in the amount of
P162,058,959.52. Petitioner complained that there were discrepancies in said
Statement of Real Estate Tax as follows:chanRoblesvirtualLawlibrary
(a) [T]he statement included lots and buildings not found in the inventory of petitioners
real properties;

(b) [S]ome of the lots were covered by two separate tax declarations which resulted in
double assessment;

(c) [There were] double entries pertaining to the same lots; and

(d) [T]he statement included lots utilized exclusively for governmental purposes. 5

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

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

Upon request of petitioners General Manager, the Secretary of the Department of


Justice (DOJ) issued Opinion No. 50, Series of 1998, 8 and we quote the pertinent
portions of said Opinion below:chanRoblesvirtualLawlibrary

You further state that among the real properties deemed transferred to MCIAA are the
airfield, runway, taxiway and the lots on which the runway and taxiway are situated, the
tax declarations of which were transferred in the name of the MCIAA. In 1997, the City
of Lapu-Lapu imposed real estate taxes on these properties invoking the provisions of
the Local Government Code.

It is your view that these properties are not subject to real property tax because they are
exclusively used for airport purposes. You said that the runway and taxiway are not only
used by the commercial airlines but also by the Philippine Air Force and other
government agencies. As such and in conjunction with the above interpretation of
Section 15 of R.A. No. 6958, you believe that these properties are considered owned by
the Republic of the Philippines. Hence, this request for opinion.

The query is resolved in the affirmative. The properties used for airport purposes
(i.e. airfield, runway, taxiway and the lots on which the runway and taxiway are
situated) are owned by the Republic of the Philippines.

x x x x

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

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

Moreover, then Undersecretary Antonio P. Belicena of the Department of Finance,


in his 1st Indorsement dated May 18, 1998, advanced that this Department (DOF)
interposes no objection to the request of Mactan Cebu International Airport
Authority for exemption from payment of real property tax on the property used
for airport purposes mentioned above.

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


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

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

Petitioner filed a petition for prohibition11 with the Regional Trial Court (RTC) of Lapu-
Lapu City with prayer for the issuance of a temporary restraining order (TRO) and/or a
writ of preliminary injunction, docketed as SCA No. 6056-L. Branch 53 of RTC Lapu-
Lapu City then issued a 72-hour TRO. The petition for prohibition sought to enjoin
respondent City from issuing a warrant of levy against petitioners properties and from
selling them at public auction for delinquency in realty tax obligations. The petition
likewise prayed for a declaration that the airport terminal building, the airfield, runway,
taxiway and the lots on which they are situated are exempted from real estate taxes
after due hearing. Petitioner based its claim of exemption on DOJ Opinion No. 50.

The RTC issued an Order denying the motion for extension of the TRO. Thus, on
December 10, 2003, respondent City auctioned 27 of petitioners properties. As there
was no interested bidder who participated in the auction sale, respondent City forfeited
and purchased said properties. The corresponding Certificates of Sale of Delinquent
Property were issued to respondent City.12chanrobleslaw

Petitioner claimed before the RTC that it had discovered that respondent City did not
pass any ordinance authorizing the collection of real property tax, a tax for the special
education fund (SEF), and a penalty interest for its nonpayment. Petitioner argued that
without the corresponding tax ordinances, respondent City could not impose and collect
real property tax, an additional tax for the SEF, and penalty interest from
petitioner.13chanrobleslaw

The RTC issued an Order14 on December 28, 2004 granting petitioners application for a
writ of preliminary injunction. The pertinent portions of the Order are quoted
below:chanRoblesvirtualLawlibrary
The supervening legal issue has rendered it imperative that the matter of the
consolidation of the ownership of the auctioned properties be placed on hold.
Furthermore, it is the view of the Court that great prejudice and damage will be suffered
by petitioner if it were to lose its dominion over these properties now when the most
important legal issue has still to be resolved by the Court. Besides, the respondents and
the intervenor have not sufficiently shown cause why petitioners application should not
be granted.

WHEREFORE, the foregoing considered, petitioners application for a writ of preliminary


injunction is granted. Consequently, upon the approval of a bond in the amount of one
million pesos (P1,000,000.00), let a writ of preliminary injunction issue enjoining the
respondents, the intervenor, their agents or persons acting in [their] behalf, to desist
from consolidating and exercising ownership over the properties of the
petitioner.chanroblesvirtuallawlibrary
However, upon motion of respondents, the RTC lifted the writ of preliminary injunction in
an Order15dated December 5, 2005. The RTC reasoned as
follows:chanRoblesvirtualLawlibrary
The respondent City, in the course of the hearing of its motion, presented to this Court a
certified copy of its Ordinance No. 44 (Omnibus Tax Ordinance of the City of Lapu-
Lapu), Section 25 whereof authorized the collection of a rate of one and one-half (1 )
[per centum] from owners, executors or administrators of any real estate lying within the
jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown in the
latest revision.

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

x x x x

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% interest allowed under Sec. 255
of the said law which provides:chanRoblesvirtualLawlibrary
In case of failure to pay the basic real property tax or any other tax levied under this
Title upon the expiration of the periods as provided in Section 250, or when due, as the
case may be, shall subject the taxpayer to the payment of interest at the rate of two
percent (2%) per month on the unpaid amount or a fraction thereof, until the delinquent
tax shall have been fully paid: Provided, however, That in no case shall the total interest
on the unpaid tax or portion thereof exceed thirty-six (36)
months.chanroblesvirtuallawlibrary
This difference does not however detract from the essential enforceability and effectivity
of Ordinance No. 44 pursuant to Section 529 of RA 7160 and Article 278 of the
Implementing Rules and Regulations. The outcome of this disparity is simply that
respondent City can only collect an interest of 2% per month on the unpaid tax.
Consequently, respondent City [has] to recompute the petitioners tax liability.

It is also the Courts perception that respondent City can still collect the additional 1%
tax on real property without an ordinance to this effect. It may be recalled that Republic
Act No. 5447 has created the Special Education Fund which is constituted from the
proceeds of the additional tax on real property imposed by the law. Respondent City
has collected this tax as mandated by this law without any ordinance for the purpose, as
there is no need for it. Even when RA 5447 was amended by PD 464 (Real Property
Tax Code), respondent City had continued to collect the tax, as it used to.

It is true that RA 7160 has repealed RA 5447, but what has been repealed are only
Section 3, a(3) and b(2) which concern the allocation of the additional tax, considering
that under RA 7160, the proceeds of the additional 1% tax on real property accrue
exclusively to the Special Education Fund. Nevertheless, RA 5447 has not been totally
repealed; there is only a partial repeal.

It may be observed that there is no requirement in RA 7160 that an ordinance be


enacted to enable the collection of the additional 1% tax. This is so since RA 5447 is
still in force and effect, and the declared policy of the government in enacting the law,
which is to contribute to the financial support of the goals of education as provided in
the Constitution, necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the passage of an
ordinance in order that the tax may be collected would be to place the collection of the
tax at the option of the local legislature. This would run counter to the declared policy of
the government when the SEF was created and the tax imposed.

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

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


gesture in the light of Section 263 of RA 7160. x x x.

x x x x

It would seem from the foregoing provisions, that once the taxpayer fails to redeem
within the one-year period, ownership fully vests on the local government unit
concerned. Thus, when in the present case petitioner failed to redeem the parcels of
land acquired by respondent City, the ownership thereof became fully vested on
respondent City without the latter having to perform any other acts to perfect its
ownership. Corollary thereto, ownership on the part of respondent City has become a
fait accompli.

WHEREFORE, in the light of the foregoing considerations, respondents motion for


reconsideration is granted, and the order of this Court dated December 28, 2004 is
hereby reconsidered. Consequently, the writ of preliminary injunction issued by this
Court is hereby lifted.chanroblesvirtuallawlibrary
Aggrieved, petitioner filed a petition for certiorari16 with the Court of Appeals (Cebu
City), with urgent prayer for the issuance of a TRO and/or writ of preliminary injunction,
docketed as CA-G.R. SP No. 01360. The Court of Appeals (Cebu City) issued a
TRO17 on January 5, 2006 and shortly thereafter, issued a writ of preliminary
injunction18 on February 17, 2006.

RULING OF THE COURT OF APPEALS

The Court of Appeals (Cebu City) promulgated the questioned Decision on October 8,
2007, holding that petitioner is a government-owned or controlled corporation and its
properties are subject to realty tax. The dispositive portion of the questioned Decision
reads:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, judgment is hereby rendered by us as follows:
a. We DECLARE the airport terminal building, the airfield, runway, taxiway and the
lots on which they are situated NOT EXEMPT from the real estate tax imposed
by the respondent City of Lapu-Lapu;
b. We DECLARE the imposition and collection of the real estate tax, the additional
levy for the Special Education Fund and the penalty interest
as VALID and LEGAL. However, pursuant to Section 255 of the Local
Government Code, respondent city can only collect an interest of 2% per month
on the unpaid tax which total interest shall, in no case, exceed thirty-six (36)
months;
c. We DECLARE the sale in public auction of the aforesaid properties and the
eventual forfeiture and purchase of the subject property by the respondent City of
Lapu-Lapu as NULL and VOID. However, petitioner MCIAAs property is
encumbered only by a limited lien possessed by the respondent City of Lapu-
Lapu in accord with Section 257 of the Local Government Code. 19
Petitioner filed a Motion for Partial Reconsideration20 of the questioned Decision
covering only the portion of said decision declaring that petitioner is a GOCC and,
therefore, not exempt from the realty tax and special education fund imposed by
respondent City. Petitioner cited Manila International Airport Authority v. Court of
Appeals21 (the 2006 MIAA case) involving the City of Paraaque and the Manila
International Airport Authority. Petitioner claimed that it had been described by this
Court as a government instrumentality, and that it followed as a logical consequence
that petitioner is exempt from the taxing powers of respondent City of Lapu-
Lapu.22 Petitioner alleged that the 1996 MCIAA case had been overturned by the Court
in the 2006 MIAA case. Petitioner thus prayed that it be declared exempt from paying
the realty tax, special education fund, and interest being collected by respondent City.
On February 12, 2008, the Court of Appeals denied petitioners motion for partial
reconsideration in the questioned Resolution.

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

In the questioned Decision, the Court of Appeals held that petitioners airport terminal
building, airfield, runway, taxiway, and the lots on which they are situated are not
exempt from real estate tax reasoning as follows:chanRoblesvirtualLawlibrary
Under the Local Government Code (LGC for brevity), enacted pursuant to the
constitutional mandate of local autonomy, all natural and juridical persons, including
government-owned or controlled corporations (GOCCs), instrumentalities and agencies,
are no longer exempt from local taxes even if previously granted an exemption. The
only exemptions from local taxes are those specifically provided under the Code itself,
or those enacted through subsequent legislation.

Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for
the exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from local taxation.

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

x x x x

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


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

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

x x x x

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

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

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


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

x x x x

From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133 of the LGC,
instrumentalities were generally exempt from all forms of local government taxation,
unless otherwise provided in the Code. On the other hand, Section 232 otherwise
provided insofar as it allowed local government units to levy an ad valorem real
property tax, irrespective of who owned the property. At the same time, the imposition of
real property taxes under Section 232 is, in turn, qualified by the phrase not hereinafter
specifically exempted. The exemptions from real property taxes are enumerated in
Section 234 of the Code which specifically states that only real properties owned by the
Republic of the Philippines or any of its political subdivisions are exempted from the
payment of the tax. Clearly, instrumentalities or GOCCs do not fall within the exceptions
under Section 234 of the LGC.

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

x x x x
The question of whether or not petitioner MCIAA is an instrumentality or a GOCC has
already been lengthily but soundly, cogently and lucidly answered in the [1996 MCIAA]
case x x x.

x x x x

Based on the foregoing, the claim of the majority of the Supreme Court in the
[2006 MIAA] case that MIAA (and also petitioner MCIAA) is not a government-owned or
controlled corporation but an instrumentality based on Section 2(10) of the
Administrative Code of 1987 appears to be unsound. In the [2006 MIAA] case, the
majority justifies MIAAs purported exemption on Section 133(o) of the Local
Government Code which places agencies and instrumentalities: as generally exempt
from the taxation powers of the LGUs. It further went on to hold that By express
mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. x x x.26 (Citations omitted.)
The Court of Appeals further cited Justice Tingas dissent in the 2006 MIAA case as
well as provisions from petitioner MCIAAs charter to show that petitioner is a
GOCC.27 The Court of Appeals wrote:chanRoblesvirtualLawlibrary
These cited provisions establish the fitness of the petitioner MCIAA to be the subject of
legal relations. Under its charter, it has the power to acquire, possess and incur
obligations. It also has the power to contract in its own name and to acquire title to
movable or immovable property. More importantly, it may likewise exercise powers of a
corporation under the Corporation Code. Moreover, based on its own allegation, it even
recognized itself as a GOCC when it alleged in its petition for prohibition filed before the
lower court that it is a body corporate organized and existing under Republic Act No.
6958 x x x.

We also find to be not meritorious the assertion of petitioner MCIAA that the respondent
city can no longer challenge the tax-exempt character of the properties since it is
estopped from doing so when respondent City of Lapu-Lapu, through its former mayor,
Ernest H. Weigel, Jr., had long ago conceded that petitioners properties are exempt
from real property tax.

It is not denied by the respondent city that it considered, through its former mayor,
Ernest H. Weigel, Jr., petitioners subject properties, specifically the runway and
taxiway, as exempt from taxes. However, as astutely pointed out by the respondent city
it can never be in estoppel, particularly in matters involving taxes. It is a well-known
rule that erroneous application and enforcement of the law by public officers do not
preclude subsequent correct application of the statute, and that the Government is
never estopped by mistake or error on the part of its agents.28 (Citations omitted.)
The Court of Appeals established the following:chanRoblesvirtualLawlibrary
a) [R]espondent City was able to prove and establish that it has a valid and existing
ordinance for the imposition of realty tax against petitioner MCIAA;

b) [T]he imposition and collection of additional levy of 1% Special Education Fund (SEF)
is authorized by law, Republic Act No. 5447; and

c) [T]he collection of penalty interest for delinquent taxes is not only authorized by law
but is likewise [sanctioned] by respondent Citys ordinance.29
The Court of Appeals likewise held that respondent City has a valid and existing local
tax ordinance, Ordinance No. 44, or the Omnibus Tax Ordinance of Lapu-Lapu City,
which provided for the imposition of real property tax. The relevant provision
reads:chanRoblesvirtualLawlibrary
Chapter 5 Tax on Real Property Ownership

Section 25. RATE OF TAX. - A rate of one and one-half (1 ) percentum shall be
collected from owners, executors or administrators of any real estate lying within the
territorial jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown in
the latest revision.30
The Court of Appeals found that even if Ordinance No. 44 was enacted prior to the
effectivity of the LGC, it remained in force and effect, citing Section 529 of the LGC and
Article 278 of the LGCs Implementing Rules and Regulations.31chanrobleslaw

As regards the Special Education Fund, the Court of Appeals held that respondent City
can still collect the additional 1% tax on real property even without an ordinance to this
effect, as this is authorized by Republic Act No. 5447, as amended by Presidential
Decree No. 464 (the Real Property Tax Code), which does not require an enabling tax
ordinance. The Court of Appeals affirmed the RTCs ruling that Republic Act No. 5447
was still in force and effect notwithstanding the passing of the LGC, as the latter only
partially repealed the former law. What Section 534 of the LGC repealed was Section 3
a(3) and b(2) of Republic Act No. 5447, and not the entire law that created the Special
Education Fund.32 The repealed provisions referred to allocation of taxes on Virginia
type cigarettes and duties on imported leaf tobacco and the percentage remittances to
the taxing authority concerned. The Court of Appeals, citing The Commission on Audit
of the Province of Cebu v. Province of Cebu,33 held that [t]he failure to add a specific
repealing clause particularly mentioning the statute to be repealed indicates that the
intent was not to repeal any existing law on the matter, unless an irreconcilable
inconsistency and repugnancy exists in the terms of the new and the old laws.34 The
Court of Appeals quoted the RTCs discussion on this issue, which we reproduce
below:chanRoblesvirtualLawlibrary
It may be observed that there is no requirement in RA 7160 that an ordinance be
enacted to enable the collection of the additional 1% tax. This is so since R.A. 5447 is
still in force and effect, and the declared policy of the government in enacting the law,
which is to contribute to the financial support of the goals of education as provided in
the Constitution, necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the passage of an
ordinance in order that the tax may be collected would be to place the collection of the
tax at the option of the local legislature. This would run counter to the declared policy of
the government when the SEF was created and the tax imposed. 35
Regarding the penalty interest, the Court of Appeals found that Section 30 of Ordinance
No. 44 of respondent City provided for a penalty surcharge of 25% of the tax due for a
given year. Said provision reads:chanRoblesvirtualLawlibrary
Section 30. PENALTY FOR FAILURE TO PAY TAX. Failure to pay the tax provided
for under this Chapter within the time fixed in Section 27, shall subject the taxpayer to a
surcharge of twenty-five percent (25%), without interest.36
The Court of Appeals however declared that after the effectivity of the Local
Government Code, the respondent City could only collect penalty surcharge up to the
extent of 72%, covering a period of three years or 36 months, for the entire delinquent
property.37 This was lower than the 25% per annum surcharge imposed by Ordinance
No. 44.38 The Court of Appeals affirmed the findings of the RTC in the decision quoted
below:chanRoblesvirtualLawlibrary
The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% allowed under Sec. 255 of the
said law which provides:ChanRoblesVirtualawlibrary

x x x x

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

x x x x

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

Section 13. Borrowing Power. The Authority may, in accordance with Section 21,
Article XII of the Constitution and other existing laws, rules and regulations on local or
foreign borrowing, raise funds, either from local or international sources, by way of
loans, credit or securities, and other borrowing instruments with the power to create
pledges, mortgages and other voluntary liens or encumbrances on any of its assets or
properties, subject to the prior approval of the President of the Philippines.

All loans contracted by the Authority under this section, together with all interests and
other sums payable in respect thereof, shall constitute a charge upon all the revenues
and assets of the Authority and shall rank equally with one another, but shall have
priority over any other claim or charge on the revenue and assets of the Authority:
Provided, That this provision shall not be construed as a prohibition or restriction on the
power of the Authority to create pledges, mortgages and other voluntary liens or
encumbrances on any asset or property of the Authority.

The payment of the loans or other indebtedness of the Authority may be guaranteed by
the National Government subject to the approval of the President of the
Philippines.chanroblesvirtuallawlibrary
The Court of Appeals concluded that it is clear that petitioner MCIAA is denied by its
charter the absolute right to dispose of its property to any person or entity except to the
national government and it is not empowered to obtain loans or encumber its property
without the approval of the President.41 The questioned Decision contained the
following conclusion:chanRoblesvirtualLawlibrary
With the advent of RA 7160, the Local Government Code, the power to tax is no longer
vested exclusively on Congress. LGUs, through its local legislative bodies, are now
given direct authority to levy taxes, fees and other charges pursuant to Article X,
Section 5 of the 1987 Constitution. And one of the most significant provisions of the
LGC is the removal of the blanket inclusion of instrumentalities and agencies of the
national government from the coverage of local taxation. The express withdrawal by the
Code of previously granted exemptions from realty taxes applied to instrumentalities
and government-owned or controlled corporations (GOCCs) such as the
petitioner Mactan-Cebu International Airport Authority. Thus, petitioner MCIAA became
a taxable person in view of the withdrawal of the realty tax exemption that it previously
enjoyed under Section 14 of RA No. 6958 of its charter. As expressed and categorically
held in the Mactan case, the removal and withdrawal of tax exemptions previously
enjoyed by persons, natural or juridical, are consistent with the State policy to ensure
autonomy to local governments and the objective of the Local Government Code that
they enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals.

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

Second, and more importantly, the ruling of the Supreme Court in the MIAA case
cannot be similarly invoked in the case at bench. The said case cannot be
considered as the law of the case. The law of the case doctrine has been defined
as that principle under which determinations of questions of law will generally be held to
govern a case throughout all its subsequent stages where such determination has
already been made on a prior appeal to a court of last resort. It is merely a rule of
procedure and does not go to the power of the court, and will not be adhered to where
its application will result in an unjust decision. It relates entirely to questions of law, and
is confined in its operation to subsequent proceedings in the same case. According to
said doctrine, whatever has been irrevocably established constitutes the law of the case
only as to the same parties in the same case and not to different parties in an entirely
different case. Besides, pending resolution of the aforesaid motion for reconsideration in
the MIAA case, the latter case has not irrevocably established anything.

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

Petitioner is before us now claiming that this Court, in the 2006 MIAA case, had
expressly declared that petitioner, while vested with corporate powers, is not considered
a government-owned or controlled corporation, but is a government instrumentality like
the Manila International Airport Authority (MIAA), Philippine Ports Authority (PPA),
University of the Philippines, and Bangko Sentral ng Pilipinas (BSP). Petitioner alleges
that as a government instrumentality, all its airport lands and buildings are exempt from
real estate taxes imposed by respondent City.44chanrobleslaw

Petitioner alleges that Republic Act No. 6958 placed a limitation on petitioners
administration of its assets and properties as it provides under Section 4(e) that any
asset in the international airport important to national security cannot be alienated or
mortgaged by petitioner or transferred to any entity other than the National
Government.45chanrobleslaw

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred in
disregarding the following:chanRoblesvirtualLawlibrary
I

PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY DECLARED


BY THE HONORABLE COURT IN THE MIAA CASE. AS SUCH, IT IS EXEMPT FROM
PAYING REAL ESTATE TAXES IMPOSED BY RESPONDENT CITY OF LAPU-LAPU.
II

THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT TERMINAL


BUILDING, AIRFIELD, RUNWAY, TAXIWAY, INCLUDING THE LOTS ON WHICH
THEY ARE SITUATED, ARE EXEMPT FROM REAL PROPERTY TAXES.
III

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY TAX


WITHOUT ANY APPROPRIATE ORDINANCE.
IV

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL 1% TAX


FOR THE SPECIAL EDUCATION FUND IN THE ABSENCE OF ANY
CORRESPONDING ORDINANCE.
V

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE ANY INTEREST SANS ANY


ORDINANCE MANDATING ITS IMPOSITION.46
Petitioner claims the following similarities with MIAA:
1. MCIAA belongs to the same class and performs identical functions as MIAA;
2. MCIAA is a public utility like MIAA;
3. MIAA was organized to operate the international and domestic airport in
Paranaque City for public use, while MCIAA was organized to operate the
international and domestic airport in Mactan for public use.
4. Both are attached agencies of the Department of Transportation and
Communications.47
Petitioner compares its charter (Republic Act No. 6958) with that of MIAA (Executive
Order No. 903).

Section 3 of Executive Order No. 903 provides:chanRoblesvirtualLawlibrary


Sec. 3. Creation of the Manila International Airport Authority. There is hereby
established a body corporate to be known as the Manila International Airport Authority
which shall be attached to the Ministry of Transportation and Communications. The
principal office of the Authority shall be located at the New Manila International Airport.
The Authority may establish such offices, branches, agencies or subsidiaries as it may
deem proper and necessary; x x x.chanroblesvirtuallawlibrary
Section 2 of Republic Act No. 6958 reads:chanRoblesvirtualLawlibrary
Section 2. Creation of the Mactan-Cebu International Airport Authority. There is
hereby established a body corporate to be known as the Mactan-Cebu International
Airport Authority which shall be attached to the Department of Transportation and
Communications. The principal office of the Authority shall be located at
the MactanInternational Airport, Province of Cebu.
The Authority may have such branches, agencies or subsidiaries as it may deem proper
and necessary.chanroblesvirtuallawlibrary
As to MIAAs purposes and objectives, Section 4 of Executive Order No. 903
reads:chanRoblesvirtualLawlibrary
Sec. 4. Purposes and Objectives. The Authority shall have the following purposes and
objectives:ChanRoblesVirtualawlibrary

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

(b) To formulate and adopt for application in the Airport internationally acceptable
standards of airport accommodation and service; and

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

(a) To encourage, promote and develop international and domestic air traffic in the
central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communications in the country; and

(b) To upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service.chanroblesvirtuallawlibrary
The powers, functions and duties of MIAA under Section 5 of Executive Order No. 903
are:ChanRoblesVirtualawlibrary

Sec. 5. Functions, Powers and Duties. The Authority shall have the following functions,
powers and duties:chanRoblesvirtualLawlibrary
(a) To formulate, in coordination with the Bureau of Air Transportation and other
appropriate government agencies, a comprehensive and integrated policy and
program for the Airport and to implement, review and update such policy and
program periodically;
(b) To control, supervise, construct, maintain, operate and provide such facilities or
services as shall be necessary for the efficient functioning of the Airport;
(c) To promulgate rules and regulations governing the planning, development,
maintenance, operation and improvement of the Airport, and to control and/or
supervise as may be necessary the construction of any structure or the rendition of
any services within the Airport;
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose
of any land, building, airport facility, or property of whatever kind and nature,
whether movable or immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and
objectives;
(k) To levy, and collect dues, charges, fees or assessments for the use of the Airport
premises, works, appliances, facilities or concessions or for any service provided by
the Authority, subject to the approval of the Minister of Transportation and
Communications in consultation with the Minister of Finance, and subject further to
the provisions of Batas Pambansa Blg. 325 where applicable;
(l) To invest its idle funds, as it may deem proper, in government securities and other
evidences of indebtedness of the government;
(m) To provide services, whether on its own or otherwise, within the Airport and the
approaches thereof, which shall include but shall not be limited to, the following:
(1) Aircraft movement and allocation of parking areas of aircraft on the ground;
(2) Loading or unloading of aircrafts;
(3) Passenger handling and other services directed towards the care, convenience
and security of passengers, visitors and other airport users; and
(4) Sorting, weighing, measuring, warehousing or handling of baggage and goods.
(n) To perform such other acts and transact such other business, directly or indirectly
necessary, incidental or conducive to the attainment of the purposes and objectives
of the Authority, including the adoption of necessary measures to remedy
congestion in the Airport; and
(o) To exercise all the powers of a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions of this Executive Order.
Petitioner claims that MCIAA has related functions, powers and duties under Section 4
of Republic Act No. 6958, as shown in the provision quoted
below:chanRoblesvirtualLawlibrary
Section 4. Functions, Powers and Duties. The Authority shall have the following
functions, powers and duties:ChanRoblesVirtualawlibrary

(a) To formulate a comprehensive and integrated development policy and program for
the airports and to implement, review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or
services as shall be necessary for the efficient functioning of the airports;

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


maintenance, operation and improvement of the airports, and to control and supervise
the construction of any structure or the rendition of any service within the airports;

(d) To exercise all the powers of a corporation under the Corporation Code of the
Philippines, insofar as those powers are not inconsistent with the provisions of this Act;

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of
any land, building, airport facility, or property of whatever kind and nature, whether
movable or immovable, or any interest therein: Provided, That any asset located in
the Mactan abakport important to national security shall not be subject to alienation or
mortgage by the Authority nor to transfer to any entity other than the National
Government;

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

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

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

(i) To invest its idle funds, as it may deem proper, in government securities and other
evidences of indebtedness; and

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

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

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

2. Both charters contain a proviso on tax exemptions (Section 21, Executive Order No.
903; Section 14, Republic Act No. 6958);

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

4. Both have borrowing power subject to the approval of the President (Section 16,
Executive Order No. 903; Section 13, Republic Act No. 6958). 48chanrobleslaw

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

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

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

Petitioner prays that judgment be rendered:chanRoblesvirtualLawlibrary


a) Declaring petitioner exempt from paying real property taxes as it is a government
instrumentality;
b) Declaring respondent City of Lapu-Lapu as bereft of any authority to levy and
collect the basic real property tax, the additional tax for the SEF and the penalty
interest for its failure to pass the corresponding tax ordinances; and
c) Declaring, in the alternative, the airport lands and buildings of petitioner as exempt
from real property taxes as they are used solely and exclusively for public
purpose.51
In its Consolidated Reply filed through the OSG, petitioner claims that the
2006 MIAA ruling has overturned the 1996 MCIAA ruling. Petitioner cites Justice Dante
O. Tingas dissent in the MIAA ruling, as follows:chanRoblesvirtualLawlibrary
[The] ineluctable conclusion is that the majority rejects the rationale and ruling
in Mactan. The majority provides for a wildly different interpretation of Section 133, 193
and 234 of the Local Government Code than that employed by the Court in Mactan.
Moreover, the parties in Mactan and in this case are similarly situated, as can be
obviously deducted from the fact that both petitioners are airport authorities operating
under similarly worded charters. And the fact that the majority cites doctrines
contrapuntal to the Local Government Code as in Basco and Maceda evinces an intent
to go against the Courts jurisprudential trend adopting the philosophy of expanded local
government rule under the Local Government Code.

x x x The majority is obviously inconsistent with Mactan and there is no way these two
rulings can stand together. Following basic principles in statutory
construction, Mactan will be deemed as giving way to this new ruling.

x x x x

There is no way the majority can be justified unless Mactan is overturned. The MCIAA
and the MIAA are similarly situated. They are both, as will be demonstrated, GOCCs,
commonly engaged in the business of operating an airport. They are the owners of
airport properties they respectively maintain and hold title over these properties in their
name. These entities are both owned by the State, and denied by their respective
charters the absolute right to dispose of their properties without prior approval
elsewhere. Both of them are not empowered to obtain loans or encumber their
properties without prior approval the prior approval of the President. 52 (Citations
omitted.)
Petitioner likewise claims that the enactment of Ordinance No. 070-2007 is an
admission on respondent Citys part that it must have a tax measure to be able to
impose a tax or special assessment. Petitioner avers that assuming that it is a non-
exempt entity or that its airport lands and buildings are not exempt, it was only upon the
effectivity of Ordinance No. 070-2007 on January 1, 2008 that respondent City could
properly impose the basic real property tax, the additional tax for the SEF, and the
interest in case of nonpayment.53chanrobleslaw

Petitioner filed its Memorandum54 on June 17, 2009.

RESPONDENTS THEORY

In their Comment,55 respondents point out that petitioner partially moved for a
reconsideration of the questioned Decision only as to the issue of whether petitioner is a
GOCC or not. Thus, respondents declare that the other portions of the questioned
decision had already attained finality and ought not to be placed in issue in this petition
for certiorari. Thus, respondents discussed the other issues raised by petitioner with
reservation as to this objection.

Respondents summarized the issues and the grounds relied upon as


follows:chanRoblesvirtualLawlibrary
STATEMENT OF THE ISSUES

WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY


EXEMPT FROM PAYING REAL PROPERTY TAXES

WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX, SPECIAL


EDUCATION FUND AND PENALTY INTEREST

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


TAXIWAY INCLUDING THE LOTS ON WHICH THEY ARE SITUATED ARE EXEMPT
FROM REALTY TAXES
GROUNDS RELIED UPON
1. PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES
2. TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM
REALTY TAXES
3. ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT
4. CITY CAN COLLECT REALTY TAX AND INTEREST
5. CITY CAN COLLECT SEF
6. MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY WARRANTING
INJUNCTIVE RELIEF
7. MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC56
Respondents claim that the mere mention of MCIAA in the MIAA v. [Court of
Appeals] case does not make it the controlling case on the matter.57 Respondents
further claim that the 1996 MCIAA case where this Court held that petitioner is a GOCC
is the controlling jurisprudence. Respondents point out that petitioner and MIAA are two
very different entities. Respondents argue that petitioner is a GOCC contrary to its
assertions, based on its Charter and on DOJ Opinion No. 50.

Respondents contend that if petitioner is not a GOCC but an instrumentality of the


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

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

1. Estoppel does not lie against the government.

2. Respondent City can collect realty taxes and interest.


a. Based on the Local Government Code (Sections 232, 233, 255) and its IRR
(Sections 241, 247).
b. The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the Omnibus Tax
Ordinance, wherein the imposition of real property tax was made. This Ordinance
was in force and effect by virtue of Article 278 of the IRR of Republic Act No.
7160.60chanrobleslaw
c. Ordinance No. 070-2007, known as the Revised Lapu-Lapu City Revenue Code,
imposed real property taxes, special education fund and further provided for the
payment of interest and surcharges. Thus, the issue is pass and is moot and
academic.
3. Respondent City can collect Special Education Fund.
a. The LGC does not require the enactment of an ordinance for the collection of the
SEF.
b. Congress did not entirely repeal the SEF law, hence, its levy, imposition and
collection need not be covered by ordinance. Besides, the City has enacted the
Revenue Code containing provisions for the levy and collection of the SEF. 61
Furthermore, respondents aver that:ChanRoblesVirtualawlibrary

1. Collection of taxes is beyond the ambit of injunction.


a. Respondents contend that the petition only questions the denial of the writ of
preliminary injunction by the RTC and the Court of Appeals. Petitioner failed to
show irreparable injury.
b. Comparing the alleged damage that may be caused petitioner and the direct
affront and challenge against the power to tax, which is an attribute of
sovereignty, it is but appropriate that injunctive relief should be denied.
2. Petitioner did not comply with LGC provisions on payment under protest.
a. Petitioner should have protested the tax imposition as provided in Article 285 of
the IRR of Republic Act No. 7160. Section 252 of Republic Act No.
716062 requires that the taxpayers protest can only be entertained if the tax is
first paid under protest.63
Respondents submitted their Memorandum64 on June 30, 2009, wherein they allege
that the 1996 MCIAAcase is still good law, as shown by the following cases wherein it
was quoted:
1. National Power Corporation v. Local Board of Assessment Appeals of
Batangas [545 Phil. 92 (2007)];
2. Mactan-Cebu International Airport Authority v. Urgello [549 Phil. 302 (2007)];
3. Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785 (2008)]; and
4. The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492 (2009)].
Respondents assert that the constant reference to the 1996 MCIAA case could hardly
mean that the doctrine has breathed its last and that the 1996 MCIAA case stands as
precedent and is controlling on petitioner MCIAA.65chanrobleslaw

Respondents allege that the issue for consideration is whether it is proper for petitioner
to raise the issue of whether it is not liable to pay real property taxes, special education
fund (SEF), interests and/or surcharges.66 Respondents argue that the Court of Appeals
was correct in declaring petitioner liable for realty taxes, etc., on the terminal building,
taxiway, and runway. Respondent City relies on the following
grounds:chanRoblesvirtualLawlibrary
1. The case of MCIAA v. Marcos, et al., is controlling on petitioner MCIAA;
2. MCIAA is a corporation;
3. Section 133 in relation to Sections 232 and 234 of the Local Government Code of
1991 authorizes the collection of real property taxes (etc.) from MCIAA;
4. Terminal Building, Runway & Taxiway are not of the Public Dominion and are not
exempt from realty taxes, special education fund and interest;
5. Respondent City can collect realty tax, interest/surcharge, and Special Education
Fund from MCIAA; [and]
6. Estoppel does not lie against the government.67
THIS COURTS RULING

The petition has merit. The petitioner is an instrumentality of the government; thus, its
properties actually, solely and exclusively used for public purposes, consisting of the
airport terminal building, airfield, runway, taxiway and the lots on which they are
situated, are not subject to real property tax and respondent City is not justified in
collecting taxes from petitioner over said properties.
DISCUSSION

The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still
controls and that petitioner is a GOCC. The 2006 MIAA case governs.

The Court of Appeals reliance on the 1996 MCIAA case is misplaced and its staunch
refusal to apply the 2006 MIAA case is patently erroneous. The Court of Appeals,
finding for respondents, refused to apply the ruling in the 2006 MIAA case on the
premise that the same had not yet reached finality, and that as far as MCIAA is
concerned, the 1996 MCIAA case is still good law.68chanrobleslaw

While it is true, as respondents allege, that the 1996 MCIAA case was cited in a long
line of cases,69 still, in 2006, the Court en banc decided a case that in
effect reversed the 1996 Mactan ruling. The 2006 MIAA case had, since the
promulgation of the questioned Decision and Resolution, reached finality and had in fact
been either affirmed or cited in numerous cases by the Court.70 The decision became
final and executory on November 3, 2006.71 Furthermore, the 2006 MIAA case was
decided by the Court en banc while the 1996 MCIAA case was decided by a Division.
Hence, the 1996 MCIAA case should be read in light of the subsequent and
unequivocal ruling in the 2006 MIAA case.

To recall, in the 2006 MIAA case, we held that MIAAs airport lands and buildings are
exempt from real estate tax imposed by local governments; that it is not a GOCC but an
instrumentality of the national government, with its real properties being owned by the
Republic of the Philippines, and these are exempt from real estate tax. Specifically
referring to petitioner, we stated as follows:chanRoblesvirtualLawlibrary
Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or controlled
corporation. Examples are the Mactan International Airport Authority, the
Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng
Pilipinas. All these government instrumentalities exercise corporate powers but they are
not organized as stock or non-stock corporations as required by Section 2(13) of the
Introductory Provisions of the Administrative Code. These government instrumentalities
are sometimes loosely called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense as understood under
the Administrative Code, which is the governing law defining the legal relationship and
status of government entities.72 (Emphases ours.)
In the 2006 MIAA case, the issue before the Court was whether the Airport Lands and
Buildings of MIAA are exempt from real estate tax under existing laws. 73 We quote the
extensive discussion of the Court that led to its finding that MIAAs lands and buildings
were exempt from real estate tax imposed by local
governments:chanRoblesvirtualLawlibrary
First, MIAA is not a government-owned or controlled corporation but an instrumentality
of the National Government and thus exempt from local taxation. Second, the real
properties of MIAA are owned by the Republic of the Philippines and thus exempt from
real estate tax.

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

x x x x

There is no dispute that a government-owned or controlled corporation is not exempt


from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as
follows:chanRoblesvirtualLawlibrary
SEC. 2. General Terms Defined. - x x x

(13) Government-owned or controlled corporation refers to any agency organized as a


stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x
x.chanroblesvirtuallawlibrary
A government-owned or controlled corporation must be organized as a stock or non-
stock corporation. MIAA is not organized as a stock or non-stock corporation. MIAA is
not a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares. x x x

x x x x

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

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

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

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

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify
as a government-owned or controlled corporation. What then is the legal status of
MIAA within the National Government?

MIAA is a government instrumentality vested with corporate powers to perform


efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate
powers.Section 2(10) of the Introductory Provisions of the Administrative Code defines
a government instrumentality as follows:chanRoblesvirtualLawlibrary
SEC. 2. General Terms Defined. - x x x

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x
x.chanroblesvirtuallawlibrary
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers. Thus, MIAA exercises the governmental powers of eminent domain,
police authority and the levying of fees and charges. At the same time, MIAA
exercises all the powers of a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions of this Executive Order.

Likewise, when the law makes a government instrumentality operationally autonomous,


the instrumentality remains part of the National Government machinery although not
integrated with the department framework. The MIAA Charter expressly states that
transforming MIAA into a separate and autonomous body will make its operation more
financially viable.

Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or controlled
corporation. Examples are the Mactan International Airport Authority,the Philippine
Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All
these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the
Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict
sense as understood under the Administrative Code, which is the governing law
defining the legal relationship and status of government entities.74 (Emphases
ours, citations omitted.)
The Court in the 2006 MIAA case went on to discuss the limitation on the taxing power
of the local governments as against the national government or its
instrumentality:chanRoblesvirtualLawlibrary
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:chanRoblesvirtualLawlibrary
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. -
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the
following:ChanRoblesVirtualawlibrary

x x x x

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. x x x.chanroblesvirtuallawlibrary
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers of
local governments, local governments may only exercise such power subject to such
guidelines and limitations as the Congress may provide.

When local governments invoke the power to tax on national government


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

Another rule is that a tax exemption is strictly construed against the taxpayer claiming
the exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the
national government instrumentality. x x x.

x x x x

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

There is also no reason for local governments to tax national government


instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound and
compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt
whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that unless otherwise
provided in the Code, local governments cannot tax national government
instrumentalities. x x x.75(Emphases ours, citations omitted.)
The Court emphasized that the airport lands and buildings of MIAA are owned by the
Republic and belong to the public domain. The Court said:chanRoblesvirtualLawlibrary
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. x x x.

x x x x

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

The Airport Lands and Buildings are devoted to public use because they are used
by the public for international and domestic travel and transportation. The fact
that the MIAA collects terminal fees and other charges from the public does not
remove the character of the Airport Lands and Buildings as properties for public
use. x x x.

x x x x

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

The Airport Lands and Buildings of MIAA x x x are properties of public dominion
because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines. 76 (Emphases
supplied, citations omitted.)
The Court also held in the 2006 MIAA case that airport lands and buildings are outside
the commerce of man.
As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion
are outside the commerce of man. As early as 1915, this Court already ruled
in Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus:ChanRoblesVirtualawlibrary
x x x x

The Civil Code, Article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, x x x.

x x x x

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

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

Before MIAA can encumber the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. x x x.

x x x x

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

The authority of the President to reserve lands of the public domain for public use, and
to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:chanRoblesvirtualLawlibrary
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
- (1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;
x x x x

There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties of
public dominion, owned by the Republic and outside the commerce of man.77
Thus, the Court held that MIAA is merely holding title to the Airport Lands and Buildings
in trust for the Republic. [Under] Section 48, Chapter 12, Book I of the Administrative
Code [which] allows instrumentalities like MIAA to hold title to real properties owned by
the Republic.78chanrobleslaw

The Court in the 2006 MIAA case cited Section 234(a) of the Local Government Code
and held that said provision exempts from real estate tax any [r]eal property owned by
the Republic of the Philippines.79The Court emphasized, however, that portions of the
Airport Lands and Buildings that MIAA leases to private entities are not exempt from
real estate tax. The Court further held:chanRoblesvirtualLawlibrary
This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing [t]axes, fees or charges of any kind on the
National Government, its agencies and instrumentalities x x x. The real properties
owned by the Republic are titled either in the name of the Republic itself or in the name
of agencies or instrumentalities of the National Government. The Administrative Code
allows real property owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remain owned by the
Republic and continue to be exempt from real estate tax.

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

However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such a
case, MIAA has granted the beneficial use of such land area for a consideration to a
taxable person and therefore such land area is subject to real estate tax. x x x. 80
Significantly, the Court reiterated the above ruling and applied the same reasoning
in Manila International Airport Authority v. City of
Pasay,81 thus:chanRoblesvirtualLawlibrary
The only difference between the 2006 MIAA case and this case is that the 2006
MIAA case involved airport lands and buildings located in Paraaque City while
this case involved airport lands and buildings located in Pasay City. The 2006
MIAA case and this case raised the same threshold issue: whether the local
government can impose real property tax on the airport lands, consisting mostly of the
runways, as well as the airport buildings, of MIAA. x x x.
x x x x

The definition of instrumentality under Section 2(10) of the Introductory Provisions of


the Administrative Code of 1987 uses the phrase includes x x x government-owned or
controlled corporations which means that a government instrumentality may or may
not be a government-owned or controlled corporation. Obviously, the term government
instrumentality is broader than the term government-owned or controlled
corporation. x x x.

x x x x

The fact that two terms have separate definitions means that while a government
instrumentality may include a government-owned or controlled corporation, there
may be a government instrumentality that will not qualify as a government-owned or
controlled corporation.

A close scrutiny of the definition of government-owned or controlled corporation in


Section 2(13) will show that MIAA would not fall under such definition. MIAA is a
government instrumentality that does not qualify as a government-owned or
controlled corporation. x x x.

x x x x

Thus, MIAA is not a government-owned or controlled corporation but a government


instrumentality which is exempt from any kind of tax from the local governments.
Indeed, the exercise of the taxing power of local government units is subject to the
limitations enumerated in Section 133 of the Local Government Code. Under Section
133(o) of the Local Government Code, local government units have no power to tax
instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to
pay real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion
intended for public use, and as such are exempt from real property tax under Section
234(a) of the Local Government Code. However, under the same provision, if MIAA
leases its real property to a taxable person, the specific property leased becomes
subject to real property tax. In this case, only those portions of the NAIA Pasay
properties which are leased to taxable persons like private parties are subject to real
property tax by the City of Pasay. (Emphases added, citations omitted.)
The Court not only mentioned petitioner MCIAA as similarly situated as MIAA. It also
mentioned several other government instrumentalities, among which was the Philippine
Fisheries Development Authority. Thus, applying the 2006 MIAA ruling, the Court,
in Philippine Fisheries Development Authority v. Court of
Appeals,82 held:chanRoblesvirtualLawlibrary
On the basis of the parameters set in the MIAA case, the Authority should be classified
as an instrumentality of the national government. As such, it is generally exempt from
payment of real property tax, except those portions which have been leased to private
entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as
among the instrumentalities of the national government. x x x.

x x x x

Indeed, the Authority is not a GOCC but an instrumentality of the government. The
Authority has a capital stock but it is not divided into shares of stocks. Also, it has no
stockholders or voting shares. Hence, it is not a stock corporation. Neither [is it] a non-
stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as an


agency of the national government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. When the law vests in a government instrumentality corporate
powers, the instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry out the
governments policy to promote the development of the countrys fishing industry and
improve the efficiency in handling, preserving, marketing, and distribution of fish and
other aquatic products, exercises the governmental powers of eminent domain, and the
power to levy fees and charges. At the same time, the Authority exercises the general
corporate powers conferred by laws upon private and government-owned or controlled
corporations.

x x x x

In light of the foregoing, the Authority should be classified as an instrumentality of the


national government which is liable to pay taxes only with respect to the portions of the
property, the beneficial use of which were vested in private entities. When local
governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt
whether a person, article or activity is taxable is resolved against taxation. This rule
applies with greater force when local governments seek to tax national government
instrumentalities.

Thus, the real property tax assessments issued by the City of Iloilo should be upheld
only with respect to the portions leased to private persons. In case the Authority fails to
pay the real property taxes due thereon, said portions cannot be sold at public auction
to satisfy the tax delinquency. x x x.
x x x x

In sum, the Court finds that the Authority is an instrumentality of the national
government, hence, it is liable to pay real property taxes assessed by the City of Iloilo
on the IFPC only with respect to those portions which are leased to private entities.
Notwithstanding said tax delinquency on the leased portions of the IFPC, the latter or
any part thereof, being a property of public domain, cannot be sold at public auction.
This means that the City of Iloilo has to satisfy the tax delinquency through means other
than the sale at public auction of the IFPC. (Citations omitted.)
Another government instrumentality specifically mentioned in the 2006 MIAA case was
the Philippine Ports Authority (PPA). Hence, in Curata v. Philippine Ports
Authority,83 the Court held that the PPA is similarly situated as MIAA, and ruled in this
wise:chanRoblesvirtualLawlibrary
This Courts disquisition in Manila International Airport Authority v. Court of Appeals
ruling that MIAA is not a government-owned and/or controlled corporation (GOCC), but
an instrumentality of the National Government and thus exempt from local taxation, and
that its real properties are owned by the Republic of the Philippines is instructive. x x
x. These findings are squarely applicable to PPA, as it is similarly situated as
MIAA. First, PPA is likewise not a GOCC for not having shares of stocks or
members. Second, the docks, piers and buildings it administers are likewise owned by
the Republic and, thus, outside the commerce of man. Third, PPA is a mere trustee of
these properties. Hence, like MIAA, PPA is clearly a government instrumentality, an
agency of the government vested with corporate powers to perform efficiently its
governmental functions.

Therefore, an undeniable conclusion is that the funds of PPA partake of government


funds, and such may not be garnished absent an allocation by its Board or by statutory
grant. If the PPA funds cannot be garnished and its properties, being government
properties, cannot be levied via a writ of execution pursuant to a final judgment, then the
trial court likewise cannot grant discretionary execution pending appeal, as it would run
afoul of the established jurisprudence that government properties are exempt from
execution. What cannot be done directly cannot be done indirectly. (Citations omitted.)
In Government Service Insurance System v. City Treasurer and City Assessor of the
City of Manila84 the Court found that the GSIS was also a government instrumentality
and not a GOCC, applying the 2006 MIAA case even though the GSIS was not among
those specifically mentioned by the Court as similarly situated as MIAA. The Court
said:chanRoblesvirtualLawlibrary
GSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Courts fairly recent ruling in Manila
International Airport Authority v. Court of Appeals, a case likewise involving real estate
tax assessments by a Metro Manila city on the real properties administered by MIAA,
argues for the non-tax liability of GSIS for real estate taxes. x x x.

x x x x
While perhaps not of governing sway in all fours inasmuch as what were involved
in Manila International Airport Authority, e.g., airfields and runways, are
properties of the public dominion and, hence, outside the commerce of man, the
rationale underpinning the disposition in that case is squarely applicable to GSIS,
both MIAA and GSIS being similarly situated. First, while created under CA 186 as a
non-stock corporation, a status that has remained unchanged even when it operated
under PD 1146 and RA 8291, GSIS is not, in the context of the aforequoted Sec. 193 of
the LGC, a GOCC following the teaching of Manila International Airport Authority, for,
like MIAA, GSISs capital is not divided into unit shares. Also, GSIS has no members to
speak of. And by members, the reference is to those who, under Sec. 87 of the
Corporation Code, make up the non-stock corporation, and not to the compulsory
members of the system who are government employees. Its management is entrusted
to a Board of Trustees whose members are appointed by the President.

Second, the subject properties under GSISs name are likewise owned by the Republic.
The GSIS is but a mere trustee of the subject properties which have either been ceded
to it by the Government or acquired for the enhancement of the system. This particular
property arrangement is clearly shown by the fact that the disposal or conveyance of
said subject properties are either done by or through the authority of the President of
the Philippines. x x x. (Emphasis added, citations omitted.)
All the more do we find that petitioner MCIAA, with its many similarities to the MIAA,
should be classified as a government instrumentality, as its properties are being used
for public purposes, and should be exempt from real estate taxes. This is not to
derogate in any way the delegated authority of local government units to collect realty
taxes, but to uphold the fundamental doctrines of uniformity in taxation and equal
protection of the laws, by applying all the jurisprudence that have exempted from said
taxes similar authorities, agencies, and instrumentalities, whether covered by the
2006 MIAA ruling or not.

To reiterate, petitioner MCIAA is vested with corporate powers but it is not a stock or
non-stock corporation, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Like MIAA,
petitioner MCIAA has capital under its charter but it is not divided into shares of stock. It
also has no stockholders or voting shares. Republic Act No. 6958
provides:chanRoblesvirtualLawlibrary
Section 9. Capital. The [Mactan-Cebu International Airport] Authority shall have an
authorized capital stock equal to and consisting of:ChanRoblesVirtualawlibrary

(a) The value of fixed assets (including airport facilities, runways and equipment) and
such other properties, movable and immovable, currently administered by or belonging
to the airports as valued on the date of the effectivity of this Act;

(b) The value of such real estate owned and/or administered by the airports; and

(c) Government contribution in such amount as may be deemed an appropriate initial


balance. Such initial amount, as approved by the President of the Philippines, which
shall be more or less equivalent to six (6) months working capital requirement of the
Authority, is hereby authorized to be appropriated in the General Appropriations Act of
the year following its enactment into law.chanroblesvirtuallawlibrary
Thereafter, the government contribution to the capital of the Authority shall be provided
for in the General Appropriations Act.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion
because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines, and are outside the
commerce of man. This, unless petitioner leases its real property to a taxable person,
the specific property leased becomes subject to real property tax; in which case, only
those portions of petitioners properties which are leased to taxable persons like private
parties are subject to real property tax by the City of Lapu-Lapu.

We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the
Court in the 2006 MIAA case, and we quote:chanRoblesvirtualLawlibrary
To summarize, MIAA is not a government-owned or controlled corporation under
Section 2(13) of the Introductory Provisions of the Administrative Code because it is not
organized as a stock or non-stock corporation. Neither is MIAA a government-owned or
controlled corporation under Section 16, Article XII of the 1987 Constitution because
MIAA is not required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As
a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the
exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable
entity under the Local Government Code. Such exception applies only if the beneficial
use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use
and thus are properties of public dominion. Properties of public dominion are owned by
the State or the Republic. x x x.

x x x x

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

4. Conclusion

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

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the State or
the Republic of the Philippines. Article 420 specifically mentions ports x x x constructed
by the State, which includes public airports and seaports, as properties of public
dominion and owned by the Republic. As properties of public dominion owned by the
Republic, there is no doubt whatsoever that the Airport Lands and Buildings are
expressly exempt from real estate tax under Section 234(a) of the Local Government
Code. This Court has also repeatedly ruled that properties of public dominion are
not subject to execution or foreclosure sale.85 (Emphases added.)
WHEREFORE, we hereby GRANT the petition. We REVERSE and SET
ASIDE the Decision dated October 8, 2007 and the Resolution dated February 12,
2008 of the Court of Appeals (Cebu City)in CA-G.R. SP No. 01360. Accordingly,
we DECLARE:
1. Petitioners properties that are actually, solely and exclusively used for public
purpose, consisting of the airport terminal building, airfield, runway, taxiway and
the lots on which they are situated, EXEMPT from real property tax imposed by
the City of Lapu-Lapu.
2. VOID all the real property tax assessments, including the additional tax for the
special education fund and the penalty interest, as well as the final notices of real
property tax delinquencies, issued by the City of Lapu-Lapu on petitioners
properties, except the assessment covering the portions that petitioner has
leased to private parties.
3. NULL and VOID the sale in public auction of 27 of petitioners properties and the
eventual forfeiture and purchase of the said properties by respondent City of
Lapu-Lapu. We likewise declare VOID the corresponding Certificates of Sale of
Delinquent Property issued to respondent City of Lapu-Lapu.
SO ORDERED.cralawlawlibrary
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 115455 October 30, 1995


ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO,
as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of
Internal Revenue; and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS
OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF
CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA;
and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal
Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,
(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA,
EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO
SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G.
FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND
NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF
CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal
Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION
OF PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY
V. CHATO, as the Commissioner of Internal Revenue; and HON. GUILLERMO
PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.
RESOLUTION

MENDOZA, J.:
These are motions seeking reconsideration of our decision dismissing the petitions filed
in these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise
known as the Expanded Value-Added Tax Law. The motions, of which there are 10 in
all, have been filed by the several petitioners in these cases, with the exception of the
Philippine Educational Publishers Association, Inc. and the Association of Philippine
Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to
which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine
Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R.
No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a
rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real
Estate and Builders Association (CREBA)) reiterate previous claims made by them that
R.A. No. 7716 did not "originate exclusively" in the House of Representatives as
required by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was
filed in the House of Representatives where it passed three readings and that afterward
it was sent to the Senate where after first reading it was referred to the Senate Ways
and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630)
which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate
committee should have done was to amend H. No. 11197 by striking out the text of the
bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a
House bill and the Senate version just becomes the text (only the text) of the House
bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at
least two occasions during the Eighth Congress, the Senate passed its own version of
revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987
BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX
AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was
approved by the President on April 10, 1992. This Act is actually a consolidation of H.
No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920,
which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES)
which was approved by the President on May 22, 1992. This Act is a consolidation of H.
No. 22232, which was approved by the House of Representatives on August 2, 1989,
and S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result
of the consolidation of House and Senate bills. These are the following, with indications
of the dates on which the laws were approved by the President and dates the separate
bills of the two chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION,
AMENDING FOR THIS PURPOSE THE PERTINENT SECTIONS
OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL
REVENUE TO REQUIRE THE PAYMENT OF THE VALUE-
ADDED TAX EVERY MONTH AND TO ALLOW LOCAL
GOVERNMENT UNITS TO SHARE IN VAT REVENUE,
AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE
NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL
REVENUE TO PRESCRIBE THE PLACE FOR PAYMENT OF
INTERNAL REVENUE TAXES BY LARGE TAXPAYERS,
AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
(February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS
POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR
AGENCIES INCLUDING GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND
WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON GROSS PAYMENT FOR THE
PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS
RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS
(April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS TO DECLARE DIVIDENDS
UNDER CERTAIN CONDITIONS TO THE NATIONAL
GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND
ADMINISTRATION OF THE DOCUMENTARY STAMP TAX,
AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR
EXCHANGE OF SHARES OF STOCK LISTED AND TRADED
THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH
INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY
INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. It is noteworthy that, in the
particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the
Senate, voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner
Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like S.
No. 1630 is instead enacted as a substitute measure, "taking into Consideration . .
. H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment
shall be considered.
No amendment by substitution shall be entertained unless the text
thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken
thereon.
69. No amendment which seeks the inclusion of a legislative
provision foreign to the subject matter of a bill (rider) shall be
entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be amended by substituting it
with another which covers a subject distinct from that proposed in
the original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the
Philippine Senate possesses less power than the U.S. Senate because of textual
differences between constitutional provisions giving them the power to propose or
concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of
Representatives; but the Senate may propose or concur with
amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to
drop the phrase "as on other Bills" in the American version, according to petitioners,
shows the intention of the framers of our Constitution to restrict the Senate's power to
propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic)
were eliminated so as to show that these bills were not to be like other bills but must be
treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the
power of the Senate. It will be recalled that the 1935 Constitution originally provided for
a unicameral National Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for lawmaking by the
Senate and the House of Representatives. The work of proposing amendments to the
Constitution was done by the National Assembly, acting as a constituent assembly,
some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds, revenue or tariff bills, bills of
local application, and private bills shall originate exclusively in the
Assembly, but the Senate may propose or concur with
amendments. In case of disapproval by the Senate of any such
bills, the Assembly may repass the same by a two-thirds vote of all
its members, and thereupon, the bill so repassed shall be deemed
enacted and may be submitted to the President for corresponding
action. In the event that the Senate should fail to finally act on any
such bills, the Assembly may, after thirty days from the opening of
the next regular session of the same legislative term, reapprove the
same with a vote of two-thirds of all the members of the Assembly.
And upon such reapproval, the bill shall be deemed enacted and
may be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed
the proposal. It deleted everything after the first sentence. As rewritten, the proposal
was approved by the National Assembly and embodied in Resolution No. 38, as
amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and ratified by them in
the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of
the present Constitution was derived. It explains why the word "exclusively" was added
to the American text from which the framers of the Philippine Constitution borrowed and
why the phrase "as on other Bills" was not copied. Considering the defeat of the
proposal, the power of the Senate to propose amendments must be understood to be
full, plenary and complete "as on other Bills." Thus, because revenue bills are required
to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent
over to it by the House, however, the Senate certainly can pass its own version on the
same subject matter. This follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power
to concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this
power, the Senate can practically re-write a bill required to come
from the House and leave only a trace of the original bill. For
example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of
an inheritance tax . This was changed by the Senate into a
corporation tax. The amending authority of the Senate was
declared by the United States Supreme Court to be sufficiently
broad to enable it to make the alteration. [Flint v. Stone Tracy
Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE
PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the
House of Representatives because it is more numerous in
membership and therefore also more representative of the people.
Moreover, its members are presumed to be more familiar with the
needs of the country in regard to the enactment of the legislation
involved.
The Senate is, however, allowed much leeway in the exercise of its
power to propose or concur with amendments to the bills initiated
by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by
the Senate to make a proposed inheritance tax a corporation tax. It
is also accepted practice for the Senate to introduce what is known
as an amendment by substitution, which may entirely replace the
bill initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate
may propose or concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. As petitioner Tolentino states
in a high school text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the
bill omitting or adding sections or altering its language; (3) to make
and endorse an entirely new bill as a substitute, in which case it will
be known as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258
(1950))
To except from this procedure the amendment of bills which are required to originate in
the House by prescribing that the number of the House bill and its other parts up to the
enacting clause must be preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is
therefore as much an amendment of H. No. 11197 as any which the Senate could have
made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of
S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197,"
implying that there is something substantially different between the reference to S. No.
1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No.
7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both
houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be
mere amendments of the corresponding provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement
A to the basic petition of petitioner Tolentino, while showing differences between the two
bills, at the same time indicates that the provisions of the Senate bill were precisely
intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the
Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form
did not have to pass the Senate on second and three readings. It was enough that after
it was passed on first reading it was referred to the Senate Committee on Ways and
Means. Neither was it required that S. No. 1630 be passed by the House of
Representatives before the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No.
1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act
prohibiting the disclosure of bank deposits), were referred to a conference committee,
the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice
versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to
procedure: If a House bill is passed by the House but not passed by
the Senate, and a Senate bill of a similar nature is passed in the
Senate but never passed in the House, can the two bills be the
subject of a conference, and can a law be enacted from these two
bills? I understand that the Senate bill in this particular instance
does not refer to investments in government securities, whereas
the bill in the House, which was introduced by the Speaker, covers
two subject matters: not only investigation of deposits in banks but
also investigation of investments in government securities. Now,
since the two bills differ in their subject matter, I believe that no law
can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in
order. It is precisely in cases like this where a conference should be
had. If the House bill had been approved by the Senate, there
would have been no need of a conference; but precisely because
the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now
considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis
added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No.
1630 are distinct and unrelated measures also accounts for the petitioners'
(Kilosbayan's and PAL's) contention that because the President separately certified to
the need for the immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version of the same
revenue bill which at the moment was being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented
in a house of Congress even though the bills are merely versions of the bill he has
already certified. It is enough that he certifies the bill which, at the time he makes the
certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on
June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment
because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the
main decision that the phrase "except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that
"printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must
have passed "three readings on separate days." There is not only textual support for
such construction but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have
been printed and copies thereof in its final form furnished its
Members at least three calendar days prior to its passage, except
when the President shall have certified to the necessity of its
immediate enactment. Upon the last reading of a bill, no
amendment thereof shall be allowed and the question upon its
passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings
on separate days, and printed copies thereof in its final form have
been distributed to the Members three days before its passage,
except when the Prime Minister certifies to the necessity of its
immediate enactment to meet a public calamity or emergency.
Upon the last reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI,
26 (2) of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof
in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings
on separate days are required and a bill has to be printed in final form before it can be
passed, the need for a law may be rendered academic by the occurrence of the very
emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency,
especially in a country like the Philippines where budget deficit is a chronic condition.
Even if this were the case, an enormous budget deficit does not make the need for R.A.
No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.
Apparently, the members of the Senate (including some of the petitioners in these
cases) believed that there was an urgent need for consideration of S. No. 1630,
because they responded to the call of the President by voting on the bill on second and
third readings on the same day. While the judicial department is not bound by the
Senate's acceptance of the President's certification, the respect due coequal
departments of the government in matters committed to them by the Constitution and
the absence of a clear showing of grave abuse of discretion caution a stay of the judicial
hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the
Senate where it was discussed for six days. Only its distribution in advance in its final
printed form was actually dispensed with by holding the voting on second and third
readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on March
24, 1994 elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-
fold: (1) to inform the members of Congress of what they must vote on and (2) to give
them notice that a measure is progressing through the enacting process, thus enabling
them and others interested in the measure to prepare their positions with reference to it.
(1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p.
282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and
the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI))
that in violation of the constitutional policy of full public disclosure and the people's right
to know (Art. II, 28 and Art. III, 7) the Conference Committee met for two days in
executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold
such sessions with only the conferees and their staffs in attendance and it was only in
1975 when a new rule was adopted requiring open sessions. Unlike its American
counterpart, the Philippine Congress has not adopted a rule prescribing open hearings
for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in
1975, at least staff members were present. These were staff members of the Senators
and Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were
excluded. There is no showing that the conferees themselves did not take notes of their
proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret
diplomatic negotiations involving state interests, conferees keep notes of their meetings.
Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee
reports must contain "a detailed, sufficiently explicit statement of the changes in or other
amendments." These changes are shown in the bill attached to the Conference
Committee Report. The members of both houses could thus ascertain what changes
had been made in the original bills without the need of a statement detailing the
changes.
The same question now presented was raised when the bill which became R.A. No.
1400 (Land Reform Act of 1955) was reported by the Conference Committee.
Congressman Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to
consider the report of the conference committee regarding House
Bill No. 2557 by reason of the provision of Section 11, Article XII, of
the Rules of this House which provides specifically that the
conference report must be accompanied by a detailed statement of
the effects of the amendment on the bill of the House. This
conference committee report is not accompanied by that detailed
statement, Mr. Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few
words in connection with the point of order raised by the gentleman
from Pangasinan.
There is no question about the provision of the Rule cited by the
gentleman from Pangasinan, but this provision applies to those
cases where only portions of the bill have been amended. In this
case before us an entire bill is presented; therefore, it can be easily
seen from the reading of the bill what the provisions are.
Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look
into the reason for the provisions of the Rules, and the reason for
the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases
inserted in or deleted from the provisions of the bill included in the
conference report, and we cannot understand what those words
and phrases mean and their relation to the bill. In that case, it is
necessary to make a detailed statement on how those words and
phrases will affect the bill as a whole; but when the entire bill itself
is copied verbatim in the conference report, that is not necessary.
So when the reason for the Rule does not exist, the Rule does not
exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the
ruling was appealed, it was upheld by viva voce and when a division of the House was
called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new
provisions as long as these are germane to the subject of the conference. As this Court
held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion
written by then Justice Cruz, the jurisdiction of the conference committee is not limited
to resolving differences between the Senate and the House. It may propose an entirely
new provision. What is important is that its report is subsequently approved by the
respective houses of Congress. This Court ruled that it would not entertain allegations
that, because new provisions had been added by the conference committee, there was
thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the
petitioners' charges that an amendment was made upon the last
reading of the bill that eventually became R.A. No. 7354 and
that copies thereof in its final form were not distributed among the
members of each House. Both the enrolled bill and the legislative
journals certify that the measure was duly enacted i.e., in
accordance with Article VI, Sec. 26 (2) of the Constitution. We are
bound by such official assurances from a coordinate department of
the government, to which we owe, at the very least, a becoming
courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the
Philippines in a 1979 study:
Conference committees may be of two types: free or instructed.
These committees may be given instructions by their parent bodies
or they may be left without instructions. Normally the conference
committees are without instructions, and this is why they are often
critically referred to as "the little legislatures." Once bills have been
sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new
measures that were not in the original legislation. No minutes are
kept, and members' activities on conference committees are difficult
to determine. One congressman known for his idealism put it this
way: "I killed a bill on export incentives for my interest group [copra]
in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted,
then the committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in
COMMITTEES AND LEGISLATURES: A COMPARATIVE
ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We
cite it only to say that conference committees here are no different from their
counterparts in the United States whose vast powers we noted in Philippine Judges
Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has the
power "to determine the rules of its proceedings," including those of its committees. Any
meaningful change in the method and procedures of Congress or its committees must
therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716
violates Art. VI, 26 (1) of the Constitution which provides that "Every bill passed by
Congress shall embrace only one subject which shall be expressed in the title thereof."
PAL contends that the amendment of its franchise by the withdrawal of its exemption
from the VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue
"in lieu of all other taxes, duties, royalties, registration, license and other fees and
charges of any kind, nature, or description, imposed, levied, established, assessed or
collected by any municipal, city, provincial or national authority or government agency,
now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of
the National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from
the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or
international agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from
the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except
those granted under Presidential Decree Nos. 66, 529, 972, 1491,
1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses its
intention to amend any provision of the NIRC which stands in the way of accomplishing
the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law
by specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply
with the constitutional requirement, since it is already stated in the title that the law
seeks to amend the pertinent provisions of the NIRC, among which is 103(q), in order
to widen the base of the VAT. Actually, it is the bill which becomes a law that is required
to express in its title the subject of legislation. The titles of H. No. 11197 and S. No.
1630 in fact specifically referred to 103 of the NIRC as among the provisions sought to
be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made
by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE
POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND
RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR
OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient description of the
subject of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment
of the general objectives of the statute to be expressed in its title
would not only be unreasonable but would actually render
legislation impossible. [Cooley, Constitutional Limitations, 8th Ed.,
p. 297] As has been correctly explained:
The details of a legislative act need not be specifically
stated in its title, but matter germane to the subject as
expressed in the title, and adopted to the
accomplishment of the object in view, may properly
be included in the act. Thus, it is proper to create in
the same act the machinery by which the act is to be
enforced, to prescribe the penalties for its infraction,
and to remove obstacles in the way of its execution. If
such matters are properly connected with the subject
as expressed in the title, it is unnecessary that they
should also have special mention in the title.
(Southern Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A.
No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the press.
At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed
freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the
press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. It is thus different from
the tax involved in the cases invoked by the PPI. The license tax in Grosjean
v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers
whose weekly circulation was over 20,000, with the result that the tax applied only to 13
out of 124 publishers in Louisiana. These large papers were critical of Senator Huey
Long who controlled the state legislature which enacted the license tax. The censorial
motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue,
460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because
although it could have been made liable for the sales tax or, in lieu thereof, for the use
tax on the privilege of using, storing or consuming tangible goods, the press was not.
Instead, the press was exempted from both taxes. It was, however, later made to pay
a special use tax on the cost of paper and ink which made these items "the only items
subject to the use tax that were component of goods to be sold at retail." The U.S.
Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the
VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises
registered with the Export Processing Zone Authority, and many more are likewise
totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to
broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No.
7716. An enumeration of some of these transactions will suffice to show that by and
large this is not so and that the exemptions are granted for a purpose. As the Solicitor
General says, such exemptions are granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of the end-user rather than for
profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the
manufacture of feeds).
(b) Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) or for
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax
and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against
the press because "even nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this assertion the following
statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is not so restricted. A
license tax certainly does not acquire constitutional validity because
it classifies the privileges protected by the First Amendment along
with the wares and merchandise of hucksters and peddlers and
treats them all alike. Such equality in treatment does not save the
ordinance. Freedom of press, freedom of speech, freedom of
religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is
mainly for regulation. Its imposition on the press is unconstitutional because it lays a
prior restraint on the exercise of its right. Hence, although its application to others, such
those selling goods, is valid, its application to the press or to religious groups, such as
the Jehovah's Witnesses, in connection with the latter's sale of religious books and
pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to
impose a tax on income or property of a preacher. It is quite another thing to exact a tax
on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101
Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on
those engaged in the sale of general merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible Society without restraining the free
exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which
are given free to those who cannot afford to pay so that to tax the sales would be to
increase the price, while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental as to make it
difficult to differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on
the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as
amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to
accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is
not liable to pay the VAT does not excuse it from the payment of this fee because it also
sells some copies. At any rate whether the PBS is liable for the VAT must be decided in
concrete cases, in the event it is assessed this tax by the Commissioner of Internal
Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the
rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without reasonable basis and
(3) violates the rule that taxes should be uniform and equitable and that Congress shall
"evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to be paid because of the
10% VAT. The additional amount, it is pointed out, is something that the buyer did not
anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities
from numerous sources are cited by the plaintiffs, but none of them show that a lawful
tax on a new subject, or an increased tax on an old one, interferes with a contract or
impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen
the security of another, or may impose additional burdens upon one class and release
the burdens of another, still the tax must be paid unless prohibited by the Constitution,
nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574
(1919)). Indeed not only existing laws but also "the reservation of the essential attributes
of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-
American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful
authority of the government and no obligation of contract can extend to the defeat of
that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the
sale of agricultural products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property which is equally essential.
The sale of real property for socialized and low-cost housing is exempted from the tax,
but CREBA claims that real estate transactions of "the less poor," i.e., the middle class,
who are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are
essential goods and services was already exempt under 103, pars. (b) (d) (1) of the
NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A.
No. 7716 granted exemption to these transactions, while subjecting those of petitioner
to the payment of the VAT. Moreover, there is a difference between the "homeless
poor" and the "homeless less poor" in the example given by petitioner, because the
second group or middle class can afford to rent houses in the meantime that they
cannot yet buy their own homes. The two social classes are thus differently situated in
life. "It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De
Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran
ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates
Art. VI, 28(1) which provides that "The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies equally to all persons,
forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra;
Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original
VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in violation
of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this
Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid
tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods
and services sold to the public, which are not exempt, at the
constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales
of goods or services by persons engaged in business with an
aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and
marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general
public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the
Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues
that the law contravenes the mandate of Congress to provide for a progressive system
of taxation because the law imposes a flat rate of 10% and thus places the tax burden
on all taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted to
mean simply that "direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their
original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the
manufacture of feeds).
(b) Goods used for personal consumption or use (household and
personal effects of citizens returning to the Philippines) and or
professional use, like professional instruments and implements, by
persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be
used for manufacture of petroleum products subject to excise tax
and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary
services, and services rendered under employer-employee
relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international
agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for
Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly by higher income
groups. These include real properties held primarily for sale to customers or for lease in
the ordinary course of trade or business, the right or privilege to use patent, copyright,
and other similar property or right, the right or privilege to use industrial, commercial or
scientific equipment, motion picture films, tapes and discs, radio, television, satellite
transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common
carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There is
no fully developed record which can impart to adjudication the impact of actuality. There
is no factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's
members have not even been assessed the VAT. Petitioner's case is not made
concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not suffice. There
must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision
as void on its face, he has not made out a case. This is merely to
adhere to the authoritative doctrine that where the due process and
equal protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for proof of
such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It
may be that postponement of adjudication would result in a multiplicity of suits. This
need not be the case, however. Enforcement of the law may give rise to such a case. A
test case, provided it is an actual case and not an abstract or hypothetical one, may
thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion
that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made
that "there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the government." This duty
can only arise if an actual case or controversy is before us. Under Art . VIII, 5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean
is that in the exercise of that jurisdiction we have the judicial power to determine
questions of grave abuse of discretion by any branch or instrumentality of the
government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right
to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559
(1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the
Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary
Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129).
The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of
all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming
within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of
discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the
Cooperative Union of the Philippines (CUP), after briefly surveying the course of
legislation, argues that it was to adopt a definite policy of granting tax exemption to
cooperatives that the present Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to infringe a constitutional policy.
Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives
from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955;
that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and
sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the Constitution "repudiated the
previous actions of the government adverse to the interests of the cooperatives, that
is, the repeated revocation of the tax exemption to cooperatives and instead upheld the
policy of strengthening the cooperatives by way of the grant of tax exemptions," by
providing the following in Art. XII:
1. The goals of the national economy are a more equitable
distribution of opportunities, income, and wealth; a sustained
increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity
as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment
based on sound agricultural development and agrarian reform,
through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and
foreign markets. However, the State shall protect Filipino
enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all
regions of the country shall be given optimum opportunity to
develop. Private enterprises, including corporations, cooperatives,
and similar collective organizations, shall be encouraged to
broaden the base of their ownership.
15. The Congress shall create an agency to promote the viability
and growth of cooperatives as instruments for social justice and
economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955
singled out cooperatives by withdrawing their exemption from income and sales taxes
under P.D. No. 175, 5. What P.D. No. 1955, 1 did was to withdraw the exemptions
and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after
P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in 1986, the
exemption was again repealed by E.O. No. 93, 1, but then again cooperatives were
not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation,
as far as the grant of tax privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to
cooperatives, no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives
are exempt from taxation. Such theory is contrary to the Constitution under which only
the following are exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law because electric cooperatives are
exempted from the VAT. The classification between electric and other cooperatives
(farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently
rests on a congressional determination that there is greater need to provide cheaper
electric power to as many people as possible, especially those living in the rural areas,
than there is to provide them with other necessities in life. We cannot say that such
classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity
of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have now come to the conclusion
that the law suffers from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a grave abuse
of discretion. Any question as to its necessity, desirability or expediency must be
addressed to Congress as the body which is electorally responsible, remembering that,
as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and
welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas &
Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public
accountability of legislators, that those who took part in passing the law in question by
voting for it in Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the
temporary restraining order previously issued is hereby lifted.
SO ORDERED.
EN BANC

BRITISH AMERICAN TOBACCO, G.R. No. 163583


Petitioner,
Present:

Puno, C.J.,
Quisumbing,
Ynares-Santiago,
Carpio,
- versus - Austria-Martinez,
Corona,
Carpio Morales,
Azcuna,
Tinga,
Chico-Nazario,
Velasco, Jr.,
Nachura,
Reyes,
Leonardo-De Castro, and
Brion, JJ.
JOSE ISIDRO N. CAMACHO,
in his capacity as Secretary of
the Department of Finance and
GUILLERMO L. PARAYNO, JR.,
in his capacity as Commissioner of
the Bureau of Internal Revenue,
Respondents.
PHILIP MORRIS PHILIPPINES
MANUFACTURING, INC.,
FORTUNE TOBACCO, CORP., Promulgated:
MIGHTY CORPORATION, and
JT INTERNATIONAL, S.A.,
Respondents-in-Intervention. August 20, 2008

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

DECISION
YNARES-SANTIAGO, J.:

This petition for review assails the validity of: (1) Section 145 of the National Internal
Revenue Code (NIRC), as recodified by Republic Act (RA) 8424; (2) RA 9334, which
further amended Section 145 of the NIRC on January 1, 2005; (3) Revenue Regulations
Nos. 1-97, 9-2003, and 22-2003; and (4) Revenue Memorandum Order No. 6-
2003.Petitioner argues that the said provisions are violative of the equal protection and
uniformity clauses of the Constitution.

RA 8240, entitled An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as
Amended and For Other Purposes, took effect on January 1, 1997. In the same year,
Congress passed RA 8424 or The Tax Reform Act of 1997, re-codifying the
NIRC. Section 142 was renumbered as Section 145 of the NIRC.

Paragraph (c) of Section 145 provides for four tiers of tax rates based on the net
retail price per pack of cigarettes. To determine the applicable tax rates of existing
cigarette brands, a survey of the net retail prices per pack of cigarettes was conducted
as of October 1, 1996, the results of which were embodied in Annex D of the NIRC as
the duly registered, existing or active brands of cigarettes.

Paragraph (c) of Section 145, [1] states

SEC. 145. Cigars and cigarettes.

xxxx

(c) Cigarettes packed by machine. There shall be levied, assessed and


collected on cigarettes packed by machine a tax at the rates prescribed
below:

(1) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the
tax shall be Thirteen pesos and forty-four centavos (P13.44)
per pack;

(2) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (10.00) per pack,
the tax shall be Eight pesos and ninety-six centavos (P8.96)
per pack;
(3) If the net retail price (excluding the excise tax and the
value-added tax) is Five pesos (P5.00) but does not exceed
Six pesos and fifty centavos (P6.50) per pack, the tax shall
be Five pesos and sixty centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and
the value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be One peso and twelve centavos (P1.12) per
pack.

Variants of existing brands of cigarettes which are introduced in the


domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.

xxxx

New brands shall be classified according to their current net retail


price.

For the above purpose, net retail price shall mean the price at
which the cigarette is sold on retail in 20 major supermarkets in Metro
Manila (for brands of cigarettes marketed nationally), excluding the
amount intended to cover the applicable excise tax and the value-added
tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its


average net retail price as of October 1, 1996, as set forth in Annex
D of this Act, shall remain in force until revised by
Congress. (Emphasis supplied)

As such, new brands of cigarettes shall be taxed according to their current net retail
price while existing or old brands shall be taxed based on their net retail price as
of October 1, 1996.

To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue


Regulations No. 1-97,[2] which classified the existing brands of cigarettes as those duly
registered or active brands prior to January 1, 1997. New brands, or those registered
after January 1, 1997, shall be initially assessed at their suggested retail price until such
time that the appropriate survey to determine their current net retail price is
conducted. Pertinent portion of the regulations reads

SECTION 2. Definition of Terms.

xxxx
3. Duly registered or existing brand of cigarettes shall include duly
registered, existing or active brands of cigarettes, prior to January 1, 1997.
xxxx

6. New Brands shall mean brands duly registered after January 1,


1997 and shall include duly registered, inactive brands of cigarette not
sold in commercial quantity before January 1, 1997.

SECTION 4. Classification and Manner of Taxation of Existing Brands,


New Brands and Variant of Existing Brands.

xxxx

B. New Brand

New brands shall be classified according to their current net retail price. In
the meantime that the current net retail price has not yet been established,
the suggested net retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in 20 major
supermarkets or retail outlets in Metro Manila (for brands of cigarette
marketed nationally) or in five (5) major supermarkets or retail outlets in
the region (for brands which are marketed only outside Metro Manila) at
which the cigarette is sold on retail in reams/cartons, three (3) months
after the initial removal of the new brand to determine the actual net retail
price excluding the excise tax and value added tax which shall then be the
basis in determining the specific tax classification. In case the current net
retail price is higher than the suggested net retail price, the former shall
prevail. Any difference in specific tax due shall be assessed and collected
inclusive of increments as provided for by the National Internal Revenue
Code, as amended.

In June 2001, petitioner British American Tobacco introduced into the market Lucky
Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a
suggested retail price of P9.90 per pack.[3] Pursuant to Sec. 145 (c) quoted above, the
Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.

On February 17, 2003, Revenue Regulations No. 9-2003,[4] amended Revenue


Regulations No. 1-97 by providing, among others, a periodic review every two years or
earlier of the current net retail price of new brands and variants thereof for the purpose
of establishing and updating their tax classification, thus:

For the purpose of establishing or updating the tax classification of new


brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed through
the issuance of an appropriate Revenue Regulations.

Pursuant thereto, Revenue Memorandum Order No. 6-2003[5] was issued on March
11, 2003, prescribing the guidelines and procedures in establishing current net retail
prices of new brands of cigarettes and alcohol products.
Subsequently, Revenue Regulations No. 22-2003[6] was issued on August 8,
2003 to implement the revised tax classification of certain new brands introduced in the
market after January 1, 1997, based on the survey of their current net retail price. The
survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol
Lights, are sold at the current net retail price of P22.54, P22.61 and P21.23, per pack,
respectively.[7] Respondent Commissioner of the Bureau of Internal Revenue thus
recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky Strikes
average net retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial Court (RTC) of
Makati, Branch 61, a petition for injunction with prayer for the issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No.
03-1032. Said petition sought to enjoin the implementation of Section 145 of the NIRC,
Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order
No. 6-2003 on the ground that they discriminate against new brands of cigarettes, in
violation of the equal protection and uniformity provisions of the Constitution.

Respondent Commissioner of Internal Revenue filed an Opposition[8] to the application


for the issuance of a TRO. On September 4, 2003, the trial court denied the application
for TRO, holding that the courts have no authority to restrain the collection of
taxes.[9] Meanwhile, respondent Secretary of Finance filed a Motion to
Dismiss,[10] contending that the petition is premature for lack of an actual controversy or
urgent necessity to justify judicial intervention.

In an Order dated March 4, 2004, the trial court denied the motion to dismiss and issued
a writ of preliminary injunction to enjoin the implementation of Revenue Regulations
Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-
2003.[11] Respondents filed a Motion for Reconsideration[12] and Supplemental Motion
for Reconsideration.[13] At the hearing on the said motions, petitioner and respondent
Commissioner of Internal Revenue stipulated that the only issue in this case is the
constitutionality of the assailed law, order, and regulations.[14]

On May 12, 2004, the trial court rendered a decision [15] upholding the constitutionality of
Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and
Revenue Memorandum Order No. 6-2003. The trial court also lifted the writ of
preliminary injunction. The dispositive portion of the decision reads:

WHEREFORE, premises considered, the instant Petition is hereby


DISMISSED for lack of merit. The Writ of Preliminary Injunction previously
issued is hereby lifted and dissolved.
SO ORDERED.[16]

Petitioner brought the instant petition for review directly with this Court on a pure
question of law.

While the petition was pending, RA 9334 (An Act Increasing The Excise Tax
Rates Imposed on Alcohol And Tobacco Products, Amending For The Purpose
Sections 131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As Amended), took
effect on January 1, 2005. The statute, among others,

(1) increased the excise tax rates provided in paragraph (c) of


Section 145;

(2) mandated that new brands of cigarettes shall initially be


classified according to their suggested net retail price, until such time that
their correct tax bracket is finally determined under a specified period and,
after which, their classification shall remain in force until revised by
Congress;

(3) retained Annex D as tax base of those surveyed as of October


1, 1996 including the classification of brands for the same products which,
although not set forth in said Annex D, were registered on or before
January 1, 1997 and were being commercially produced and marketed on
or after October 1, 1996, and which continue to be commercially produced
and marketed after the effectivity of this Act. Said classification shall
remain in force until revised by Congress; and

(4) provided a legislative freeze on brands of cigarettes introduced


between the period January 2, 1997[17] to December 31, 2003, such that
said cigarettes shall remain in the classification under which the BIR has
determined them to belong as of December 31, 2003, until revised by
Congress.

Pertinent portions, of RA 9334, provides:

SEC. 145. Cigars and Cigarettes.

xxxx

(C) Cigarettes Packed by Machine. There shall be levied, assessed


and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per
pack;

Effective on January 1, 2007, Two pesos and twenty-


three centavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-


seven centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and


seventy-two centavos (P2.72) per pack.

(2) If the net retail price (excluding the excise tax and the value-added tax)
is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-five


centavos (P6.35) per pack;

Effective on January 1, 2007, Six pesos and seventy-


four centavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and


fourteen centavos (P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-


six centavos (P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-
added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-


five centavos (10.35) per pack;

Effective on January 1, 2007, Ten pesos and eighty-


eight centavos (P10.88) per pack;

Effective on January 1, 2009, Eleven pesos and forty-


three centavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00)


per pack.
(4) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Twenty-five pesos


(P25.00) per pack;

Effective on January 1, 2007, Twenty-six pesos and


six centavos (P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos


and sixteen centavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and


thirty centavos (P28.30) per pack.

xxxx

New brands, as defined in the immediately following paragraph, shall


initially be classified according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240.

Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of Internal
Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of eighteen (18) months from such
validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be classified; Provided
however, That brands of cigarettes introduced in the domestic
market between January 1, 1997 [should be January 2, 1997] and
December 31, 2003 shall remain in the classification under which the
Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not
be revised except by an act of Congress.
Net retail price, as determined by the Bureau of Internal Revenue through
a price survey to be conducted by the Bureau of Internal Revenue itself, or
the National Statistics Office when deputized for the purpose by the
Bureau of Internal Revenue, shall mean the price at which the cigarette is
sold in retail in at least twenty (20) major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail price
shall mean the price at which the cigarette is sold in at least five (5) major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on its average


net retail price as of October 1, 1996, as set forth in Annex D,
including the classification of brands for the same products which,
although not set forth in said Annex D, were registered and were
being commercially produced and marketed on or after October 1,
1996, and which continue to be commercially produced and
marketed after the effectivity of this Act, shall remain in force until
revised by Congress. (Emphasis added)

Under RA 9334, the excise tax due on petitioners products was increased to
P25.00 per pack. In the implementation thereof, respondent Commissioner assessed
petitioners importation of 911,000 packs of Lucky Strike cigarettes at the increased tax
rate of P25.00 per pack, rendering it liable for taxes in the total sum of
P22,775,000.00.[18]

Hence, petitioner filed a Motion to Admit Attached Supplement [19] and a


Supplement[20] to the petition for review, assailing the constitutionality of RA 9334
insofar as it retained Annex D and praying for a downward classification of Lucky Strike
products at the bracket taxable at P8.96 per pack. Petitioner contended that the
continued use of Annex D as the tax base of existing brands of cigarettes gives undue
protection to said brands which are still taxed based on their price as of October 1996
notwithstanding that they are now sold at the same or even at a higher price than new
brands like Lucky Strike. Thus, old brands of cigarettes such as Marlboro and Philip
Morris which, like Lucky Strike, are sold at or more than P22.00 per pack, are taxed at
the rate of P10.88 per pack, while Lucky Strike products are taxed at P26.06 per pack.

In its Comment to the supplemental petition, respondents, through the Office of


the Solicitor General (OSG), argued that the passage of RA 9334, specifically the
provision imposing a legislative freeze on the classification of cigarettes introduced into
the market between January 2, 1997 and December 31, 2003, rendered the instant
petition academic. The OSG claims that the provision in Section 145, as amended by
RA 9334, prohibiting the reclassification of cigarettes introduced during said period,
cured the perceived defect of Section 145 considering that, like the cigarettes under
Annex D, petitioners brands and other brands introduced between January 2, 1997 and
December 31, 2003, shall remain in the classification under which the BIR has placed
them and only Congress has the power to reclassify them.

On March 20, 2006, Philip Morris Philippines Manufacturing Incorporated filed a


Motion for Leave to Intervene with attached Comment-in-Intervention.[21] This was
followed by the Motions for Leave to Intervene of Fortune Tobacco
Corporation,[22] Mighty Corporation, [23] and JT International, S.A., with their respective
Comments-in-Intervention. The Intervenors claim that they are parties-in-interest who
stand to be affected by the ruling of the Court on the constitutionality of Section 145 of
the NIRC and its Annex D because they are manufacturers of cigarette brands which
are included in the said Annex. Hence, their intervention is proper since the protection
of their interest cannot be addressed in a separate proceeding.

According to the Intervenors, no inequality exists because cigarettes classified by


the BIR based on their net retail price as of December 31, 2003 now enjoy the
same status quo provision that prevents the BIR from reclassifying cigarettes included
in Annex D. It added that the Court has no power to pass upon the wisdom of the
legislature in retaining Annex D in RA 9334; and that the nullification of said Annex
would bring about tremendous loss of revenue to the government, chaos in the
collection of taxes, illicit trade of cigarettes, and cause decline in cigarette demand to
the detriment of the farmers who depend on the tobacco industry.

Intervenor Fortune Tobacco further contends that petitioner is estopped from


questioning the constitutionality of Section 145 and its implementing rules and
regulations because it entered into the cigarette industry fully aware of the existing tax
system and its consequences. Petitioner imported cigarettes into the country knowing
that its suggested retail price, which will be the initial basis of its tax classification, will
be confirmed and validated through a survey by the BIR to determine the correct tax
that would be levied on its cigarettes.

Moreover, Fortune Tobacco claims that the challenge to the validity of the BIR
issuances should have been brought by petitioner before the Court of Tax Appeals
(CTA) and not the RTC because it is the CTA which has exclusive appellate jurisdiction
over decisions of the BIR in tax disputes.

On August 7, 2006, the OSG manifested that it interposes no objection to the


motions for intervention.[24] Therefore, considering the substantial interest of the
intervenors, and in the higher interest of justice, the Court admits their intervention.
Before going into the substantive issues of this case, we must first address the
matter of jurisdiction, in light of Fortune Tobaccos contention that petitioner should have
brought its petition before the Court of Tax Appeals rather than the regional trial court.

The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125,
as amended by Republic Act No. 9282. Section 7 thereof states, in pertinent part:

Sec. 7. Jurisdiction. The CTA shall exercise:


a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving


disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by
the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving


disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relations thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of
action, in which case the inaction shall be deemed a denial; xxx. [25]

While the above statute confers on the CTA jurisdiction to resolve tax disputes in
general, this does not include cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or constitutionality of a law, or a rule
or regulation issued by the administrative agency in the performance of its quasi-
legislative function, the regular courts have jurisdiction to pass upon the same. The
determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the regular
courts. Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This
is within the scope of judicial power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts of the political
departments. Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to
determine whether or not there has been a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any branch or instrumentality of the
Government.[26]

In Drilon v. Lim,[27] it was held:

We stress at the outset that the lower court had jurisdiction to


consider the constitutionality of Section 187, this authority being embraced
in the general definition of the judicial power to determine what are the
valid and binding laws by the criterion of their conformity to the
fundamental law. Specifically, B.P. 129 vests in the regional trial courts
jurisdiction over all civil cases in which the subject of the litigation is
incapable of pecuniary estimation, even as the accused in a criminal
action has the right to question in his defense the constitutionality of a law
he is charged with violating and of the proceedings taken against him,
particularly as they contravene the Bill of Rights. Moreover, Article X,
Section 5(2), of the Constitution vests in the Supreme Court appellate
jurisdiction over final judgments and orders of lower courts in all cases in
which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question.

The petition for injunction filed by petitioner before the RTC is a direct attack on
the constitutionality of Section 145(C) of the NIRC, as amended, and the validity of its
implementing rules and regulations. In fact, the RTC limited the resolution of the subject
case to the issue of the constitutionality of the assailed provisions. The determination of
whether the assailed law and its implementing rules and regulations contravene the
Constitution is within the jurisdiction of regular courts. The Constitution vests the power
of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in the courts,
including the regional trial courts.[28] Petitioner, therefore, properly filed the subject case
before the RTC.

We come now to the issue of whether petitioner is estopped from assailing the
authority of the Commissioner of Internal Revenue. Fortune Tobacco raises this
objection by pointing out that when petitioner requested the Commissioner for a ruling
that its Lucky Strike Soft Pack cigarettes was a new brand rather than a variant of an
existing brand, and thus subject to a lower specific tax rate, petitioner executed an
undertaking to comply with the procedures under existing regulations for the
assessment of deficiency internal revenue taxes.

Fortune Tobacco argues that petitioner, after invoking the authority of the
Commissioner of Internal Revenue, cannot later on turn around when the ruling is
adverse to it.

Estoppel, an equitable principle rooted in natural justice, prevents persons from


going back on their own acts and representations, to the prejudice of others who have
relied on them.[29] The principle is codified in Article 1431 of the Civil Code, which
provides:

Through estoppel, an admission or representation is rendered


conclusive upon the person making it and cannot be denied or disproved
as against the person relying thereon.

Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of Court, viz:

Sec. 2. Conclusive presumptions. The following are instances of


conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing true,
and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission be permitted to falsify it.

The elements of estoppel are: first, the actor who usually must have knowledge,
notice or suspicion of the true facts, communicates something to another in a
misleading way, either by words, conduct or silence; second, the other in fact relies, and
relies reasonably or justifiably, upon that communication; third, the other would be
harmed materially if the actor is later permitted to assert any claim inconsistent with his
earlier conduct; and fourth, the actor knows, expects or foresees that the other would
act upon the information given or that a reasonable person in the actor's position would
expect or foresee such action.[30]

In the early case of Kalalo v. Luz,[31] the elements of estoppel, as related to the
party to be estopped, are: (1) conduct amounting to false representation or concealment
of material facts; or at least calculated to convey the impression that the facts are other
than, and inconsistent with, those which the party subsequently attempts to
assert; (2) intent,or at least expectation that this conduct shall be acted upon by, or at
least influence, the other party; and (3) knowledge, actual or constructive, of the real
facts.

We find that petitioner was not guilty of estoppel. When it made the undertaking
to comply with all issuances of the BIR, which at that time it considered as valid,
petitioner did not commit any false misrepresentation or misleading act. Indeed,
petitioner cannot be faulted for initially undertaking to comply with, and subjecting itself
to the operation of Section 145(C), and only later on filing the subject case praying for
the declaration of its unconstitutionality when the circumstances change and the law
results in what it perceives to be unlawful discrimination. The mere fact that a law has
been relied upon in the past and all that time has not been attacked as unconstitutional
is not a ground for considering petitioner estopped from assailing its validity. For courts
will pass upon a constitutional question only when presented before it in bona
fide cases for determination, and the fact that the question has not been raised before is
not a valid reason for refusing to allow it to be raised later.[32]

Now to the substantive issues.

To place this case in its proper context, we deem it necessary to first discuss
how the assailed law operates in order to identify, with precision, the specific provisions
which, according to petitioner, have created a grossly discriminatory classification
scheme between old and new brands. The pertinent portions of RA 8240, as amended
by RA 9334, are reproduced below for ready reference:

SEC. 145. Cigars and Cigarettes.


xxxx

(C) Cigarettes Packed by Machine. There shall be levied, assessed


and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (P5.00) per pack, the tax shall be:

Effective on January 1, 2005, Two pesos (P2.00) per


pack;

Effective on January 1, 2007, Two pesos and twenty-


three centavos (P2.23) per pack;

Effective on January 1, 2009, Two pesos and forty-


seven centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and


seventy-two centavos (P2.72) per pack.

(2) If the net retail price (excluding the excise tax and the value-added tax)
is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos
(P6.50) per pack, the tax shall be:

Effective on January 1, 2005, Six pesos and thirty-five


centavos (P6.35) per pack;

Effective on January 1, 2007, Six pesos and seventy-


four centavos (P6.74) per pack;

Effective on January 1, 2009, Seven pesos and


fourteen centavos (P7.14) per pack; and

Effective on January 1, 2011, Seven pesos and fifty-


six centavos (P7.56) per pack.

(3) If the net retail price (excluding the excise tax and the value-
added tax) exceeds Six pesos and fifty centavos (P6.50) but does not
exceed Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Ten pesos and thirty-


five centavos (10.35) per pack;

Effective on January 1, 2007, Ten pesos and eighty-


eight centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-
three centavos (P11.43) per pack; and

Effective on January 1, 2011, Twelve pesos (P12.00)


per pack.

(4) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (P10.00) per pack, the tax shall be:

Effective on January 1, 2005, Twenty-five pesos


(P25.00) per pack;

Effective on January 1, 2007, Twenty-six pesos and


six centavos (P26.06) per pack;

Effective on January 1, 2009, Twenty-seven pesos


and sixteen centavos (P27.16) per pack; and

Effective on January 1, 2011, Twenty-eight pesos and


thirty centavos (P28.30) per pack.

xxxx

New brands, as defined in the immediately following paragraph, shall


initially be classified according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240.

Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of Internal
Revenue shall validate the suggested net retail price of the new brand
against the net retail price as defined herein and determine the correct tax
bracket under which a particular new brand of cigarette, as defined above,
shall be classified. After the end of eighteen (18) months from such
validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of
revalidation in order to finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be classified; Provided
however, That brands of cigarettes introduced in the domestic market
between January 1, 1997 [should be January 2, 1997] and December 31,
2003 shall remain in the classification under which the Bureau of Internal
Revenue has determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of
Congress.

Net retail price, as determined by the Bureau of Internal Revenue through


a price survey to be conducted by the Bureau of Internal Revenue itself, or
the National Statistics Office when deputized for the purpose by the
Bureau of Internal Revenue, shall mean the price at which the cigarette is
sold in retail in at least twenty (20) major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the net retail price
shall mean the price at which the cigarette is sold in at least five (5) major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and value-added tax.

The classification of each brand of cigarettes based on its average net


retail price as of October 1, 1996, as set forth in Annex D, including the
classification of brands for the same products which, although not set forth
in said Annex D, were registered and were being commercially produced
and marketed on or after October 1, 1996, and which continue to be
commercially produced and marketed after the effectivity of this Act, shall
remain in force until revised by Congress.

As can be seen, the law creates a four-tiered system which we may refer to as
the low-priced,[33] medium-priced,[34] high-priced,[35] and premium-priced[36] tax
brackets. When a brand is introduced in the market, the current net retail price is
determined through the aforequoted specified procedure. The current net retail price is
then used to classify under which tax bracket the brand belongs in order to finally
determine the corresponding excise tax rate on a per pack basis. The assailed feature
of this law pertains to the mechanism where, after a brand is classified based on its
current net retail price, the classification is frozen and only Congress can thereafter
reclassify the same. From a practical point of view, Annex D is merely a by-product of
the whole mechanism and philosophy of the assailed law. That is, the brands under
Annex D were also classified based on their current net retail price, the only difference
being that they were the first ones so classified since they were the only brands
surveyed as of October 1, 1996, or prior to the effectivity of RA 8240 on January 1,
1997.[37]

Due to this legislative classification scheme, it is possible that over time the net
retail price of a previously classified brand, whether it be a brand under Annex D or a
new brand classified after the effectivity of RA 8240 on January 1, 1997, would
increase (due to inflation, increase of production costs, manufacturers decision to
increase its prices, etc.) to a point that its net retail price pierces the tax bracket to which
it was previously classified.[38] Consequently, even if its present day net retail price
would make it fall under a higher tax bracket, the previously classified brand would
continue to be subject to the excise tax rate under the lower tax bracket by virtue of the
legislative classification freeze.

Petitioner claims that this is what happened in 2004 to the Marlboro and Philip Morris
brands, which were permanently classified under Annex D. As of October 1, 1996,
Marlboro had net retail prices ranging from P6.78 to P6.84 while Philip Morris had net
retail prices ranging from P7.39 to P7.48. Thus, pursuant to RA 8240,[39] Marlboro and
Philip Morris were classified under the high-priced tax bracket and subjected to an
excise tax rate of P8.96 per pack. Petitioner then presented evidence showing that after
the lapse of about seven years or sometime in 2004, Marlboros and Philip Morris net
retail prices per pack both increased to about P15.59.[40] This meant that they would fall
under the premium-priced tax bracket, with a higher excise tax rate of P13.44 per
pack,[41] had they been classified based on their 2004 net retail prices. However, due to
the legislative classification freeze, they continued to be classified under the high-priced
tax bracket with a lower excise tax rate. Petitioner thereafter deplores the fact that its
Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights cigarettes,
introduced in the market sometime in 2001 and validated by a BIR survey in 2003, were
found to have net retail prices of P11.53, P11.59 and P10.34,[42] respectively, which are
lower than those of Marlboro and Philip Morris. However, since petitioners cigarettes
were newly introduced brands in the market, they were taxed based on their current net
retail prices and, thus, fall under the premium-priced tax bracket with a higher excise tax
rate of P13.44 per pack. This unequal tax treatment between Marlboro and Philip
Morris, on the one hand, and Lucky Strike, on the other, is the crux of petitioners
contention that the legislative classification freeze violates the equal protection and
uniformity of taxation clauses of the Constitution.

It is apparent that, contrary to its assertions, petitioner is not only questioning the
undue favoritism accorded to brands under Annex D, but the entire mechanism and
philosophy of the law which freezes the tax classification of a cigarette brand based on
its current net retail price. Stated differently, the alleged discrimination arising from the
legislative classification freeze between the brands under Annex D and petitioners
newly introduced brands arose only because the former were classified based on their
current net retail price as of October 1, 1996 and petitioners newly introduced brands
were classified based on their current net retail price as of 2003. Without this
corresponding freezing of the classification of petitioners newly introduced brands
based on their current net retail price, it would be impossible to establish that a
disparate tax treatment occurred between the Annex D brands and petitioners newly
introduced brands.

This clarification is significant because, under these circumstances, a declaration


of unconstitutionality would necessarily entail nullifying the whole mechanism of the law
and not just Annex D. Consequently, if the assailed law is declared unconstitutional on
equal protection grounds, the entire method by which a brand of cigarette is classified
would have to be invalidated. As a result, no method to classify brands under Annex D
as well as new brands would be left behind and the whole Section 145 of the NIRC, as
amended, would become inoperative.[43]

To simplify the succeeding discussions, we shall refer to the whole mechanism


and philosophy of the assailed law which freezes the tax classification of a cigarette
brand based on its current net retail price and which, thus, produced different classes of
brands based on the time of their introduction in the market (starting with the brands in
Annex D since they were the first brands so classified as of October 1, 1996) as
the classification freeze provision.[44]

As thus formulated, the central issue is whether or not the classification freeze
provision violates the equal protection and uniformity of taxation clauses of the
Constitution.

In Sison, Jr. v. Ancheta,[45] this Court, through Chief Justice Fernando, explained the
applicable standard in deciding equal protection and uniformity of taxation challenges:

Now for equal protection. The applicable standard to avoid the


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

Petitioner likewise invoked the kindred concept of uniformity.


According to the Constitution: "The rule of taxation shall be uniform and
equitable." This requirement is met according to Justice Laurel in
Philippine Trust Company v. Yatco, decided in 1940, when the tax
"operates with the same force and effect in every place where the subject
may be found." He likewise added: "The rule of uniformity does not call for
perfect uniformity or perfect equality, because this is hardly attainable."
The problem of classification did not present itself in that case. It did not
arise until nine years later, when the Supreme Court held: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for
purposes of taxation, . . . As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice
and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." There is quite a similarity then to the standard of equal
protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation."[46] (Emphasis
supplied)
In consonance thereto, we have held that in our jurisdiction, the standard and analysis
of equal protection challenges in the main have followed the rational basis test, coupled
with a deferential attitude to legislative classifications and a reluctance to invalidate a
law unless there is a showing of a clear and unequivocal breach of the
Constitution.[47]Within the present context of tax legislation on sin products which neither
contains a suspect classification nor impinges on a fundamental right, the rational-basis
test thus finds application. Under this test, a legislative classification, to survive an equal
protection challenge, must be shown to rationally further a legitimate state
interest.[48] The classifications must be reasonable and rest upon some ground of
difference having a fair and substantial relation to the object of the legislation. [49] Since
every law has in its favor the presumption of constitutionality, the burden of proof is on
the one attacking the constitutionality of the law to prove beyond reasonable doubt that
the legislative classification is without rational basis.[50] The presumption of
constitutionality can be overcome only by the most explicit demonstration that a
classification is a hostile and oppressive discrimination against particular persons and
classes, and that there is no conceivable basis which might support it. [51]

A legislative classification that is reasonable does not offend the constitutional


guaranty of the equal protection of the laws. The classification is considered valid and
reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the
purpose of the law; (3) it applies, all things being equal, to both present and future
conditions; and (4) it applies equally to all those belonging to the same class. [52]

The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency. That is,
since a new brand was not yet in existence at the time of the passage of RA 8240, then
Congress needed a uniform mechanism to fix the tax bracket of a new brand. The
current net retail price, similar to what was used to classify the brands under Annex D
as of October 1, 1996, was thus the logical and practical choice. Further, with the
amendments introduced by RA 9334, the freezing of the tax classifications now
expressly applies not just to Annex D brands but to newer brands introduced after the
effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in
the future.[53] (However, as will be discussed later, the intent to apply the freezing
mechanism to newer brands was already in place even prior to the amendments
introduced by RA 9334 to RA 8240.) This does not explain, however, why the
classification is frozen after its determination based on current net retail price and how
this is germane to the purpose of the assailed law. An examination of the legislative
history of RA 8240 provides interesting answers to this question.

RA 8240 was the first of three parts in the Comprehensive Tax Reform Package
then being pushed by the Ramos Administration. It was enacted with the following
objectives stated in the Sponsorship Speech of Senator Juan Ponce Enrile (Senator
Enrile), viz:

First, to evolve a tax structure which will promote fair competition


among the players in the industries concerned and generate buoyant and
stable revenue for the government.

Second, to ensure that the tax burden is equitably distributed not


only amongst the industries affected but equally amongst the various
levels of our society that are involved in various markets that are going to
be affected by the excise tax on distilled spirits, fermented liquor, cigars
and cigarettes.

In the case of firms engaged in the industries producing the


products that we are about to tax, this means relating the tax burden to
their market share, not only in terms of quantity, Mr. President, but in
terms of value.

In case of consumers, this will mean evolving a multi-tiered rate


structure so that low-priced products are subject to lower tax rates and
higher-priced products are subject to higher tax rates.

Third, to simplify the tax administration and compliance with the tax
laws that are about to unfold in order to minimize losses arising from
inefficiencies and tax avoidance scheme, if not outright tax evasion. [54]
In the initial stages of the crafting of the assailed law, the Department of Finance (DOF)
recommended to Congress a shift from the then existing ad valorem taxation system to
a specific taxation system with respect to sin products, including cigarettes. The DOF
noted that the ad valorem taxation system was a source of massive tax leakages
because the taxpayer was able to evade paying the correct amount of taxes through the
undervaluation of the price of cigarettes using various marketing arms and dummy
corporations. In order to address this problem, the DOF proposed a specific taxation
system where the cigarettes would be taxed based on volume or on a per pack basis
which was believed to be less susceptible to price manipulation. The reason was that
the BIR would only need to monitor the sales volume of cigarettes, from which it could
easily compute the corresponding tax liability of cigarette manufacturers. Thus, the DOF
suggested the use of a three-tiered system which operates in substantially the same
manner as the four-tiered system under RA 8240 as earlier discussed. The proposal of
the DOF was embodied in House Bill (H.B.) No. 6060, the pertinent portions of which
states

SEC. 142. Cigars and cigarettes.

(c) Cigarettes packed by machine. There shall be levied, assessed


and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the manufacturers or importers wholesale price (net of excise


tax and value-added tax) per pack exceeds four pesos and twenty
centavos (P4.20), the tax shall be seven pesos and fifty centavos (P7.50);

(2) If the manufacturers or importers wholesale price (net of excise


tax and value-added tax) per pack exceeds three pesos and ninety
centavos (P3.90) but does not exceed four pesos and twenty centavos
(P4.20), the tax shall be five pesos and fifty centavos (P5.50): provided,
that after two (2) years from the effectivity of this Act, cigarettes otherwise
subject to tax under this subparagraph shall be taxed under subparagraph
(1) above.

(3) If the manufacturers or importers wholesale price (net of excise


tax and value-added tax) per pack does not exceeds three pesos and
ninety centavos (P3.90), the tax rate shall be one peso (P1.00).

Variants of existing brands and new brands of cigarettes packed by


machine to be introduced in the domestic market after the effectivity of this
Act, shall be taxed under paragraph (c)(1) hereof.

The rates of specific tax on cigars and cigarettes under


paragraphs (a), (b), and (c) hereof, including the price levels for
purposes of classifying cigarettes packed by machine, shall be
revised upward two (2) years after the effectivity of this Act and
every two years thereafter by the Commissioner of Internal Revenue,
subject to the approval of the Secretary of Finance, taking into
account the movement of the consumer price index for cigars and
cigarettes as established by the National Statistics Office: provided,
that the increase in taxes and/or price levels shall be equal to the
present change in such consumer price index for the two-year
period: provided, further, that the President, upon the
recommendation of the Secretary of Finance, may suspend or defer
the adjustment in price levels and tax rates when the interest of the
national economy and general welfare so require, such as the need
to obviate unemployment, and economic and social
dislocation: provided, finally, that the revised price levels and tax
rates authorized herein shall in all cases be rounded off to the
nearest centavo and shall be in force and effect on the date of
publication thereof in a newspaper of general circulation. x x
x (Emphasis supplied)

What is of particular interest with respect to the proposal of the DOF is that it
contained a provision for the periodic adjustment of the excise tax rates and tax
brackets, and a corresponding periodic resurvey and reclassification of cigarette brands
based on the increase in the consumer price index as determined by the Commissioner
of Internal Revenue subject to certain guidelines. The evident intent was to prevent
inflation from eroding the value of the excise taxes that would be collected from
cigarettes over time by adjusting the tax rate and tax brackets based on the increase in
the consumer price index. Further, under this proposal, old brands as well as new
brands introduced thereafter would be subjected to a resurvey and reclassification
based on their respective values at the end of every two years in order to align them
with the adjustment of the excise tax rate and tax brackets due to the movement in the
consumer price index.[55]

Of course, we now know that the DOF proposal, insofar as the periodic adjustment of
tax rates and tax brackets, and the periodic resurvey and reclassification of cigarette
brands are concerned, did not gain approval from Congress. The House and Senate
pushed through with their own versions of the excise tax system on beers and
cigarettes both denominated as H.B. No. 7198. For convenience, we shall refer to the
bill deliberated upon by the House as the House Version and that of the Senate as the
Senate Version.
The Houses Committee on Ways and Means, then chaired by Congressman Exequiel
B. Javier (Congressman Javier), roundly rejected the DOF proposal. Instead, in its
Committee Report submitted to the plenary, it proposed a different excise tax system
which used a specific tax as a basic tax with an ad valorem comparator. Further, it
deleted the proposal to have a periodic adjustment of tax rates and the tax brackets as
well as periodic resurvey and reclassification of cigarette brands, to wit:
The rigidity of the specific tax system calls for the need for frequent
congressional intervention to adjust the tax rates to inflation and to keep
pace with the expanding needs of government for more revenues. The
DOF admits this flaw inherent in the tax system it proposed. Hence, to
obviate the need for remedial legislation, the DOF is asking Congress to
grant to the Commissioner the power to revise, one, the specific tax rates:
and two, the price levels of beer and cigarettes. What the DOF is asking,
Mr. Speaker, is for Congress to delegate to the Commissioner of Internal
Revenue the power to fix the tax rates and classify the subjects of taxation
based on their price levels for purposes of fixing the tax rates. While we
sympathize with the predicament of the DOF, it is not for Congress to
abdicate such power. The power sought to be delegated to be exercised
by the Commissioner of Internal Revenue is a legislative power vested by
the Constitution in Congress pursuant to Section 1, Article VI of the
Constitution. Where the power is vested, there it must remain in Congress,
a body of representatives elected by the people. Congress may not
delegate such power, much less abdicate it.

xxxx

Moreover, the grant of such power, if at all constitutionally


permissible, to the Commissioner of Internal Revenue is fraught with
ethical implications. The debates on how much revenue will be raised,
how much money will be taken from the pockets of taxpayers, will
inexorably shift from the democratic Halls of Congress to the secret and
non-transparent corridors of unelected agencies of government, the
Department of Finance and the Bureau of Internal Revenue, which are not
accountable to our people. We cannot countenance the shift for ethical
reasons, lest we be accused of betraying the trust reposed on this
Chamber by the people. x x x

A final point on this proposal, Mr. Speaker, is the exercise of the


taxing power of the Commissioner of Internal Revenue which will be
triggered by inflation rates based on the consumer price index. Simply
stated, Mr. Speaker, the specific tax rates will be fixed by the
Commissioner depending on the price levels of beers and cigarettes as
determined by the consumers price index. This is a novel idea, if not
necessarily weird in the field of taxation. What if the brewer or the
cigarette manufacturer sells at a price below the consumers price index?
Will it be taxed on the basis of the consumers price index which is over
and above its wholesale or retail price as the case may be? This is a weird
form of exaction where the tax is based not on what the brewer or
manufacturer actually realized but on an imaginary wholesale or retail
price. This amounts to a taxation based on presumptive price levels and
renders the specific tax a presumptive tax. We hope, the DOF and the BIR
will also honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to
consumers price index as proposed by the DOF engenders anti-trust
concerns. The proposal if enacted into law will serve as a barrier to the
entry of new players in the beer and cigarette industries which are
presently dominated by shared monopolies. A new player in these
industries will be denied business flexibility to fix its price levels to promote
its product and penetrate the market as the price levels are dictated by the
consumer price index. The proposed tax regime, Mr. Speaker, will merely
enhance the stranglehold of the oligopolies in the beer and cigarette
industries, thus, reversing the governments policy of dismantling
monopolies and combinations in restraint of trade.[56]

For its part, the Senates Committee on Ways and Means, then chaired by
Senator Juan Ponce Enrile (Senator Enrile), developed its own version of the excise tax
system on cigarettes. The Senate Version consisted of a four-tiered system and,
interestingly enough, contained a periodic excise tax rate and tax bracket adjustment as
well as a periodic resurvey and reclassification of brands provision (periodic adjustment
and reclassification provision, for brevity) to be conducted by the DOF in coordination
with the BIR and the National Statistics Office based on the increase in the consumer
price index similar to the one proposed by the DOF, viz:

SEC. 4 Section 142 of the National Internal Revenue Code, as


amended, is hereby further amended to read as follows:

SEC. 142. Cigars and cigarettes.

xxxx

(c) Cigarettes packed by machine. There shall be levied, assessed and


collected on cigarettes packed by machine a tax at the rates prescribed
below:

(1) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack, the
tax shall be Twelve pesos (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos
(P6.50) per pack, the tax shall be Eight pesos (P8.00) per
pack;
(3) If the net retail price (excluding the excise tax and
the value-added tax) is Five pesos (P5.00) up to Six pesos
and fifty centavos (P6.50) per pack, the tax shall be Five
pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and
the value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be One peso (P1.00) per pack.

Variants of existing brands of cigarettes which are introduced in the


domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.

xxx

The rates of specific tax on cigars and cigarettes under


subparagraph (a), (b) and (c) hereof, including the net retail prices for
purposes of classification, shall be adjusted on the sixth of January
three years after the effectivity of this Act and every three years
thereafter. The adjustment shall be in accordance with the inflation
rate measured by the average increase in the consumer price index
over the three-year period. The adjusted tax rates and net price
levels shall be in force on the eighth of January.

Within the period hereinabove mentioned, the Secretary of


Finance shall direct the conduct of a survey of retail prices of each
brand of cigarettes in coordination with the Bureau of Internal
Revenue and the National Statistics Office.

For purposes of this Section, net retail price shall mean the price at
which the cigarette is sold on retail in 20 major supermarkets in Metro
Manila (for brands of cigarettes marketed nationally), excluding the
amount intended to cover the applicable excise tax and the value-added
tax. For brands which are marketed only outside Metro Manila, the net
retail price shall mean the price at which the cigarette is sold in five major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.

The classification of each brand of cigarettes in the initial year


of implementation of this Act shall be based on its average net retail
price as of October 1, 1996. The said classification by brand shall
remain in force until January 7, 2000.

New brands shall be classified according to their current net retail


price.[57]
(Emphasis supplied)

During the period of interpellations, the late Senator Raul S. Roco (Senator
Roco) expressed doubts as to the legality and wisdom of putting a periodic adjustment
and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be
allowed to be automatically adjusted upwards based on a system of
indexing tied up with the Consumers Price Index (CPI). Although I must
add that we have adopted a similar system in adjusting the personal tax
exemption from income tax of our individual taxpayers.

Senator Roco: They are not exactly the same, Mr. President. But even
then, we do note that this the first time we are trying to put an automatic
adjustment. My concern is, why do we propose now this automatic
adjustment? What is the reason that impels the committee? Maybe we
can be enlightened and maybe we shall embrace it forthwith. But what is
the reason?

Senator Enrile: Mr. President, we will recall that in the House of


Representatives, it has adopted a tax proposal on these products based
on a specific tax as a basic tax with an ad valoremcomparator. The
Committee on Ways and Means of the Senate has not seen it fit to adopt
this system, but it recognized the possibility that there may be an occasion
where the price movement in the country might unwarrantedly move
upwards, in which case, if we peg the government to a specific tax rate of
P6.30, P9.30 and P12.30 for beer, since we are talking of beer, [58] the
government might lose in the process.

In order to consider the interest of the government in this, Mr.


President, and in order to obviate the possibility that some of these
products categorized under the different tiers with different specific tax
rates from moving upwards and piercing their own tiers and thereby
expose themselves to an incremental tax of higher magnitude, it was felt
that we should adopt a system where, in spite of any escalation in the
price of these products in the future, the tax rates could be adjusted
upwards so that none of these products would leave their own tier. That
was the basic principle under which we crafted this portion of the tax
proposal.

Senator Roco: Mr. President, we certainly share the judgment of the


distinguished gentleman as regards the comparator provision in the House
of Representatives and we appreciate the reasons given. But we are
under the impression that the House also, aside from the comparator, has
an adjustment clause that is fixed. It has fixed rates for the adjustment. So
that one of the basic differences between the Senate proposed version
now and the House version is that, the House of Representatives has
manifested its will and judgment as regards the tax to which we will adjust,
whereas the Senate version relegates fundamentally that judgment to the
Department of Finance.

Senator Enrile: That is correct, Mr. President, because we felt that in


imposing a fixed adjustment, we might be fixing an amount that is either
too high or too low. We cannot foresee the economic trends in this country
over a period of two years, three years, let alone ten years. So we felt that
a mechanism ought to be adopted in order to serve the interest of the
government, the interest of the producers, and the interest of the
consuming public.

Senator Roco: This is where, Mr. President, my policy difficulties start.


Under the Constitution I think it is Article VI, Section 24, and it was the
distinguished chairman of the Committee on Ways and Means who made
this Chamber very conscious of this provision revenue measures and tariff
measures shall originate exclusively from the House of Representatives.

The reason for this, Mr. President, is, there is a long history why the
House of Representatives must originate judgments on tax. The House
members represent specific districts. They represent specific
constituencies, and the whole history of parliamentarism, the whole history
of Congress as an institution is founded on the proposition that the direct
representatives of the people must speak about taxes.

Mr. President, while the Senate can concur and can introduce
amendments, the proposed change here is radical. This is the policy
difficulty that I wish to clarify with the gentleman because the judgment call
now on the amount of tax to be imposed is not coming from Congress. It is
shifted to the Department of Finance. True, the Secretary of Finance may
have been the best finance officer two years ago and now the best finance
officer in Asia, but that does not make him qualified to replace the
judgment call of the House of Representatives. That is my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes this
rate beforehand. The computation of the rate is the only thing that was left
to the Department of Finance as a tax implementor of Congress. This is
not unusual because we have already, as I said, adopted a system similar
to this. If we adjust the personal exemption of an individual taxpayer, we
are in effect adjusting the applicable tax rate to him.

Senator Roco: But the point I was trying to demonstrate, Mr.


President, is that we depart precisely from the mandate of the Constitution
that judgment on revenue must emanate from Congress. Here, it is shifted
to the Department of Finance for no visible or patent reason insofar as I
could understand. The only difference is, who will make the judgment?
Should it be Congress?

Senator Enrile: Mr. President, forgive me for answering sooner than


I should. My understanding of the Constitution is that all revenue
measures must emanate from the House. That is all the Constitution says.

Now, it does not say that the judgment call must belong to the House. The
judgment call can belong both to the House and to the Senate. We can
change whatever proposal the House did. Precisely, we are now crafting a
measure, and we are saying that this is the rate subject to an adjustment
which we also provide. We are not giving any unusual power to the
Secretary of Finance because we tell him, This is the formula that you
must adopt in arriving at the adjustment so that you do not have to come
back to us.[59]

Apart from his doubts as to the legality of the delegation of taxing power to the
DOF and BIR, Senator Roco also voiced out his concern about the possible abuse and
corruption that will arise from the periodic adjustment and reclassification
provision. Continuing

Senator Roco: Mr. President, if that is the argument, that the distinguished
gentleman has a different legal interpretation, we will then now examine
the choice. Because his legal interpretation is different from mine, then the
issues becomes: Is it more advantageous that this judgment be
exercised by the House? Should we not concur or modify in terms of
the exercise by the House of its power or are we better off giving this
judgment call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more
advantageous to fix the rate so that even if we modify the rates
identified by Congress, it is better and less susceptible to abuse.

For instance, Mr. President, would the gentlemen wish to demonstrate to


us how this will be done? On page 8, lines 5 to 9, there is a provision here
as to when the Secretary of Finance shall direct the conduct of survey of
retail prices of each brand of fermented liquor in coordination with the
Bureau of Internal Revenue and the National Statistics Office.

These offices are not exactly noted, Mr. President, for having been
sanctified by the Holy Spirit in their noble intentions. x x x[60] (Emphasis
supplied)

Pressing this point, Senator Roco continued his query:

Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the


two-year period, the Secretary of Finance shall direct the conduct of the
survey. How? When? Which retail prices and what brand shall he
consider? When he coordinates with the Bureau of Internal Revenue, what
is the Bureau of Internal Revenue supposed to be doing? What is the
National Statistics Office supposed to be doing, and under what guides
and standards?

May the gentleman wish to demonstrate how this will be done? My point,
Mr. President, is, by giving the Secretary of Finance, the BIR and the
National Statistics Office discretion over a two-year period will invite
corruption and arbitrariness, which is more dangerous than letting
the House of Representatives and this Chamber set the adjustment
rate. Why not set the adjustment rate? Why should Congress not exercise
that judgment now? x x x

Senator Enrile: x x x

Senator Roco: x x x We respectfully submit that the Chairman


consider choosing the judgment of this Chamber and the House of
Representatives over a delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of Finance. It has
won awards, and I also trust the undersecretary. But that is beside the
point. Tomorrow, they may not be there.[61](Emphasis supplied)

This point was further dissected by the two senators. There was a genuine
difference of opinion as to which system one with a fixed excise tax rate and
classification or the other with a periodic adjustment of excise tax rate and
reclassification was less susceptible to abuse, as the following exchanges show:

Senator Enrile: Mr. President, considering the sensitivity of these


products from the viewpoint of exerted pressures because of the
understandable impact of this measure on the pockets of the major
players producing these products, the committee felt that perhaps to
lessen such pressures, it is best that we now establish a norm where the
tax will be adjusted without incurring too much political controversy as has
happened in the case of this proposal.

Senator Roco: But that is exactly the same reason we say we must
rely upon Congress because Congress, if it is subjected to pressure, at
least balances off because of political factors.

When the Secretary of Finance is now subjected to pressure, are


we saying that the Secretary of Finance and the Department of Finance is
better-suited to withstand the pressure? Or are we saying Let the Finance
Secretary decide whom to yield?

I am saying that the temptation and the pressure on the Secretary


of Finance is more dangerous and more corruption-friendly than
ascertaining for ourselves now a fixed rate of increase for a fixed period.

Senator Enrile: Mr. President, perhaps the gentleman may not


agree with this representation, but in my humble opinion, this formulation
is less susceptible to pressure because there is a definite point of
reference which is the consumer price index, and that consumer price
index is not going to be used only for this purpose. The CPI is used for a
national purpose, and there is less possibility of tinkering with it.[62]
Further, Senator Roco, like Congressman Javier, expressed the view that the
periodic adjustment and reclassification provision would create an anti-competitive
atmosphere. Again, Senators Roco and Enrile had genuine divergence of opinions on
this matter, to wit:

Senator Roco: x x x On the marketing level, an adjustment clause


may, in fact, be disadvantageous to both companies, whether it is the
Lucio Tan companies or the San Miguel companies. If we have to adjust
our marketing position every two years based on the adjustment clause,
the established company may survive, but the new ones will have
tremendous difficulty. Therefore, this provision tends to indicate an
anticompetitive bias.

It is good for San Miguel and the Lucio Tan companies, but the new
companies assuming there may be new companies and we want to
encourage them because of the old point of liberalization will be at a
disadvantage under this situation. If this observation will find receptivity in
the policy consideration of the distinguished Gentleman, maybe we can
also further, later on, seek amendments to this automatic adjustment
clause in some manner.

Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness of


this provision with respect to a new entrant, because a new entrant will not
just come in without studying the market. He is a lousy businessman if he
will just come in without studying the market. If he comes in, he will
determine at what retail price level he will market his product, and he will
be coming under any of the tiers depending upon his net retail price.
Therefore, I do not see how this particular provision will affect a new
entrant.

Senator Roco: Be that as it may, Mr. President, we obviously will not


resort to debate until this evening, and we will have to look for other ways
of resolving the policy options.

Let me just close that particular area of my interpellation, by summarizing


the points we were hoping could be clarified.

1. That the automatic adjustment clause is at best questionable in


law.

2. It is corruption-friendly in the sense that it shifts the discretion


from the House of Representatives and this Chamber to the
Secretary of Finance, no matter how saintly he may be.
3. There is, although the judgment call of the gentleman disagrees
to our view, an anticompetitive situation that is geared at[63]

After these lengthy exchanges, it appears that the views of Senator Enrile were
sustained by the Senate Body because the Senate Version was passed on Third
Reading without substantially altering the periodic adjustment and reclassification
provision.

It was actually at the Bicameral Conference Committee level where the Senate
Version underwent major changes. The Senate Panel prevailed upon the House Panel
to abandon the basic excise tax rate and ad valorem comparator as the means to
determine the applicable excise tax rate. Thus, the Senates four-tiered system was
retained with minor adjustments as to the excise tax rate per tier. However, the House
Panel prevailed upon the Senate Panel to delete the power of the DOF and BIR to
periodically adjust the excise tax rate and tax brackets, and periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index.

In lieu thereof, the classification of existing brands based on their average net
retail price as of October 1, 1996 was frozen and a fixed across-the-board 12% increase
in the excise tax rate of each tier after three years from the effectivity of the Act was put
in place. There is a dearth of discussion in the deliberations as to the applicability of the
freezing mechanism to new brands after their classification is determined based on their
current net retail price. But a plain reading of the text of RA 8240, even before its
amendment by RA 9334, as well as the previously discussed deliberations would readily
lead to the conclusion that the intent of Congress was to likewise apply the freezing
mechanism to new brands. Precisely, Congress rejected the proposal to allow the DOF
and BIR to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify cigarettes brands which would have encompassed
old and new brands alike. Thus, it would be absurd for us to conclude that Congress
intended to allow the periodic reclassification of new brands by the BIR after their
classification is determined based on their current net retail price. We shall return to this
point when we tackle the second issue.

In explaining the changes made at the Bicameral Conference Committee level,


Senator Enrile, in his report to the Senate plenary, noted that the fixing of the excise tax
rates was done to avoid confusion.[64] Congressman Javier, for his part, reported to the
House plenary the reasons for fixing the excise tax rate and freezing the classification,
thus:

Finally, this twin feature, Mr. Speaker, fixed specific tax rates and
frozen classification, rejects the Senate version which seeks to abdicate
the power of Congress to tax by pegging the rates as well as the
classification of sin products to consumer price index which practically
vests in the Secretary of Finance the power to fix the rates and to
classify the products for tax purposes.[65] (Emphasis supplied)
Congressman Javier later added that the frozen classification was intended to
give stability to the industry as the BIR would be prevented from tinkering with the
classification since it would remain unchanged despite the increase in the net retail
prices of the previously classified brands.[66] This would also assure the industry players
that there would be no new impositions as long as the law is unchanged. [67]

From the foregoing, it is quite evident that the classification freeze


provision could hardly be considered arbitrary, or motivated by a hostile or oppressive
attitude to unduly favor older brands over newer brands. Congress was unequivocal in
its unwillingness to delegate the power to periodically adjust the excise tax rate and tax
brackets as well as to periodically resurvey and reclassify the cigarette brands based on
the increase in the consumer price index to the DOF and the BIR. Congress doubted
the constitutionality of such delegation of power, and likewise, considered the ethical
implications thereof. Curiously, the classification freeze provision was put in place of the
periodic adjustment and reclassification provision because of the belief that the latter
would foster an anti-competitive atmosphere in the market. Yet, as it is, this same
criticism is being foisted by petitioner upon the classification freeze provision.

To our mind, the classification freeze provision was in the main the result of
Congresss earnest efforts to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same with other state
interests. In particular, the questioned provision addressed Congresss administrative
concerns regarding delegating too much authority to the DOF and BIR as this will open
the tax system to potential areas for abuse and corruption. Congress may have
reasonably conceived that a tax system which would give the least amount of discretion
to the tax implementers would address the problems of tax avoidance and tax evasion.

To elaborate a little, Congress could have reasonably foreseen that, under the
DOF proposal and the Senate Version, the periodic reclassification of brands would
tempt the cigarette manufacturers to manipulate their price levels or bribe the tax
implementers in order to allow their brands to be classified at a lower tax bracket even if
their net retail prices have already migrated to a higher tax bracket after the adjustment
of the tax brackets to the increase in the consumer price index. Presumably, this could
be done when a resurvey and reclassification is forthcoming. As briefly touched upon in
the Congressional deliberations, the difference of the excise tax rate between the
medium-priced and the high-priced tax brackets under RA 8240, prior to its amendment,
was P3.36. For a moderately popular brand which sells around 100 million packs per
year, this easily translates to P336,000,000.[68] The incentive for tax avoidance, if not
outright tax evasion, would clearly be present. Then again, the tax implementers may
use the power to periodically adjust the tax rate and reclassify the brands as a tool to
unduly oppress the taxpayer in order for the government to achieve its revenue targets
for a given year.

Thus, Congress sought to, among others, simplify the whole tax system for sin
products to remove these potential areas of abuse and corruption from both the side of
the taxpayer and the government. Without doubt, the classification freeze provision was
an integral part of this overall plan. This is in line with one of the avowed objectives of
the assailed law to simplify the tax administration and compliance with the tax laws that
are about to unfold in order to minimize losses arising from inefficiencies and tax
avoidance scheme, if not outright tax evasion.[69] RA 9334 did not alter this classification
freeze provision of RA 8240. On the contrary, Congress affirmed this freezing
mechanism by clarifying the wording of the law. We can thus reasonably conclude, as
the deliberations on RA 9334 readily show, that the administrative concerns in tax
administration, which moved Congress to enact the classification freeze provision in RA
8240, were merely continued by RA 9334. Indeed, administrative concerns may provide
a legitimate, rational basis for legislative classification.[70] In the case at bar, these
administrative concerns in the measurement and collection of excise taxes on sin
products are readily apparent as afore-discussed.

Aside from the major concern regarding the elimination of potential areas for
abuse and corruption from the tax administration of sin products, the legislative
deliberations also show that the classification freeze provision was intended to generate
buoyant and stable revenues for government. With the frozen tax classifications, the
revenue inflow would remain stable and the government would be able to predict with a
greater degree of certainty the amount of taxes that a cigarette manufacturer would pay
given the trend in its sales volume over time. The reason for this is that the previously
classified cigarette brands would be prevented from moving either upward or downward
their tax brackets despite the changes in their net retail prices in the future and, as a
result, the amount of taxes due from them would remain predictable. The classification
freeze provision would, thus, aid in the revenue planning of the government.[71]

All in all, the classification freeze provision addressed Congresss administrative


concerns in the simplification of tax administration of sin products, elimination of
potential areas for abuse and corruption in tax collection, buoyant and stable revenue
generation, and ease of projection of revenues. Consequently, there can be no denial of
the equal protection of the laws since the rational-basis test is amply satisfied.

Going now to the contention of petitioner that the classification freeze


provision unduly favors older brands over newer brands, we must first contextualize the
basis of this claim. As previously discussed, the evidence presented by the petitioner
merely showed that in 2004, Marlboro and Philip Morris, on the one hand, and Lucky
Strike, on the other, would have been taxed at the same rate had the classification
freeze provision been not in place. But due to the operation of the classification freeze
provision, Lucky Strike was taxed higher. From here, petitioner generalizes that this
differential tax treatment arising from the classification freeze provision adversely
impacts the fairness of the playing field in the industry, particularly, between older and
newer brands. Thus, it is virtually impossible for new brands to enter the market.

Petitioner did not, however, clearly demonstrate the exact extent of such
impact. It has not been shown that the net retail prices of other older brands previously
classified under this classification system have already pierced their tax brackets, and, if
so, how this has affected the overall competition in the market. Further, it does not
necessarily follow that newer brands cannot compete against older brands because
price is not the only factor in the market as there are other factors like consumer
preference, brand loyalty, etc. In other words, even if the newer brands are priced
higher due to the differential tax treatment, it does not mean that they cannot compete
in the market especially since cigarettes contain addictive ingredients so that a
consumer may be willing to pay a higher price for a particular brand solely due to its
unique formulation. It may also be noted that in 2003, the BIR surveyed 29 new
brands[72] that were introduced in the market after the effectivity of RA 8240 on January
1, 1997, thus negating the sweeping generalization of petitioner that the classification
freeze provision has become an insurmountable barrier to the entry of new
brands. Verily, where there is a claim of breach of the due process and equal protection
clauses, considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.[73]

Be that as it may, petitioners evidence does suggest that, at least in 2004, Philip
Morris and Marlboro, older brands, would have been taxed at the same rate as Lucky
Strike, a newer brand, due to certain conditions (i.e., the increase of the older brands
net retail prices beyond the tax bracket to which they were previously classified after the
lapse of some time) were it not for the classification freeze provision. It may be
conceded that this has adversely affected, to a certain extent, the ability of petitioner to
competitively price its newer brands vis--vis the subject older brands. Thus, to a limited
extent, the assailed law seems to derogate one of its avowed objectives, i.e. promoting
fair competition among the players in the industry. Yet, will this occurrence, by itself,
render the assailed law unconstitutional on equal protection grounds?

We answer in the negative.

Whether Congress acted improvidently in derogating, to a limited extent, the


states interest in promoting fair competition among the players in the industry, while
pursuing other state interests regarding the simplification of tax administration of sin
products, elimination of potential areas for abuse and corruption in tax collection,
buoyant and stable revenue generation, and ease of projection of revenues through
the classification freeze provision, and whether the questioned provision is the best
means to achieve these state interests, necessarily go into the wisdom of the assailed
law which we cannot inquire into, much less overrule. The classification freeze
provision has not been shown to be precipitated by a veiled attempt, or hostile attitude
on the part of Congress to unduly favor older brands over newer brands. On the
contrary, we must reasonably assume, owing to the respect due a co-equal branch of
government and as revealed by the Congressional deliberations, that the enactment of
the questioned provision was impelled by an earnest desire to improve the efficiency
and effectivity of the tax administration of sin products. For as long as the legislative
classification is rationally related to furthering some legitimate state interest, as here,
the rational-basis test is satisfied and the constitutional challenge is perfunctorily
defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed
by Congress, which state interest is superior over another, or which method is better
suited to achieve one, some or all of the states interests, or what these interests should
be in the first place. This policy-determining power, by constitutional fiat, belongs to
Congress as it is its function to determine and balance these interests or choose which
ones to pursue. Time and again we have ruled that the judiciary does not settle policy
issues. The Court can only declare what the law is and not what the law should be.
Under our system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all state
power.[74] Thus, the legislative classification under the classification freeze provision,
after having been shown to be rationally related to achieve certain legitimate state
interests and done in good faith, must, perforce, end our inquiry.

Concededly, the finding that the assailed law seems to derogate, to a limited
extent, one of its avowed objectives (i.e. promoting fair competition among the players
in the industry) would suggest that, by Congresss own standards, the current excise tax
system on sin products is imperfect. But, certainly, we cannot declare a statute
unconstitutional merely because it can be improved or that it does not tend to achieve
all of its stated objectives.[75] This is especially true for tax legislation which
simultaneously addresses and impacts multiple state interests. [76] Absent a clear
showing of breach of constitutional limitations, Congress, owing to its vast experience
and expertise in the field of taxation, must be given sufficient leeway to formulate and
experiment with different tax systems to address the complex issues and problems
related to tax administration. Whatever imperfections that may occur, the same should
be addressed to the democratic process to refine and evolve a taxation system which
ideally will achieve most, if not all, of the states objectives.

In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. As succinctly articulated in Vance v.
Bradley:[77]

The Constitution presumes that, absent some reason to infer antipathy,


even improvident decisions will eventually be rectified by the democratic
process, and that judicial intervention is generally unwarranted no matter
how unwisely we may think a political branch has acted. Thus, we will not
overturn such a statute unless the varying treatment of different groups or
persons is so unrelated to the achievement of any combination of
legitimate purposes that we can only conclude that the legislature's
actions were irrational.[78]

We now tackle the second issue.

Petitioner asserts that Revenue Regulations No. 1-97, as amended by Revenue


Regulations No. 9-2003, Revenue Regulations No. 22-2003 and Revenue
Memorandum Order No. 6-2003, are invalid insofar as they empower the BIR to
reclassify or update the classification of new brands of cigarettes based on their current
net retail prices every two years or earlier. It claims that RA 8240, even prior to its
amendment by RA 9334, did not authorize the BIR to conduct said periodic resurvey
and reclassification.

The questioned provisions are found in the following sections of the assailed
issuances:

(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97,


as amended by Section 2 of Revenue Regulations 9-2003, viz:

For the purpose of establishing or updating the tax classification of


new brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed through
the issuance of an appropriate Revenue Regulations.

(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as
pertinent to cigarettes packed by machine, viz:

II. POLICIES AND GUIDELINES

1. The conduct of survey covered by this Order, for purposes of


determining the current retail prices of new brands of cigarettes and
alcohol products introduced in the market on or after January 1,
1997, shall be undertaken in the following instances:

xxxx

b. For reclassification of new brands of said excisable products that


were introduced in the market after January 1, 1997.

xxxx

4. The determination of the current retail prices of new brands of


the aforesaid excisable products shall be initiated as follows:

xxxx

b. After the lapse of the prescribed two-year period or as the


Commissioner may otherwise direct, the appropriate tax
reclassification of these brands based on the current net retail
prices thereof shall be determined by a survey to be conducted
upon a written directive by the Commissioner.

For this purpose, a memorandum order to the Assistant


Commissioner, Large Taxpayers Service, Heads, Excise Tax
Areas, and Regional Directors of all Revenue Regions, except
Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall be issued by the
Commissioner for the submission of the list of major
supermarkets/retail outlets where the above excisable products are
being sold, as well as the list of selected revenue officers who shall
be designated to conduct the said activity(ies).

xxxx

6. The results of the survey conducted in Revenue Region Nos. 4


to 9 shall be submitted directly to the Chief, LT Assistance Division
II (LTAD II), National Office for consolidation. On the other hand,
the results of the survey conducted in Revenue Regions other than
Revenue Region Nos. 4 to 9, shall be submitted to the Office of the
Regional Director for regional consolidation. The consolidated
regional survey, together with the accomplished survey forms shall
be transmitted to the Chief, LTAD II for national consolidation within
three (3) days from date of actual receipt from the survey teams.
The LTAD II shall be responsible for the evaluation and analysis of
the submitted survey forms and the preparation of the
recommendation for the updating/revision of the tax classification of
each brand of cigarettes and alcohol products. The said
recommendation, duly validated by the ACIR, LTS, shall be
submitted to the Commissioner for final review within ten (10) days
from the date of actual receipt of complete reports from all the
surveying Offices.

7. Upon final review by the Commissioner of the revised tax


classification of the different new brands of cigarettes and alcohol
products, the appropriate revenue regulations shall be prepared
and submitted for approval by the Secretary of Finance.

xxxx

III. PROCEDURES

xxxx

Large Taxpayers Assistance Division II


xxxx

1. Perform the following preparatory procedures on the


identification of brands to be surveyed, supermarkets/retail outlets
where the survey shall be conducted, and the personnel selected to
conduct the survey.

xxxx

b. On the tax reclassification of new brands

i. Submit a master list of registered brands covered by the


survey pursuant to the provisions of Item II.2 of this Order
containing the complete description of each brand, existing net
retail price and the corresponding tax rate thereof.

ii. Submit to the ACIR, LTS, a list of major


supermarkets/retail outlets within the territorial jurisdiction of the
concerned revenue regions where the survey will be conducted to
be used as basis in the issuance of Mission Orders. Ensure that the
minimum number of establishments to be surveyed, as prescribed
under existing revenue laws and regulations, is complied with. In
addition, the names and designations of revenue officers selected
to conduct the survey shall be clearly indicated opposite the names
of the establishments to be surveyed.

There is merit to the contention.

In order to implement RA 8240 following its effectivity on January 1, 1997, the


BIR issued Revenue Regulations No. 1-97, dated December 13, 1996, which mandates
a one-time classification only.[79] Upon their launch, new brands shall be initially taxed
based on their suggested net retail price. Thereafter, a survey shall be conducted within
three (3) months to determine their current net retail prices and, thus, fix their official tax
classifications. However, the BIR made a turnaround by issuing Revenue Regulations
No. 9-2003, dated February 17, 2003, which partly amended Revenue Regulations No.
1-97, by authorizing the BIR to periodically reclassify new brands (i.e., every two years
or earlier) based on their current net retail prices. Thereafter, the BIR issued Revenue
Memorandum Order No. 6-2003, dated March 11, 2003, prescribing the guidelines on
the implementation of Revenue Regulations No. 9-2003. This was patent error on the
part of the BIR for being contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-97, as
amended by Section 2 of Revenue Regulations 9-2003, and Revenue Memorandum
Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC
because they authorize the Commissioner of Internal Revenue to update the tax
classification of new brands every two years or earlier subject only to its issuance of the
appropriate Revenue Regulations, when nowhere in Section 145 is such authority
granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify
cigarette brands remains a prerogative of the legislature which cannot be usurped by
the former.

More importantly, as previously discussed, the clear legislative intent was for new
brands to benefit from the same freezing mechanism accorded to Annex D brands. To
reiterate, in enacting RA 8240, Congress categorically rejected the DOF proposal and
Senate Version which would have empowered the DOF and BIR to periodically adjust
the excise tax rate and tax brackets, and to periodically resurvey and reclassify cigarette
brands. (This resurvey and reclassification would have naturally encompassed both old
and new brands.) It would thus, be absurd for us to conclude that Congress intended to
allow the periodic reclassification of new brands by the BIR after their classification is
determined based on their current net retail price while limiting the freezing of the
classification to Annex D brands. Incidentally, Senator Ralph G. Recto expressed the
following views during the deliberations on RA 9334, which later amended RA 8240:

Senator Recto: Because, like I said, when Congress agreed to


adopt a specific tax system [under R.A. 8240], when Congress did not
index the brackets, and Congress did not index the rates but only provided
for a one rate increase in the year 2000, we shifted from ad valorem which
was based on value to a system of specific which is based on volume.
Congress then, in effect, determined the classification based on the prices
at that particular period of time and classified these products accordingly.

Of course, Congress then decided on what will happen to the new


brands or variants of existing brands. To favor government, a variant
would be classified as the highest rate of tax for that particular brand. In
case of a new brand, Mr. President, then the BIR should classify
them. But I do not think it was the intention of Congress then to give
the BIR the authority to reclassify them every so often. I do not think
it was the intention of Congress to allow the BIR to classify a new
brand every two years, for example, because it will be arbitrary for
the BIR to do so. x x x[80] (Emphasis supplied)

For these reasons, the amendments introduced by RA 9334 to RA 8240, insofar as the
freezing mechanism is concerned, must be seen merely as underscoring the legislative
intent already in place then, i.e. new brands as being covered by the freezing
mechanism after their classification based on their current net retail prices.

Unfortunately for petitioner, this result will not cause a downward reclassification of
Lucky Strike. It will be recalled that petitioner introduced Lucky Strike in June
2001.However, as admitted by petitioner itself, the BIR did not conduct the required
market survey within three months from product launch. As a result, Lucky Strike was
never classified based on its actual current net retail price. Petitioner failed to timely
seek redress to compel the BIR to conduct the requisite market survey in order to fix the
tax classification of Lucky Strike. In the meantime, Lucky Strike was taxed based on
its suggested net retail price of P9.90 per pack, which is within the high-priced tax
bracket. It was only after the lapse of two years or in 2003 that the BIR conducted a
market survey which was the first time that Lucky Strikes actual current net retail price
was surveyed and found to be from P10.34 to P11.53 per pack, which is within the
premium-priced tax bracket. The case of petitioner falls under a situation where there
was no reclassification based on its current net retail price which would have been
invalid as previously explained. Thus, we cannot grant petitioners prayer for a
downward reclassification of Lucky Strike because it was never reclassified by the BIR
based on its actual current net retail price.

It should be noted though that on August 8, 2003, the BIR issued Revenue
Regulations No. 22-2003 which implemented the revised tax classifications of new
brands based on their current net retail prices through the market survey conducted
pursuant to Revenue Regulations No. 9-2003. Annex A of Revenue Regulations No. 22-
2003 lists the result of the market survey and the corresponding recommended tax
classification of the new brands therein aside from Lucky Strike. However, whether
these other brands were illegally reclassified based on their actual current net retail
prices by the BIR must be determined on a case-to-case basis because it is possible
that these brands were classified based on their actual current net retail price for the
first time in the year 2003 just like Lucky Strike. Thus, we shall not make any
pronouncement as to the validity of the tax classifications of the other brands listed
therein.

Finally, it must be noted that RA 9334 introduced changes in the manner by


which the current net retail price of a new brand is determined and how its classification
is permanently fixed, to wit:

New brands, as defined in the immediately following paragraph,


shall initially be classified according to their suggested net retail price.

New brands shall mean a brand registered after the date of effectivity of
R.A. No. 8240 [on January 1, 1997].

Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported cigarettes
are intended by the manufacture or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed
nationwide, and in other regions, for those with regional markets. At the
end of three (3) months from the product launch, the Bureau of
Internal Revenue shall validate the suggested net retail price of the
new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand
of cigarette, as defined above, shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against
the net retail price as of the time of revalidation in order to finally
determine the correct tax bracket under which a particular new brand
of cigarettes shall be classified; Provided however, That brands of
cigarettes introduced in the domestic market between January 1, 1997
and December 31, 2003 shall remain in the classification under which the
Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not
be revised except by an act of Congress. (Emphasis supplied)

Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum Order No. 6-2003
should be deemed modified by the above provisions from the date of effectivity of RA
9334 on January 1, 2005.

In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as


amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b),
II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum
Order No. 6-2003, as pertinent to cigarettes packed by machine, are invalid insofar as
they grant the BIR the power to reclassify or update the classification of new brands
every two years or earlier. Further, these provisions are deemed modified upon the
effectivity of RA 9334 on January 1, 2005 insofar as the manner of determining the
permanent classification of new brands is concerned.

We now tackle the last issue.

Petitioner contends that RA 8240, as amended by RA 9334, and its implementing


rules and regulations violate the General Agreement on Tariffs and Trade (GATT) of
1947, as amended, specifically, Paragraph 2, Article III, Part II:

2. The products of the territory of any contracting party imported into the
territory of any other contracting party shall not be subject, directly or
indirectly, to internal taxes or other internal charges of any kind in excess
of those applied, directly or indirectly, to like domestic products. Moreover,
no contracting party shall otherwise apply internal taxes or other internal
charges to imported or domestic products in a manner contrary to the
principles set forth in paragraph 1.

It claims that it is the duty of this Court to correct, in favor of the GATT, whatever
inconsistency exists between the assailed law and the GATT in order to prevent
triggering the international dispute settlement mechanism under the GATT-WTO
Agreement.

We disagree.

The classification freeze provision uniformly applies to all newly introduced


brands in the market, whether imported or locally manufactured. It does not purport to
single out imported cigarettes in order to unduly favor locally produced ones. Further,
petitioners evidence was anchored on the alleged unequal tax treatment between old
and new brands which involves a different frame of reference vis--vis local and imported
products. Petitioner has, therefore, failed to clearly prove its case, both factually and
legally, within the parameters of the GATT.

At any rate, even assuming arguendo that petitioner was able to prove that
the classification freeze provision violates the GATT, the outcome would still be the
same. The GATT is a treaty duly ratified by the Philippine Senate and under Article VII,
Section 21[81] of the Constitution, it merely acquired the status of a statute.[82] Applying
the basic principles of statutory construction in case of irreconcilable conflict between
statutes, RA 8240, as amended by RA 9334, would prevail over the GATT either as a
later enactment by Congress or as a special law dealing with the taxation of sin
products. Thus, in Abbas v. Commission on Elections,[83] we had occasion to explain:

Petitioners premise their arguments on the assumption that the


Tripoli Agreement is part of the law of the land, being a binding
international agreement. The Solicitor General asserts that the Tripoli
Agreement is neither a binding treaty, not having been entered into by the
Republic of the Philippines with a sovereign state and ratified according to
the provisions of the 1973 or 1987 Constitutions, nor a binding
international agreement.

We find it neither necessary nor determinative of the case to rule on


the nature of the Tripoli Agreement and its binding effect on the Philippine
Government whether under public international or internal Philippine law.
In the first place, it is now the Constitution itself that provides for the
creation of an autonomous region in Muslim Mindanao. The standard for
any inquiry into the validity of R.A. No. 6734 would therefore be what is so
provided in the Constitution. Thus, any conflict between the provisions of
R.A. No. 6734 and the provisions of the Tripoli Agreement will not have
the effect of enjoining the implementation of the Organic Act. Assuming
for the sake of argument that the Tripoli Agreement is a binding
treaty or international agreement, it would then constitute part of the
law of the land. But as internal law it would not be superior to R.A.
No. 6734, an enactment of the Congress of the Philippines, rather it
would be in the same class as the latter [SALONGA, PUBLIC
INTERNATIONAL LAW 320 (4th ed., 1974), citing Head Money Cases,
112 U.S. 580 (1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, if at
all, R.A. No. 6734 would be amendatory of the Tripoli Agreement,
being a subsequent law. Only a determination by this Court that R.A. No.
6734 contravenes the Constitution would result in the granting of the
reliefs sought. (Emphasis supplied)
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the
Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032,
is AFFIRMED with MODIFICATION. As modified, this Court declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334,
is CONSTITUTIONAL; and that

(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as


amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b),
II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum
Order No. 6-2003, insofar as pertinent to cigarettes packed by machine,
are INVALID insofar as they grant the BIR the power to reclassify or update the
classification of new brands every two years or earlier.

SO ORDERED.
EN BANC
[G.R. No. 144104. June 29, 2004]
LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as
amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP
No. 57014 which affirmed the decision of the Central Board of Assessment Appeals
holding that the lot owned by the petitioner and its hospital building constructed thereon
are subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is the
registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1,
SWO-04-000495, located at Quezon Avenue corner Elliptical Road, Central District,
Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer
Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected
in the middle of the aforesaid lot is a hospital known as the Lung Center of
the Philippines. A big space at the ground floor is being leased to private parties, for
canteen and small store spaces, and to medical or professional practitioners who use
the same as their private clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes
to a private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical
services to out-patients, both paying and non-paying. Aside from its income from paying
patients, the petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City Assessor of
Quezon City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-
01231 (15-2518-A) were issued for the land and the hospital building,
respectively.[4] On August 25, 1993, the petitioner filed a Claim for Exemption[5] from
real property taxes with the City Assessor, predicated on its claim that it is a charitable
institution. The petitioners request was denied, and a petition was, thereafter, filed
before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity)
for the reversal of the resolution of the City Assessor. The petitioner alleged that under
Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds are exclusively
used for charity patients and that the major thrust of its hospital operation is to serve
charity patients. The petitioner contends that it is a charitable institution and, as such, is
exempt from real property taxes. The QC-LBAA rendered judgment dismissing the
petition and holding the petitioner liable for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the petitioner
was not a charitable institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled to real property tax
exemption under the constitution and the law. The petitioner sought relief from the Court
of Appeals, which rendered judgment affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT,
ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section
28(3), Article VI of the 1987 Constitution. It asserts that its character as a charitable
institution is not altered by the fact that it admits paying patients and renders medical
services to them, leases portions of the land to private parties, and rents out portions of
the hospital to private medical practitioners from which it derives income to be used for
operational expenses.
The petitioner points out that for the years 1995 to 1999, 100% of its out-patients
were charity patients and of the hospitals 282-bed capacity, 60% thereof, or 170 beds,
is allotted to charity patients. It asserts that the fact that it receives subsidies from the
government attests to its character as a charitable institution. It contends that the
exclusivity required in the Constitution does not necessarily mean solely. Hence, even if
a portion of its real estate is leased out to private individuals from whom it derives
income, it does not lose its character as a charitable institution, and its exemption from
the payment of real estate taxes on its real property. The petitioner cited our ruling
in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends that even if
P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not
precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a
charitable entity. The petitioners real property is not exempt from the payment of real
estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it
failed to prove that it is a charitable institution and that the said property is actually,
directly and exclusively used for charitable purposes. The respondents noted that in a
newspaper report, it appears that graft charges were filed with the Sandiganbayan
against the director of the petitioner, its administrative officer, and Zenaida Rivera, the
proprietress of the Elliptical Orchids and Garden Center, for entering into a lease
contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month,
when the monthly rental should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the
petitioner renewed the same on March 13, 1995 for a monthly rental of
only P24,000. They assert that the petitioner uses the subsidies granted by the
government for charity patients and uses the rest of its income from the property for the
benefit of paying patients, among other purposes. They aver that the petitioner failed to
adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital
are reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is
that it is pay-patient and required to pay a certain amount as deposit. That even if a
patient is living below the poverty line, he is charged with high hospital bills. And,
without these bills being first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills or issue a promissory
note guaranteed and indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered the same
fate. Moreover, before a patient is admitted for treatment as free or charity patient, one
must undergo a series of interviews and must submit all the requirements needed by
the Center, usually accompanied by endorsement by an influential agency or person
known only to the Center. These facts were heard and admitted by the Petitioner LCP
during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they prefer to
be treated at the Quezon Institute. Can such practice by the Center be called
charitable?[10]

The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real
properties of the petitioner are exempt from real property taxes.

The Courts Ruling


The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the
context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a
charitable institution/entity or not, the elements which should be considered include the
statute creating the enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed, the character of the
services rendered, the indefiniteness of the beneficiaries, and the use and occupation of
the properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or otherwise lessening the burden of government. [12] It may
be applied to almost anything that tend to promote the well-doing and well-being of
social man. It embraces the improvement and promotion of the happiness of
man.[13] The word charitable is not restricted to relief of the poor or sick.[14] The test of a
charity and a charitable organization are in law the same. The test whether an
enterprise is charitable or not is whether it exists to carry out a purpose reorganized in
law as charitable or whether it is maintained for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the
President of the Philippines with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The raison detre for the creation of the petitioner is stated in the
decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been
the leading cause of illness and death in the Philippines, comprising more than 45% of
the total annual deaths from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into serious lung
diseases on account of unabated pollution, industrialization and unchecked cigarette
smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt and
intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by lung
diseases, and to undertake research and training on the cure and prevention of lung
diseases, through a Lung Center which will house and nurture the above and related
activities and provide tertiary-level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for the
welfare and benefit of the Filipino people.[15]
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated
medical institution which shall specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern of the government to assist and
provide material and financial support in the establishment and maintenance of a lung
center primarily to benefit the people of the Philippines and in pursuance of the policy of
the State to secure the well-being of the people by providing them specialized health
and medical services and by minimizing the incidence of lung diseases in the country
and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of
lung or pulmonary ailments and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the
biological, demographic, social, economic, eugenic and physiological aspects of lung or
pulmonary diseases and their control; and to collect and publish the findings of such
research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung
consciousness or awareness, and the development of fact-finding, information and
reporting facilities for and in aid of the general purposes or objects aforesaid, especially
in human lung requirements, general health and physical fitness, and other relevant or
related fields;
5. To encourage the training of physicians, nurses, health officers, social workers and
medical and technical personnel in the practical and scientific implementation of
services to lung patients;
6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial and/or
city and local levels; and to coordinate their various efforts and activities for the purpose
of achieving a more effective programmatic approach on the common problems relative
to the objectives enumerated herein;
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given to
the organization;
9. To extend, whenever possible and expedient, medical services to the public and, in
general, to promote and protect the health of the masses of our people, which has long
been recognized as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies
of the people in any and all walks of life, including those who are poor and needy, all
without regard to or discrimination, because of race, creed, color or political belief of the
persons helped; and to enable them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and carried
on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular circumstances, to serve its general
and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy without
discrimination.After all, any person, the rich as well as the poor, may fall sick or be
injured or wounded and become a subject of charity.[17]
As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. [18] In Congregational
Sunday School, etc. v. Board of Review,[19] the State Supreme Court of Illinois held,
thus:
[A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay
are required to do so, where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes, and those benefits are refused
to none on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
Association of South Dakota v. Baker:[21]
[T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to
enhance the usefulness of the institution to the poor; for it is a matter of common
observation amongst those who have gone about at all amongst the suffering classes,
that the deserving poor can with difficulty be persuaded to enter an asylum of any kind
confined to the reception of objects of charity; and that their honest pride is much less
wounded by being placed in an institution in which paying patients are also
received. The fact of receiving money from some of the patients does not, we think, at
all impair the character of the charity, so long as the money thus received is devoted
altogether to the charitable object which the institution is intended to further.[22]
The money received by the petitioner becomes a part of the trust fund and must be
devoted to public trust purposes and cannot be diverted to private profit or benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner
does not lose its character as a charitable institution simply because the gift or donation
is in the form of subsidies granted by the government. As held by the State Supreme
Court of Utah in Yorgason v. County Board of Equalization of Salt Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is the
presence or absence of material reciprocity. It is entirely irrelevant to this analysis that
the government, rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Marks Tower and the tenants by making a contribution
to the landlord, just as it would have been irrelevant in Intermountain Health Care if the
patients income supplements had come from private individuals rather than the
government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by
the government rather than private charitable contributions does not dictate the denial of
a charitable exemption if the facts otherwise support such an exemption, as they do
here.[25]
In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients and for
the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its
operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the
second issue, that those portions of its real property that are leased to private entities
are not exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an exemption
is equivalent to an appropriation. Hence, a claim for exemption from tax payments must
be clearly shown and based on language in the law too plain to be mistaken. [26] As held
in Salvation Army v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing power of
the state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or
must appear by necessary implication from the language used, for it is a well settled
principle that, when a special privilege or exemption is claimed under a statute, charter
or act of incorporation, it is to be construed strictly against the property owner and in
favor of the public. This principle applies with peculiar force to a claim of exemption from
taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock
corporation organized primarily to help combat the high incidence of lung and
pulmonary diseases in the Philippines, all donations, contributions, endowments and
equipment and supplies to be imported by authorized entities or persons and by the
Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use and
benefit of the Lung Center, shall be exempt from income and gift taxes, the same further
deductible in full for the purpose of determining the maximum deductible amount under
Section 30, paragraph (h), of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges
and fees imposed by the Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or for the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any property
tax exemption privileges for its real properties as well as the building constructed
thereon. If the intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be
extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural workings
of the human mind. They are predicated upon ones own voluntary act and not upon that
of others. They proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to restrict its meaning and
confine its terms to those expressly mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant at all,
and that unless the privilege is limited to the very terms of the statute the favor would be
intended beyond what was meant.[31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(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.[32]
The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution itself . .
.; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational
purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b) of
Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as
follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
...
(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.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and improvements
used exclusively for charitable purposes shall be exempt from taxation. [36] However,
under the 1973 and the present Constitutions, for lands, buildings, and improvements of
the charitable institution to be considered exempt, the same should not only be
exclusively used for charitable purposes; it is required that such property be used
actually and directly for such purposes.[37]
In light of the foregoing substantial changes in the Constitution, the petitioner cannot
rely on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was
promulgated on September 30, 1961 before the 1973 and 1987 Constitutions took
effect.[38] As this Court held in Province of Abra v. Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation. The
present Constitution added charitable institutions, mosques, and non-profit cemeteries
and required that for the exemption of lands, buildings, and improvements, they should
not only be exclusively but also actually and directly used for religious or charitable
purposes. The Constitution is worded differently. The change should not be ignored. It
must be duly taken into consideration. Reliance on past decisions would have sufficed
were the words actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation.
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.[40] 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.[41] The words dominant use or principal use cannot be
substituted for the words used exclusively without doing violence to the Constitutions
and the law.[42] Solely is synonymous with exclusively.[43]
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.[44]
The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable
purposes. While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying, other portions
thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise
under the business name Elliptical Orchids and Garden Center. Indeed, the petitioners
evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28
for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes.[45] On the other hand, the portions of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
respondent Quezon City Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof which are leased to
private persons, and to compute the real property taxes due thereon as provided for by
law.

THIRD DIVISION

THE CITY G.R. No. 181845


OF MANILA,LIBERTY M. TOLEDO,
in her capacity as THE
TREASURER OF MANILA and Present:
JOSEPH SANTIAGO, in his
capacity as the CHIEF OF THE YNARES-SANTIAGO, J.,
LICENSE DIVISION OF CITY Chairperson,
OF MANILA, CHICO-NAZARIO,
Petitioners, VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
- versus -

Promulgated:
COCA-COLA BOTTLERS
PHILIPPINES, INC., August 4, 2009
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This case is a Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Civil Procedure seeking to review and reverse the Decision[1] dated 18 January
2008 and Resolution[2] dated 18 February 2008 of the Court of Tax Appeals en
banc (CTA en banc) in C.T.A. EB No. 307. In its assailed Decision, the CTA en
banc dismissed the Petition for Review of herein petitioners City of Manila, Liberty M.
Toledo (Toledo), and Joseph Santiago (Santiago); and affirmed the Resolutions dated
24 May 2007,[3] 8 June 2007,[4] and 26 July 2007,[5] of the CTA First Division in C.T.A.
AC No. 31, which, in turn, dismissed the Petition for Review of petitioners in said case
for being filed out of time. In its questioned Resolution, the CTA en banc denied the
Motion for Reconsideration of petitioners.

Petitioner City of Manila is a public corporation empowered to collect and assess


business taxes, revenue fees, and permit fees, through its officers,
petitioners Toledo and Santiago, in their capacities as City Treasurer and Chief of the
Licensing Division, respectively. On the other hand, respondent Coca-Cola Bottlers
Philippines, Inc. is a corporation engaged in the business of manufacturing and selling
beverages, and which maintains a sales office in the City of Manila.

The case stemmed from the following facts:

Prior to 25 February 2000, respondent had been paying the City of Manila local
business tax only under Section 14 of Tax Ordinance No. 7794, [6] being expressly
exempted from the business tax under Section 21 of the same tax ordinance. Pertinent
provisions of Tax Ordinance No. 7794 provide:

Section 14. Tax on Manufacturers, Assemblers and Other


Processors. There is hereby imposed a graduated tax on manufacturers,
assemblers, repackers, processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and wines or manufacturers of
any article of commerce of whatever kind or nature, in accordance with
any of the following schedule:
xxxx

over P6,500,000.00 up to
P25,000,000.00 - - - - - - - - - - - - - - - - - - - -- P36,000.00 plus 50% of 1%
in excess of P6,500,000.00

xxxx

Section 21. Tax on Businesses Subject to the Excise, Value-Added


or Percentage Taxes under the NIRC. On any of the following businesses
and articles of commerce subject to excise, value-added or percentage
taxes under the National Internal Revenue Code hereinafter referred to as
NIRC, as amended, a tax of FIFTY PERCENT (50%) of ONE PERCENT
(1%) per annum on the gross sales or receipts of the preceding calendar
year is hereby imposed:
(A) On persons who sell goods and services in the course of trade
or business; and those who import goods whether for business or
otherwise; as provided for in Sections 100 to 103 of the NIRC as
administered and determined by the Bureau of Internal Revenue pursuant
to the pertinent provisions of the said Code.

xxxx
(D) Excisable goods subject to VAT
(1) Distilled spirits
(2) Wines
xxxx

(8) Coal and coke


(9) Fermented liquor, brewers wholesale price, excluding the ad
valorem tax

xxxx

PROVIDED, that all registered businesses in the City of Manila that


are already paying the aforementioned tax shall be exempted from
payment thereof.

Petitioner City of Manila subsequently approved on 25 February 2000, Tax


Ordinance No. 7988,[7] amending certain sections of Tax Ordinance No. 7794,
particularly: (1) Section 14, by increasing the tax rates applicable to certain
establishments operating within the territorial jurisdiction of the City of Manila; and (2)
Section 21, by deleting the proviso found therein, which stated that all registered
businesses in the City of Manila that are already paying the aforementioned tax shall be
exempted from payment thereof.Petitioner City of Manila approved only after a year,
on 22 February 2001, another tax ordinance, Tax Ordinance No. 8011, amending Tax
Ordinance No. 7988.

Tax Ordinances No. 7988 and No. 8011 were later declared by the Court null and
void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila[8] (Coca-Cola case) for the
following reasons: (1) Tax Ordinance No. 7988 was enacted in contravention of the
provisions of the Local Government Code (LGC) of 1991 and its implementing rules and
regulations; and (2) Tax Ordinance No. 8011 could not cure the defects of Tax
Ordinance No. 7988, which did not legally exist.

However, before the Court could declare Tax Ordinance No. 7988 and Tax
Ordinance No. 8011 null and void, petitioner City of Manila assessed respondent on the
basis of Section 21 of Tax Ordinance No. 7794, as amended by the aforementioned tax
ordinances, for deficiency local business taxes, penalties, and interest, in the total
amount of P18,583,932.04, for the third and fourth quarters of the year
2000. Respondent filed a protest with petitioner Toledo on the ground that the said
assessment amounted to double taxation, as respondent was taxed twice, i.e., under
Sections 14 and 21 of Tax Ordinance No. 7794, as amended by Tax Ordinances No.
7988 and No. 8011. Petitioner Toledo did not respond to the protest of respondent.

Consequently, respondent filed with the Regional Trial Court (RTC) of Manila,
Branch 47, an action for the cancellation of the assessment against respondent for
business taxes, which was docketed as Civil Case No. 03-107088.

On 14 July 2006, the RTC rendered a Decision[9] dismissing Civil Case No. 03-
107088. The RTC ruled that the business taxes imposed upon the respondent under
Sections 14 and 21 of Tax Ordinance No. 7988, as amended, were not of the same kind
or character; therefore, there was no double taxation. The RTC, though, in an
Order[10]dated 16 November 2006, granted the Motion for Reconsideration of
respondent, decreed the cancellation and withdrawal of the assessment against the
latter, and barred petitioners from further imposing/assessing local business taxes
against respondent under Section 21 of Tax Ordinance No. 7794, as amended by Tax
Ordinance No. 7988 and Tax Ordinance No. 8011. The 16 November 2006 Decision of
the RTC was in conformity with the ruling of this Court in the Coca-Cola case, in which
Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were declared null and void. The
Motion for Reconsideration of petitioners was denied by the RTC in an Order[11] dated 4
April 2007. Petitioners received a copy of the 4 April 2007 Order of the RTC, denying
their Motion for Reconsideration of the 16 November 2006 Order of the same court,
on 20 April 2007.

On 4 May 2007, petitioners filed with the CTA a Motion for Extension of Time to
File Petition for Review, praying for a 15-day extension or until 20 May 2007 within
which to file their Petition. The Motion for Extension of petitioners was docketed as
C.T.A. AC No. 31, raffled to the CTA First Division.

Again, on 18 May 2007, petitioners filed, through registered mail, a Second


Motion for Extension of Time to File a Petition for Review, praying for another 10-day
extension, or until 30 May 2007, within which to file their Petition.

On 24 May 2007, however, the CTA First Division already issued a Resolution
dismissing C.T.A. AC No. 31 for failure of petitioners to timely file their Petition for
Review on 20 May 2007.

Unaware of the 24 May 2007 Resolution of the CTA First Division, petitioners
filed their Petition for Review therewith on 30 May 2007 via registered mail. On 8 June
2007, the CTA First Division issued another Resolution, reiterating the dismissal of the
Petition for Review of petitioners.

Petitioners moved for the reconsideration of the foregoing Resolutions dated 24


May 2007 and 8 June 2007, but their motion was denied by the CTA First Division in a
Resolution dated 26 July 2007. The CTA First Division reasoned that the Petition for
Review of petitioners was not only filed out of time -- it also failed to comply with the
provisions of Section 4, Rule 5; and Sections 2 and 3, Rule 6, of the Revised Rules of
the CTA.

Petitioners thereafter filed a Petition for Review before the CTA en banc,
docketed as C.T.A. EB No. 307, arguing that the CTA First Division erred in dismissing
their Petition for Review in C.T.A. AC No. 31 for being filed out of time, without
considering the merits of their Petition.

The CTA en banc rendered its Decision on 18 January 2008, dismissing the
Petition for Review of petitioners and affirming the Resolutions dated 24 May 2007, 8
June 2007, and 26 July 2007 of the CTA First Division. The CTA en banc similarly
denied the Motion for Reconsideration of petitioners in a Resolution dated 18 February
2008.

Hence, the present Petition, where petitioners raise the following issues:

I. WHETHER OR NOT PETITIONERS


SUBSTANTIALLY COMPLIED WITH THE REGLEMENTARY
PERIOD TO TIMELY APPEAL THE CASE FOR REVIEW BEFORE
THE [CTA DIVISION].

II. WHETHER OR NOT THE RULING OF THIS COURT


IN THE EARLIER [COCA-COLA CASE] IS DOCTRINAL AND
CONTROLLING IN THE INSTANT CASE.

III. WHETHER OR NOT PETITIONER CITY


OF MANILA CAN STILL ASSESS TAXES UNDER [SECTIONS] 14
AND 21 OF [TAX ORDINANCE NO. 7794, AS AMENDED].

IV. WHETHER OR NOT THE ENFORCEMENT OF


[SECTION] 21 OF THE [TAX ORDINANCE NO. 7794, AS
AMENDED] CONSTITUTES DOUBLE TAXATION.

Petitioners assert that Section 1, Rule 7[12] of the Revised Rules of the CTA
refers to certain provisions of the Rules of Court, such as Rule 42 of the latter, and
makes them applicable to the tax court. Petitioners then cannot be faulted in relying on
the provisions of Section 1, Rule 42[13] of the Rules of Court as regards the period for
filing a Petition for Review with the CTA in division. Section 1, Rule 42 of the Rules of
Court provides for a 15-day period, reckoned from receipt of the adverse decision of the
trial court, within which to file a Petition for Review with the Court of Appeals. The same
rule allows an additional 15-day period within which to file such a Petition; and, only for
the most compelling reasons, another extension period not to exceed 15
days. Petitioners received on 20 April 2007 a copy of the 4 April 2007 Order of the RTC,
denying their Motion for Reconsideration of the 16 November 2006 Order of the same
court. On 4 May 2007, believing that they only had 15 days to file a Petition for Review
with the CTA in division, petitioners moved for a 15-day extension, or until 20 May 2007,
within which to file said Petition. Prior to the lapse of their first extension period, or on 18
May 2007, petitioners again moved for a 10-day extension, or until 30 May 2007, within
which to file their Petition for Review. Thus, when petitioners filed their Petition for
Review with the CTA First Division on 30 May 2007, the same was filed well within the
reglementary period for doing so.

Petitioners argue in the alternative that even assuming that Section 3(a), Rule
8[14] of the Revised Rules of the CTA governs the period for filing a Petition for Review
with the CTA in division, still, their Petition for Review was filed within the reglementary
period. Petitioners call attention to the fact that prior to the lapse of the 30-day period for
filing a Petition for Review under Section 3(a), Rule 8 of the Revised Rules of the CTA,
they had already moved for a 10-day extension, or until 30 May 2007, within which to
file their Petition. Petitioners claim that there was sufficient justification in equity for the
grant of the 10-day extension they requested, as the primordial consideration should be
the substantive, and not the procedural, aspect of the case. Moreover, Section 3(a),
Rule 8 of the Revised Rules of the CTA, is silent as to whether the 30-day period for
filing a Petition for Review with the CTA in division may be extended or not.

Petitioners also contend that the Coca-Cola case is not determinative of the
issues in the present case because the issue of nullity of Tax Ordinance No. 7988 and
Tax Ordinance No. 8011 is not the lis mota herein. The Coca-Cola case is not doctrinal
and cannot be considered as the law of the case.

Petitioners further insist that notwithstanding the declaration of nullity of Tax


Ordinance No. 7988 and Tax Ordinance No. 8011, Tax Ordinance No. 7794 remains a
valid piece of local legislation. The nullity of Tax Ordinance No. 7988 and Tax
Ordinance No. 8011 does not effectively bar petitioners from imposing local business
taxes upon respondent under Sections 14 and 21 of Tax Ordinance No. 7794, as they
were read prior to their being amended by the foregoing null and void tax ordinances.

Petitioners finally maintain that imposing upon respondent local business taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794 does not constitute direct
double taxation. Section 143 of the LGC gives municipal, as well as city governments,
the power to impose business taxes, to wit:

SECTION 143. Tax on Business. The municipality may impose


taxes on the following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers,


distillers, rectifiers, and compounders of liquors, distilled spirits, and wines
or manufacturers of any article of commerce of whatever kind or nature, in
accordance with the following schedule:

xxxx
(b) On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature in accordance with the following
schedule:

xxxx

(c) On exporters, and on manufacturers, millers, producers,


wholesalers, distributors, dealers or retailers of essential commodities
enumerated hereunder at a rate not exceeding one-half (1/2) of the rates
prescribed under subsections (a), (b) and (d) of this Section:

xxxx

Provided, however, That barangays shall have the exclusive power


to levy taxes, as provided under Section 152 hereof, on gross sales or
receipts of the preceding calendar year of Fifty thousand pesos
(P50,000.00) or less, in the case of cities, and Thirty thousand pesos
(P30,000) or less, in the case of municipalities.

(e) On contractors and other independent contractors, in


accordance with the following schedule:

xxxx

(f) On banks and other financial institutions, at a rate not exceeding fifty
percent (50%) of one percent (1%) on the gross receipts of the preceding
calendar year derived from interest, commissions and discounts from
lending activities, income from financial leasing, dividends, rentals on
property and profit from exchange or sale of property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article


of commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler
annually.

(h) On any business, not otherwise specified in the preceding paragraphs,


which the sanggunian concerned may deem proper to tax: Provided, That
on any business subject to the excise, value-added or percentage tax
under the National Internal Revenue Code, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or receipts of the
preceding calendar year.

Section 14 of Tax Ordinance No. 7794 imposes local business tax on


manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce,
pursuant to Section 143(a) of the LGC. On the other hand, the local business tax under
Section 21 of Tax Ordinance No. 7794 is imposed upon persons selling goods and
services in the course of trade or business, and those importing goods for business or
otherwise, who, pursuant to Section 143(h) of the LGC, are subject to excise tax, value-
added tax (VAT), or percentage tax under the National Internal Revenue Code
(NIRC). Thus, there can be no double taxation when respondent is being taxed under
both Sections 14 and 21 of Tax Ordinance No. 7794, for under the first, it is being taxed
as a manufacturer; while under the second, it is being taxed as a person selling goods
in the course of trade or business subject to excise, VAT, or percentage tax.

The Court first addresses the issue raised by petitioners concerning the period
within which to file with the CTA a Petition for Review from an adverse decision or ruling
of the RTC.

The period to appeal the decision or ruling of the RTC to the CTA via a Petition
for Review is specifically governed by Section 11 of Republic Act No. 9282,[15] and
Section 3(a), Rule 8 of the Revised Rules of the CTA.

Section 11 of Republic Act No. 9282 provides:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. Any
party adversely affected by a decision, ruling or inaction of the
Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary
of Agriculture or the Central Board of Assessment Appeals or
the Regional Trial Courts may file an Appeal with the CTA within thirty
(30) days after the receipt of such decision or ruling or after the expiration
of the period fixed by law for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a


procedure analogous to that provided for under Rule 42 of the 1997
Rules of Civil Procedure with the CTA within thirty (30) days from the
receipt of the decision or ruling or in the case of inaction as herein
provided, from the expiration of the period fixed by law to act thereon. x x
x. (Emphasis supplied.)

Section 3(a), Rule 8 of the Revised Rules of the CTA states:

SEC 3. Who may appeal; period to file petition. (a) A party adversely
affected by a decision, ruling or the inaction of the Commissioner of
Internal Revenue on disputed assessments or claims for refund of internal
revenue taxes, or by a decision or ruling of the Commissioner of Customs,
the Secretary of Finance, the Secretary of Trade and Industry, the
Secretary of Agriculture, or a Regional Trial Court in the exercise of its
original jurisdiction may appeal to the Court by petition for review filed
within thirty days after receipt of a copy of such decision or ruling, or
expiration of the period fixed by law for the Commissioner of Internal
Revenue to act on the disputed assessments. x x x. (Emphasis supplied.)

It is crystal clear from the afore-quoted provisions that to appeal an adverse


decision or ruling of the RTC to the CTA, the taxpayer must file a Petition for
Review with the CTA within 30 days from receipt of said adverse decision or ruling of
the RTC.

It is also true that the same provisions are silent as to whether such 30-day
period can be extended or not. However, Section 11 of Republic Act No. 9282 does
state that the Petition for Review shall be filed with the CTA following the procedure
analogous to Rule 42 of the Revised Rules of Civil Procedure. Section 1, Rule
42[16] of the Revised Rules of Civil Procedure provides that the Petition for Review of an
adverse judgment or final order of the RTC must be filed with the Court of Appeals
within: (1) the original 15-day period from receipt of the judgment or final order to be
appealed; (2) an extended period of 15 days from the lapse of the original period; and
(3) only for the most compelling reasons, another extended period not to exceed 15
days from the lapse of the first extended period.

Following by analogy Section 1, Rule 42 of the Revised Rules of Civil Procedure,


the 30-day original period for filing a Petition for Review with the CTA under Section 11
of Republic Act No. 9282, as implemented by Section 3(a), Rule 8 of the Revised Rules
of the CTA, may be extended for a period of 15 days. No further extension shall be
allowed thereafter, except only for the most compelling reasons, in which case the
extended period shall not exceed 15 days.

Even the CTA en banc, in its Decision dated 18 January 2008, recognizes that
the 30-day period within which to file the Petition for Review with the CTA may, indeed,
be extended, thus:
Being suppletory to R.A. 9282, the 1997 Rules of Civil Procedure allow an
additional period of fifteen (15) days for the movant to file a Petition for
Review, upon Motion, and payment of the full amount of the docket
fees. A further extension of fifteen (15) days may be granted on
compelling reasons in accordance with the provision of Section 1, Rule 42
of the 1997 Rules of Civil Procedure x x x.[17]

In this case, the CTA First Division did indeed err in finding that petitioners failed
to file their Petition for Review in C.T.A. AC No. 31 within the reglementary period.

From 20 April 2007, the date petitioners received a copy of the 4 April 2007
Order of the RTC, denying their Motion for Reconsideration of the 16 November 2006
Order, petitioners had 30 days, or until 20 May 2007, within which to file their Petition
for Review with the CTA. Hence, the Motion for Extension filed by petitioners on 4 May
2007 grounded on their belief that the reglementary period for filing their Petition for
Review with the CTA was to expire on 5 May 2007, thus, compelling them to seek an
extension of 15 days, or until 20 May 2007, to file said Petition was unnecessary and
superfluous. Even without said Motion for Extension, petitioners could file their Petition
for Review until 20 May 2007, as it was still within the 30-day reglementary period
provided for under Section 11 of Republic Act No. 9282; and implemented by Section
3(a), Rule 8 of the Revised Rules of the CTA.

The Motion for Extension filed by the petitioners on 18 May 2007, prior to the
lapse of the 30-day reglementary period on 20 May 2007, in which they prayed for
another extended period of 10 days, or until 30 May 2007, to file their Petition for
Review was, in reality, only the first Motion for Extension of petitioners. The CTA First
Division should have granted the same, as it was sanctioned by the rules of
procedure. In fact, petitioners were only praying for a 10-day extension, five days less
than the 15-day extended period allowed by the rules. Thus, when petitioners
filed via registered mail their Petition for Review in C.T.A. AC No. 31 on 30 May
2007, they were able to comply with the reglementary period for filing such a petition.

Nevertheless, there were other reasons for which the CTA First Division
dismissed the Petition for Review of petitioners in C.T.A. AC No. 31; i.e., petitioners
failed to conform to Section 4 of Rule 5, and Section 2 of Rule 6 of the Revised Rules of
the CTA. The Court sustains the CTA First Division in this regard.

Section 4, Rule 5 of the Revised Rules of the CTA requires that:

SEC. 4. Number of copies. The parties shall file eleven signed copies of
every paper for cases before the Court en banc and six signed copies
for cases before a Division of the Court in addition to the signed
original copy, except as otherwise directed by the Court. Papers to be
filed in more than one case shall include one additional copy for each
additional case. (Emphasis supplied.)

Section 2, Rule 6 of the Revised Rules of the CTA further necessitates that:

SEC. 2. Petition for review; contents. The petition for review shall contain
allegations showing the jurisdiction of the Court, a concise statement of
the complete facts and a summary statement of the issues involved in the
case, as well as the reasons relied upon for the review of the challenged
decision. The petition shall be verified and must contain a certification
against forum shopping as provided in Section 3, Rule 46 of the Rules of
Court. A clearly legible duplicate original or certified true copy of the
decision appealed from shall be attached to the petition.(Emphasis
supplied.)
The aforesaid provisions should be read in conjunction with Section 1, Rule 7 of
the Revised Rules of the CTA, which provides:

SECTION 1. Applicability of the Rules of Court on procedure in the


Court of Appeals, exception. The procedure in the Court en banc or in
Divisions in original or in appealed cases shall be the same as those in
petitions for review and appeals before the Court of Appeals pursuant to
the applicable provisions of Rules 42, 43, 44, and 46 of the Rules of
Court, except as otherwise provided for in these Rules. (Emphasis
supplied.)

As found by the CTA First Division and affirmed by the CTA en banc, the Petition
for Review filed by petitioners via registered mail on 30 May 2007 consisted only of one
copy and all the attachments thereto, including the Decision dated 14 July 2006; and
that the assailed Orders dated 16 November 2006 and 4 April 2007 of the RTC in Civil
Case No. 03-107088 were mere machine copies. Evidently, petitioners did not comply
at all with the requirements set forth under Section 4, Rule 5; or with Section 2, Rule 6
of the Revised Rules of the CTA. Although the Revised Rules of the CTA do not provide
for the consequence of such non-compliance, Section 3, Rule 42 of the Rules of Court
may be applied suppletorily, as allowed by Section 1, Rule 7 of the Revised Rules of the
CTA. Section 3, Rule 42 of the Rules of Court reads:

SEC. 3. Effect of failure to comply with requirements. The failure of


the petitioner to comply with any of the foregoing requirements regarding
the payment of the docket and other lawful fees, the deposit for costs,
proof of service of the petition, and the contents of and the documents
which should accompany the petition shall be sufficient ground for
the dismissalthereof. (Emphasis supplied.)

True, petitioners subsequently submitted certified copies of the Decision dated


14 July 2006 and assailed Orders dated 16 November 2006 and 4 April 2007 of the
RTC in Civil Case No. 03-107088, but a closer examination of the stamp on said
documents reveals that they were prepared and certified only on 14 August 2007, about
two months and a half after the filing of the Petition for Review by petitioners.

Petitioners never offered an explanation for their non-compliance with Section 4


of Rule 5, and Section 2 of Rule 6 of the Revised Rules of the CTA. Hence, although
the Court had, in previous instances, relaxed the application of rules of procedure, it
cannot do so in this case for lack of any justification.

Even assuming arguendo that the Petition for Review of petitioners in C.T.A. AC
No. 31 should have been given due course by the CTA First Division, it is still
dismissible for lack of merit.
Contrary to the assertions of petitioners, the Coca-Cola case is indeed applicable
to the instant case. The pivotal issue raised therein was whether Tax Ordinance No.
7988 and Tax Ordinance No. 8011 were null and void, which this Court resolved in the
affirmative. Tax Ordinance No. 7988 was declared by the Secretary of the Department
of Justice (DOJ) as null and void and without legal effect due to the failure of
herein petitioner City of Manila to satisfy the requirement under the law that said
ordinance be published for three consecutive days. Petitioner City of Manila never
appealed said declaration of the DOJ Secretary; thus, it attained finality after the lapse
of the period for appeal of the same. The passage of Tax Ordinance No. 8011,
amending Tax Ordinance No. 7988, did not cure the defects of the latter, which, in any
way, did not legally exist.

By virtue of the Coca-Cola case, Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 are null and void and without any legal effect. Therefore, respondent cannot
be taxed and assessed under the amendatory laws--Tax Ordinance No. 7988 and Tax
Ordinance No. 8011.

Petitioners insist that even with the declaration of nullity of Tax Ordinance No.
7988 and Tax Ordinance No. 8011, respondent could still be made liable for local
business taxes under both Sections 14 and 21 of Tax Ordinance No. 7944 as they were
originally read, without the amendment by the null and void tax ordinances.

Emphasis must be given to the fact that prior to the passage of Tax Ordinance
No. 7988 and Tax Ordinance No. 8011 by petitioner City of Manila, petitioners subjected
and assessed respondent only for the local business tax under Section 14 of Tax
Ordinance No. 7794, but never under Section 21 of the same. This was due to the clear
and unambiguous proviso in Section 21 of Tax Ordinance No. 7794, which stated that
all registered business in the City of Manila that are already paying the aforementioned
tax shall be exempted from payment thereof. The aforementioned tax referred to in
said proviso refers to local business tax. Stated differently, Section 21 of Tax Ordinance
No. 7794 exempts from the payment of the local business tax imposed by said section,
businesses that are already paying such tax under other sections of the same tax
ordinance. The said proviso, however, was deleted from Section 21 of Tax Ordinance
No. 7794 by Tax Ordinances No. 7988 and No. 8011. Following this deletion, petitioners
began assessing respondent for the local business tax under Section 21 of Tax
Ordinance No. 7794, as amended.

The Court easily infers from the foregoing circumstances that petitioners
themselves believed that prior to Tax Ordinance No. 7988 and Tax Ordinance No. 8011,
respondent was exempt from the local business tax under Section 21 of Tax Ordinance
No. 7794. Hence, petitioners had to wait for the deletion of the exempting proviso in
Section 21 of Tax Ordinance No. 7794 by Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 before they assessed respondent for the local business tax under said
section. Yet, with the pronouncement by this Court in the Coca-Cola case that Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 were null and void and without legal
effect, then Section 21 of Tax Ordinance No. 7794, as it has been previously worded,
with its exempting proviso, is back in effect. Accordingly, respondent should not have
been subjected to the local business tax under Section 21 of Tax Ordinance No. 7794
for the third and fourth quarters of 2000, given its exemption therefrom since it was
already paying the local business tax under Section 14 of the same ordinance.

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax


Ordinance No. 7794, to their own detriment. Said exempting proviso was precisely
included in said section so as to avoid double taxation.

Double taxation means taxing the same property twice when it should be taxed
only once; that is, taxing the same person twice by the same jurisdiction for the same
thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as direct duplicate taxation, the two taxes must be imposed on
the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and the
taxes must be of the same kind or character.[18]

Using the aforementioned test, the Court finds that there is indeed double taxation if
respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance
No. 7794, since these are being imposed: (1) on the same subject matter the privilege
of doing business in the City of Manila; (2) for the same purpose to make persons
conducting business within the City of Manila contribute to city revenues; (3) by the
same taxing authority petitioner City of Manila; (4) within the same taxing jurisdiction
within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods per
calendar year; and (6) of the same kind or character a local business tax imposed on
gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21
of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the
very source of the power of municipalities and cities to impose a local business tax, and
to which any local business tax imposed by petitioner City of Manila must conform. It is
apparent from a perusal thereof that when a municipality or city has already imposed a
business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other
article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city
may no longer subject the same manufacturers, etc. to a business tax under Section
143(h) of the same Code. Section 143(h) may be imposed only on businesses that are
subject to excise tax, VAT, or percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs. In the same way, businesses such as
respondents, already subject to a local business tax under Section 14 of Tax Ordinance
No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable
for local business tax under Section 21 of the same Tax Ordinance [which is based on
Section 143(h) of the LGC].
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is
hereby DENIED. No costs.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner)
under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals
En Banc (CTA En Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July
2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of
1997, petitioner withheld and remitted to respondent on 21 October 2003 the amount of
PHP 67,688,553.51, which represented the fifteen percent (15%) branch profit
remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to
Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large
Taxpayers Assessment and Investigation Division on 4 October 2005 an administrative
claim for refund or issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner requested from the International Tax
Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of
10% under the RP-Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for
Review7 with the CTA on 18 October 2005. Petitioner reiterated its claim for the refund
or issuance of its tax credit certificate for the amount of PHP 22,562,851.17
representing the alleged excess BPRT paid on branch profits remittance to DB
Germany.

THE CTA SECOND DIVISION RULING8


After trial on the merits, the CTA Second Division found that petitioner indeed paid the
total amount of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits
amounting to PHP 451,257,023.29 for 2002 and prior taxable years. Records also
disclose that for the year 2003, petitioner remitted to DB Germany the amount of EURO
5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO),
which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the
application for a tax treaty relief was not filed with ITAD prior to the payment by the
former of its BPRT and actual remittance of its branch profits to DB Germany, or prior to
its availment of the preferential rate of ten percent (10%) under the RP-Germany Tax
Treaty provision. The court a quo held that petitioner violated the fifteen (15) day period
mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No.
1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation
(formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of
Internal Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the
tax treaty may be extended to a foreign corporation wishing to avail itself thereof, the
latter should first invoke the provisions of the tax treaty and prove that they indeed apply
to the corporation.

THE CTA EN BANC RULING10


The CTA En Banc affirmed the CTA Second Divisions Decision dated 29 August 2008
and Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a
ruling from the ITAD of the BIR must be secured prior to the availment of a preferential
tax rate under a tax treaty. Applying the principle of stare decisis et non quieta movere,
the CTA En Banc took into consideration that this Court had denied the Petition in G.R.
No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the
assailed judgment.11 The CTA En Banc ruled that once a case has been decided in one
way, any other case involving exactly the same point at issue should be decided in the
same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO
No. 1-2000 cannot be relaxed for petitioner, unlike in CBK Power Company Limited v.
Commissioner of Internal Revenue.12 In that case, the rule was relaxed and the claim
for refund of excess final withholding taxes was partially granted. While it issued a ruling
to CBK Power Company Limited after the payment of withholding taxes, the ITAD did
not issue any ruling to petitioner even if it filed a request for confirmation on 4 October
2005 that the remittance of branch profits to DB Germany is subject to a preferential tax
rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with
RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty.

THE COURTS RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be
subject to a tax of 15% based on the total profits applied for or earmarked for remittance
without any deduction of the tax component. However, petitioner invokes paragraph 6,
Article 10 of the RP-Germany Tax Treaty, which provides that where a resident of the
Federal Republic of Germany has a branch in the Republic of the Philippines, this
branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the
profits remitted by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the
Philippines, remitting to its head office in Germany, the benefit of a preferential rate
equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment
of the tax treaty relief must be preceded by an application with ITAD at least 15 days
before the transaction. The Order was issued to streamline the processing of the
application of tax treaty relief in order to improve efficiency and service to the taxpayers.
Further, it also aims to prevent the consequences of an erroneous interpretation and/or
application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the
overpayment of taxes or for deficiency tax liabilities for underpayment). 13
The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under Article 10 of
the RP-Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of
RMO No. 1-2000. The filing of a tax treaty relief application is not a condition precedent
to the availment of a preferential tax rate. Further, petitioner posits that, contrary to the
ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for refund
solely on the basis of noncompliance with RMO No. 1-2000.

Respondent counters that the requirement of prior application under RMO No. 1-2000 is
mandatory in character. RMO No. 1-2000 was issued pursuant to the unquestioned
authority of the Secretary of Finance to promulgate rules and regulations for the
effective implementation of the NIRC. Thus, courts cannot ignore administrative
issuances which partakes the nature of a statute and have in their favor a presumption
of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and
noncompliance with this prerequisite is fatal to the taxpayers availment of the
preferential tax rate.

We disagree.
A minute resolution is not a binding precedent
At the outset, this Courts minute resolution on Mirant is not a binding precedent. The
Court has clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner
of Internal Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final. When a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are deemed sustained. But what
is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata. However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a previous case, CIR v.
Baier-Nickel involving the same parties and the same issues, was previously disposed
of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the
latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court
by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article
VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or
principles of law which constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision
cannot bind this Court in cases of a similar nature. There are differences in parties,
taxes, taxable periods, and treaties involved; more importantly, the disposition of that
case was made only through a minute resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of international law as
part of the law of the land.15The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. 16 More
importantly, treaties have the force and effect of law in this jurisdiction.17

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate."19
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax
treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken."20 Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must
not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-Germany Tax
Treaty does not provide for any pre-requisite for the availment of the benefits
under said agreement.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would
indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-
day period. We recognize the clear intention of the BIR in implementing RMO No. 1-
2000, but the CTAs outright denial of a tax treaty relief for failure to strictly comply with
the prescribed period is not in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons
or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest
entitlement to the relief as it would constitute a violation of the duty required by
good faith in complying with a tax treaty. The denial of the availment of tax relief for
the failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.

The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000.1wphi1 Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by RMO No. 1-2000 involve
an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally
deprive those who are entitled to the benefit of a treaty for failure to strictly comply with
an administrative issuance requiring prior application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation
and/or application of the treaty provisions. The objective of the BIR is to forestall
assessments against corporations who erroneously availed themselves of the
benefits of the tax treaty but are not legally entitled thereto, as well as to save such
investors from the tedious process of claims for a refund due to an inaccurate
application of the tax treaty provisions. However, as earlier discussed,
noncompliance with the 15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief especially in claims for
refund.
The underlying principle of prior application with the BIR becomes moot in refund cases,
such as the present case, where the very basis of the claim is erroneous or there is
excessive payment arising from non-availment of a tax treaty relief at the first instance.
In this case, petitioner should not be faulted for not complying with RMO No. 1-2000
prior to the transaction. It could not have applied for a tax treaty relief within the period
prescribed, or 15 days prior to the payment of its BPRT, precisely because it
erroneously paid the BPRT not on the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence,
the prior application requirement becomes illogical. Therefore, the fact that petitioner
invoked the provisions of the RP-Germany Tax Treaty when it requested for a
confirmation from the ITAD before filing an administrative claim for a refund
should be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax
recovery when there has been an erroneous payment of tax.1wphi1 The outright
denial of petitioners claim for a refund, on the sole ground of failure to apply for a tax
treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied though belatedly for a tax treaty
relief, in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have
confirmed whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the
RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was
able to establish the following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a
corporation organized and existing under the laws of the Federal Republic of
Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final
Income Taxes Withheld under BIR Form No. 1601-F and remitted the amount of
67,688,553.51 as branch profits remittance tax with the BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a
clearance, petitioner remitted to Frankfurt Head Office the amount of
EUR5,174,847.38 (or 330,175,961.88 at 63.804 Peso/Euro) representing its
2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its
RBU net income, due for remittance to DB Germany amounting to PHP 451,257,023.29
for 2002 and prior taxable years.23
Likewise, both the administrative and the judicial actions were filed within the two-year
prescriptive period pursuant to Section 229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of
10% BPRT in accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income
amounting to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10%
BPRT. Thus, it is proper to grant petitioner a refund ofthe difference between the PHP
67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP
22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the
Court of Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1
July 2009 are REVERSED and SET ASIDE. A new one is hereby entered ordering
respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate
in favor of petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO
MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE
PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency,
representing the erroneously paid BPRT for 2002 and prior taxable years.
SO ORDERED.

EN BANC

RENATO V. DIAZ and G.R. No. 193007


AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

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

DECISION

ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief[1] assailing the validity of the impending imposition of value-
added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway
operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have
an interest as regular users of tollways in stopping the BIR action. Additionally, Diaz
claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT
Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or
the NIRC) at the House of Representatives. Timbol, on the other hand, claims that she
served as Assistant Secretary of the Department of Trade and Industry and consultant
of the Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President
Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and other sectors to such move.
But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR
revived the idea and would impose the challenged tax on toll fees beginning August 16,
2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend
to include toll fees within the meaning of sale of services that are subject to VAT; that a
toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the non-impairment clause of
the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment
on the petition within 10 days from notice.[2] Later, the Court issued another resolution
treating the petition as one for prohibition.[3]

On August 23, 2010 the Office of the Solicitor General filed the governments
comment.[4] The government avers that the NIRC imposes VAT on all kinds of services
of franchise grantees, including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars.[5]
The government also argues that petitioners have no right to invoke the non-
impairment of contracts clause since they clearly have no personal interest in existing
toll operating agreements (TOAs) between the government and tollway operators. At
any rate, the non-impairment clause cannot limit the States sovereign taxing power
which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric
formula for computing toll rates cannot exempt tollway operators from VAT. In any
event, it cannot be claimed that the rights of tollway operators to a reasonable rate of
return will be impaired by the VAT since this is imposed on top of the toll rate. Further,
the imposition of VAT on toll fees would have very minimal effect on motorists using the
tollways.

In their reply[6] to the governments comment, petitioners point out that tollway
operators cannot be regarded as franchise grantees under the NIRC since they do not
hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off
the toll rate and putting any excess collection in an escrow account. But this would be
illegal since only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-
2010), which directs toll companies to record an accumulated input VAT of zero balance
in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants
entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by


including tollway operators and tollway operations in the terms franchise grantees and
sale of services under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax


on tax and not a tax on services; b) will impair the tollway operators right to a
reasonable return of investment under their TOAs; and c) is not administratively feasible
and cannot be implemented.

The Courts Rulings


A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that petitioners
Diaz and Timbol gave their action. The government has sought reconsideration of the
Courts resolution,[7] however, arguing that petitioners allegations clearly made out a
case for declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not meet the
requirements of Rule 65 for actions for prohibition since the BIR did not exercise
judicial, quasi-judicial, or ministerial functions when it sought to impose VAT on toll
fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in
the ordinary course of law against the BIR action in the form of an appeal to the
Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for
prohibition if the case has far-reaching implications and raises questions that need to be
resolved for the public good.[8] The Court has also held that a petition for prohibition is a
proper remedy to prohibit or nullify acts of executive officials that amount to usurpation
of legislative authority.[9]

Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists who use the
tollways everyday, but more so on the governments effort to raise revenue for funding
various projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has
been imposed, could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would make any attempt
to refund to the motorists what they paid an administrative nightmare with no
solution.Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65,
the Court has ample power to waive such technical requirements when the legal
questions to be resolved are of great importance to the public. The same may be said of
the requirement of locus standi which is a mere procedural requisite.[10]

B. On the Substantive Issues:


One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT
is levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines sale or exchange of services as
follows:

The phrase sale or exchange of services means the


performance of all kinds of services in the Philippines for others for
a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their
transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines; sales of
electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this
Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on all kinds of services
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.[11] By qualifying services with the
words all kinds, Congress has given the term services an all-encompassing
meaning. The listing of specific services are intended to illustrate how pervasive and
broad is the VATs reach rather than establish concrete limits to its application. Thus,
every activity that can be imagined as a form of service rendered for a fee should be
deemed included unless some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or
the Toll Operation Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct, maintain, and operate
expressways, also called tollways, at the operators expense. Tollways serve as
alternatives to regular public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense, the operators are
allowed to collect government-approved fees from motorists using the tollways until
such operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters
use of the tollway facilities over which the operator enjoys private proprietary
rights[12]that its contract and the law recognize. In this sense, the tollway operator is no
different from the following service providers under Section 108 who allow others to use
their properties or facilities for a fee:

1. Lessors of property, whether personal or real;


2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire and
other domestic common carriers by land relative to their transport of goods
or cargoes; and
7. Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines.

It does not help petitioners cause that Section 108 subjects to VAT all kinds of
services rendered for a fee regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. This means that services to
be subject to VAT need not fall under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge and skills.

And not only do tollway operators come under the broad term all kinds of services, they
also come under the specific class described in Section 108 as all other franchise
grantees who are subject to VAT, except those under Section 119 of this Code.

Tollway operators are franchise grantees and they do not belong to exceptions
(the low-income radio and/or television broadcasting companies with gross annual
incomes of less than P10 million and gas and water utilities) that Section 119 [13] spares
from the payment of VAT. The word franchise broadly covers government grants of a
special right to do an act or series of acts of public concern.[14]

Petitioners of course contend that tollway operators cannot be considered


franchise grantees under Section 108 since they do not hold legislative franchises. But
nothing in Section 108 indicates that the franchise grantees it speaks of are those who
hold legislative franchises. Petitioners give no reason, and the Court cannot surmise
any, for making a distinction between franchises granted by Congress and franchises
granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the
state, constitute as much a legislative franchise as though the grant had been made by
Congress itself.[15] The term franchise has been broadly construed as referring, not only
to authorizations that Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to grant franchises has
been delegated by Congress.[16]

Tollway operators are, owing to the nature and object of their business, franchise
grantees. The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special
grant of authority from the state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction Company, the former
tollway concessionaire for the North and South Luzon Expressways. Apart from
Congress, tollway franchises may also be granted by the TRB, pursuant to the exercise
of its delegated powers under P.D. 1112.[17] The franchise in this case is evidenced by a
Toll Operation Certificate.[18]

Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term sale of services under Section 108 of
the Code.But, again, nothing in Section 108 supports this contention. The reverse is
true. In specifically including by way of example electric utilities, telephone, telegraph,
and broadcasting companies in its list of VAT-covered businesses, Section 108 opens
other companies rendering public service for a fee to the imposition of VAT. Businesses
of a public nature such as public utilities and the collection of tolls or charges for its use
or service is a franchise.[19]

Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal Revenue,[20] statements
made by individual members of Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are, consequently, not controlling in the
interpretation of law. The congressional will is ultimately determined by the language of
the law that the lawmakers voted on. Consequently, the meaning and intention of the
law must first be sought in the words of the statute itself, read and considered in their
natural, ordinary, commonly accepted and most obvious significations, according to
good and approved usage and without resorting to forced or subtle construction.

Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll
fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument on the
following discussion in Manila International Airport Authority (MIAA) v. Court of
Appeals:[22]

No one can dispute that properties of public dominion


mentioned in Article 420 of the Civil Code, like roads, canals, rivers,
torrents, ports and bridges constructed by the State,are owned by
the State. The term ports includes seaports and airports.
The MIAA Airport Lands and Buildings constitute a port constructed
by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public
dominion and thus owned by the State or the Republic of
the Philippines.

x x x The operation by the government of a tollway does not


change the character of the road as one for public use. Someone
must pay for the maintenance of the road, either the public indirectly
through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon
using the road. The tollway system is even a more efficient and
equitable manner of taxing the public for the maintenance of public
roads.

The charging of fees to the public does not determine the


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

The terminal fees MIAA charges to passengers, as well as the


landing fees MIAA charges to airlines, constitute the bulk of the
income that maintains the operations of MIAA. The collection of such
fees does not change the character of MIAA as an airport for public
use. Such fees are often termed users tax. This means taxing those
among the public who actually use a public facility instead of taxing
all the public including those who never use the particular public
facility. A users tax is more equitable a principle of taxation
mandated in the 1987 Constitution.[23] (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a
users tax must also pertain to tollway fees. But the main issue in the MIAA case was
whether or not Paraaque City could sell airport lands and buildings under MIAA
administration at public auction to satisfy unpaid real estate taxes. Since local
governments have no power to tax the national government, the Court held that the City
could not proceed with the auction sale. MIAA forms part of the national government
although not integrated in the department framework.[24] Thus, its airport lands and
buildings are properties of public dominion beyond the commerce of man under Article
420(1)[25] of the Civil Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are users tax, but to make the point that
airport lands and buildings are properties of public dominion and that the collection of
terminal fees for their use does not make them private properties. Tollway fees are not
taxes.Indeed, they are not assessed and collected by the BIR and do not go to the
general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users
tax, collectible from motorists, for the construction and maintenance of certain
roadways.The tax in such a case goes directly to the government for the replenishment
of resources it spends for the roadways. This is not the case here. What the
government seeks to tax here are fees collected from tollways that are constructed,
maintained, and operated by private tollway operators at their own expense under the
build, operate, and transfer scheme that the government has adopted for
expressways.[26] Except for a fraction given to the government, the toll fees essentially
end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes
in any sense. A tax is imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures.[27] Toll fees, on the other
hand, are collected by private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and operation of the tollways, as
well as to assure them a reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not government exactions that can be
properly treated as a tax. Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the government or private
individuals or entities, as an attribute of ownership.[28]

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the
liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to the buyer. In such
a case, what is transferred is not the sellers liability but merely the burden of the VAT.[29]

Thus, the seller remains directly and legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT paid by the former is added to the
selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes part of
the cost that the buyer must pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user,
but on the tollway operator. Under Section 105 of the Code, [31] VAT is imposed on any
person who, in the course of trade or business, sells or renders services for a fee. In
other words, the seller of services, who in this case is the tollway operator, is the person
liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of
the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees
were deemed as a users tax. VAT is assessed against the tollway operators gross
receipts and not necessarily on the toll fees. Although the tollway operator may shift the
VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The
shifted VAT burden simply becomes part of the toll fees that one has to pay in order to
use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract
clause on behalf of private investors in the tollway projects. She will neither be
prejudiced by nor be affected by the alleged diminution in return of investments that
may result from the VAT imposition. She has no interest at all in the profits to be earned
under the TOAs. The interest in and right to recover investments solely belongs to the
private tollway investors.

Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule
on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming
input VAT make the VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input VAT, the name, address
and tax identification number of the tollway user must be indicated in the VAT receipt or
invoice. The manner by which the BIR intends to implement the VAT by rounding off the
toll rate and putting any excess collection in an escrow account is also illegal, while the
alternative of giving change to thousands of motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according to them, the VAT on tollway operations
is not administratively feasible.[33]

Administrative feasibility is one of the canons of a sound tax system. It simply


means that the tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid except to the extent that specific
constitutional or statutory limitations are impaired.[34] Thus, even if the imposition of VAT
on tollway operations may seem burdensome to implement, it is not necessarily invalid
unless some aspect of it is shown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the
VAT on tollway operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature. Although the transcript
of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to
go about it,[35] the facts pertaining to the matter are not sufficiently established for the
Court to pass judgment on. Besides, any concern about how the VAT on tollway
operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the
BIRs discretion on the matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC
63-2010 which directs toll companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, the date when the VAT imposition was
supposed to take effect. The issuance allegedly violates Section 111(A) [36] of the Code
which grants first time VAT payers a transitional input VAT of 2% on beginning
inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT as early as
2005, but failed to charge VAT-inclusive toll fees which by now can no longer be
collected. The tollway operators agreed to waive the 2% transitional input VAT, in
exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the
2% transitional input VAT belongs to the tollway operators who have not questioned the
circulars validity. They are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative


prerogative or expand the VAT laws coverage when she sought to impose VAT on
tollway operations. Section 108(A) of the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may be provided under Section 119 of
the Code.Tollway operators are not among the franchise grantees subject to franchise
tax under the latter provision. Neither are their services among the VAT-exempt
transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners
so strongly allege, then it would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and based on language in the law
too plain to be mistaken.[37] But as the law is written, no such exemption obtains for
tollway operators. The Court is thus duty-bound to simply apply the law as it is found.

Lastly, the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Courts role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the tax statute. Thus, any
unwarranted burden that may be perceived to result from enforcing such policy must be
properly referred to Congress. The Court has no discretion on the matter but simply
applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when
R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now, however,
that the executive has earnestly pursued the VAT imposition against tollway
operators. The executive exercises exclusive discretion in matters pertaining to the
implementation and execution of tax laws. Consequently, the executive is more properly
suited to deal with the immediate and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and


Commissioner of Internal Revenues motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbols
petition for lack of merit, and SETS ASIDE the Courts temporary restraining order dated
August 13, 2010.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 167919 February 14, 2007
PLARIDEL M. ABAYA, COMMODORE PLARIDEL C. GARCIA (retired) and PMA 59
FOUNDATION, INC., rep. by its President, COMMODORE CARLOS L. AGUSTIN
(retired), Petitioners,
vs.
HON. SECRETARY HERMOGENES E. EBDANE, JR., in his capacity as Secretary
of the DEPARTMENT OF PUBLIC WORKS and HIGHWAYS, HON. SECRETARY
EMILIA T. BONCODIN, in her capacity as Secretary of the DEPARTMENT OF
BUDGET and MANAGEMENT, HON. SECRETARY CESAR V. PURISIMA, in his
capacity as Secretary of the DEPARTMENT OF FINANCE, HON. TREASURER
NORMA L. LASALA, in her capacity as Treasurer of the Bureau of Treasury, and
CHINA ROAD and BRIDGE CORPORATION, Respondents.
DECISION
CALLEJO, SR., J.:

Before the Court is the petition for certiorari and prohibition under Rule 65 of the Rules
of Court seeking to set aside and nullify Resolution No. PJHL-A-04-012 dated May 7,
2004 issued by the Bids and Awards Committee (BAC) of the Department of Public
Works and Highways (DPWH) and approved by then DPWH Acting Secretary Florante
Soriquez. The assailed resolution recommended the award to private respondent China
Road & Bridge Corporation of the contract for the implementation of civil works for
Contract Package No. I (CP I), which consists of the improvement/rehabilitation of the
San Andres (Codon)-Virac-Jct. Bago-Viga road, with the length of 79.818 kilometers, in
the island province of Catanduanes.

The CP I project is one of the four packages comprising the project for the
improvement/rehabilitation of the Catanduanes Circumferential Road, covering a total
length of about 204.515 kilometers, which is the main highway in Catanduanes
Province. The road section (Catanduanes Circumferential Road) is part of the Arterial
Road Links Development Project (Phase IV) funded under Loan Agreement No. PH-
P204 dated December 28, 1999 between the Japan Bank for International Cooperation
(JBIC) and the Government of the Republic of the Philippines.

Background
Based on the Exchange of Notes dated December 27, 1999, 1 the Government of Japan
and the Government of the Philippines, through their respective representatives,
namely, Mr. Yoshihisa Ara, Ambassador Extraordinary and Plenipotentiary of Japan to
the Republic of the Philippines, and then Secretary of Foreign Affairs Domingo L.
Siazon, have reached an understanding concerning Japanese loans to be extended to
the Philippines. These loans were aimed at promoting our countrys economic
stabilization and development efforts.
The Exchange of Notes consisted of two documents: (1) a Letter from the Government
of Japan, signed by Ambassador Ara, addressed to then Secretary of Foreign Affairs
Siazon, confirming the understanding reached between the two governments
concerning the loans to be extended by the Government of Japan to the Philippines;
and (2) a document denominated as Records of Discussion where the salient terms of
the loans as set forth by the Government of Japan, through the Japanese delegation,
were reiterated and the said terms were accepted by the Philippine delegation. Both
Ambassador Ara and then Secretary Siazon signed the Records of Discussion as
representatives of the Government of Japan and Philippine Government, respectively.
The Exchange of Notes provided that the loans to be extended by the Government of
Japan to the Philippines consisted of two loans: Loan I and Loan II. The Exchange of
Notes stated in part:
I
1. A loan in Japanese yen up to the amount of seventy-nine billion eight hundred
and sixty-one million yen (Y79,861,000,000) (hereinafter referred to as "the Loan
I") will be extended, in accordance with the relevant laws and regulations of
Japan, to the Government of the Republic of the Philippines (hereinafter referred
to as "the Borrower I") by the Japan Bank for International Cooperation
(hereinafter referred to as "the Bank") to implement the projects enumerated in
the List A attached hereto (hereinafter referred to as "the List A") according to the
allocation for each project as specified in the List A.
2. (1) The Loan I will be made available by loan agreements to be concluded
between the Borrower I and the Bank. The terms and conditions of the Loan I as
well as the procedure for its utilization will be governed by said loan agreements
which will contain, inter alia, the following principles:
...
(2) Each of the loan agreements mentioned in sub-paragraph (1) above
will be concluded after the Bank is satisfied of the feasibility, including
environmental consideration, of the project to which such loan agreement
relates.
3. (1) The Loan I will be made available to cover payments to be made by the
Philippine executing agencies to suppliers, contractors and/or consultants of
eligible source countries under such contracts as may be entered into between
them for purchases of products and/or services required for the implementation
of the projects enumerated in the List A, provided that such purchases are made
in such eligible source countries for products produced in and/or services
supplied from those countries.
(2) The scope of eligible source countries mentioned in sub-paragraph (1)
above will be agreed upon between the authorities concerned of the two
Governments.
(3) A part of the Loan I may be used to cover eligible local currency
requirements for the implementation of the projects enumerated in the List
A.
4. With regard to the shipping and marine insurance of the products purchased
under the Loan I, the Government of the Republic of the Philippines will refrain
from imposing any restrictions that may hinder fair and free competition among
the shipping and marine insurance companies.
x x x x2 1awphi1.net
Pertinently, List A, which specified the projects to be financed under the Loan I, includes
the Arterial Road Links Development Project (Phase IV), to wit:
LIST A
Maximum amount in million yen)
1. Secondary Education Development and Improvement Project 7,210
2. Rural Water Supply Project (Phase V) 951
3. Bohol Irrigation Project (Phase II) 6,078
4. Agrarian Reform Infrastructure Support Project (Phase II) 16,990
5. Arterial Road Links Development Project (Phase IV) 15,384
6. Cordillera Road Improvement Project 5,852
7. Philippines-Japan Friendship Highway Mindanao Section Rehabilitation
Project (Phase II) 7,434
8. Rehabilitation and Maintenance of Bridges Along Arterial Roads Project
(Phase IV) 5,068
9. Maritime Safety Improvement Project (Phase C) 4,714
10. Pinatubo Hazard Urgent Mitigation Project (Phase II) 9,013
11. Pasig-Marikina River Channel Improvement Project (Phase I) 1,167
Total 79,8613
The Exchange of Notes further provided that:
III
xxxx
3. The Government of the Republic of the Philippines will ensure that the products
and/or services mentioned in sub-paragraph (1) of paragraph 3 of Part I and sub-
paragraph (1) of paragraph 4 of Part II are procured in accordance with the guidelines
for procurement of the Bank, which set forth, inter alia, the procedures of international
tendering to be followed except where such procedures are inapplicable or
inappropriate.
x x x x4
The Records of Discussion, which formed part of the Exchange of Notes, also stated in
part, thus:
xxxx
1. With reference to sub-paragraph (3) of paragraph 3 of Part I of the Exchange of
Notes concerning the financing of eligible local currency requirements for the
implementation of the projects mentioned in the said sub-paragraph, the representative
of the Japanese delegation stated that:
(1) such requirement of local currency as general administrative expenses,
interest during construction, taxes and duties, expenses concerning office,
remuneration to employees of the executing agencies and housing, not directly
related to the implementation of the said projects, as well as purchase of land
properties, compensation and the like, however, will not be considered as eligible
for financing under the Loan I; and
(2) the procurement of products and/or services will be made in accordance with
the procedures of international competitive tendering except where such
procedures are inapplicable and inappropriate.
x x x x5
Thus, in accordance with the agreement reached by the Government of Japan and the
Philippine Government, as expressed in the Exchange of Notes between the
representatives of the two governments, the Philippines obtained from and was granted
a loan by the JBIC. Loan Agreement No. PH-P204 dated December 28, 1999, in
particular, stated as follows:
Loan Agreement No. PH-P204, dated December 28, 1999, between JAPAN BANK FOR
INTERNATIONAL COOPERATION and the GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES.
In the light of the contents of the Exchange of Notes between the Government of Japan
and the Government of the Republic of the Philippines dated December 27, 1999,
concerning Japanese loans to be extended with a view to promoting the economic
stabilization and development efforts of the Republic of the Philippines.
JAPAN BANK FOR INTERNATIONAL COOPERATION (hereinafter referred to as "the
BANK") and THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES
(hereinafter referred to as "the Borrower") herewith conclude the following Loan
Agreement (hereinafter referred to as "the Loan Agreement", which includes all
agreements supplemental hereto).
x x x x6
Under the terms and conditions of Loan Agreement No. PH-P204, JBIC agreed to lend
the Philippine Government an amount not exceeding FIFTEEN BILLION THREE
HUNDRED EIGHTY-FOUR MILLION Japanese Yen (Y15,384,000,000) as principal for
the implementation of the Arterial Road Links Development Project (Phase IV) on the
terms and conditions set forth in the Loan Agreement and in accordance with the
relevant laws and regulations of Japan.7 The said amount shall be used for the
purchase of eligible goods and services necessary for the implementation of the above-
mentioned project from suppliers, contractors or consultants.8
Further, it was provided under the said loan agreement that other terms and conditions
generally applicable thereto shall be set forth in the General Terms and Conditions,
dated November 1987, issued by the Overseas Economic Cooperation Fund (OECF)
and for the purpose, reference to "the OECF" and "Fund" therein (General Terms and
Conditions) shall be substituted by "the JBIC" and "Bank," respectively.9 Specifically, the
guidelines for procurement of all goods and services to be financed out of the proceeds
of the said loan shall be as stipulated in the Guidelines for Procurement under OECF
Loans dated December 1997 (herein referred to as JBIC Procurement Guidelines). 10
As mentioned earlier, the proceeds of Loan Agreement No. PH-P204 was to be used to
finance the Arterial Road Links Development Project (Phase IV), of which the
Catanduanes Circumferential Road was a part. This road section, in turn, was divided
into four contract packages (CP):
CP I: San Andres (Codon)-Virac-Jct. Bato- Viga Road - 79.818 kms
CP II: Viga-Bagamanoc Road - 10.40 kms.
CP III: Bagamanoc-Pandan Road - 47.50 kms.
CP IV: Pandan-Caramoran-Codon Road - 66.40 kms.11
Subsequently, the DPWH, as the government agency tasked to implement the project,
caused the publication of the "Invitation to Prequalify and to Bid" for the implementation
of the CP I project in two leading national newspapers, namely, the Manila Times and
Manila Standard on November 22 and 29, and December 5, 2002.
A total of twenty-three (23) foreign and local contractors responded to the invitation by
submitting their accomplished prequalification documents on January 23, 2003. In
accordance with the established prequalification criteria, eight contractors were
evaluated or considered eligible to bid as concurred by the JBIC. One of them, however,
withdrew; thus, only seven contractors submitted their bid proposals.
The bid documents submitted by the prequalified contractors/bidders were examined to
determine their compliance with the requirements as
stipulated in Article 6 of the Instruction to Bidders.12 After the lapse of the deadline for
the submission of bid proposals, the opening of the bids commenced immediately. Prior
to the opening of the respective bid proposals, it was announced that the Approved
Budget for the Contract (ABC) was in the amount of 738,710,563.67.
The result of the bidding revealed the following three lowest bidders and their respective
bids vis--vis the ABC:13
Original Bid As Read As-Corrected Bid
Name of Bidder Variance
(Pesos) Amount (Pesos)
1) China Road And
993,183,904.98 952,564,821.71 28.95%
Bridge Corporation
2) Cavite Ideal Intl
1,099,926,598.11 1,099,926,598.11 48.90%
Const. Devt. Corp.
3) Italian Thai Devt.
1,125,022,075.34 1,125,392,475.36 52.35%
Public Company, Ltd.
The bid of private respondent China Road & Bridge Corporation was corrected from the
original 993,183,904.98 (with variance of 34.45% from the ABC) to 952,564,821.71
(with variance of 28.95% from the ABC) based on their letter clarification dated April 21,
2004.14
After further evaluation of the bids, particularly those of the lowest three bidders, Mr.
Hedifume Ezawa, Project Manager of the Catanduanes Circumferential Road
Improvement Project (CCRIP), in his Contractors Bid Evaluation Report dated April
2004, recommended the award of the contract to private respondent China Road &
Bridge Corporation:
In accordance with the Guidelines for the Procurements under ODA [Official
Development Assistance] Loans, the Consultant hereby recommends the award of the
contract for the construction of CP I, San Andres (Codon) Virac Jct. Bato Viga
Section under the Arterial Road Links Development Projects, Phase IV, JBIC Loan No.
PH-P204 to the Lowest Complying Bidder, China Road and Bridge Corporation, at its
total corrected bid amount of Nine Hundred Fifty-Two Million Five Hundred Sixty-Four
Thousand Eight Hundred Twenty-One & 71/100 Pesos.15
The BAC of the DPWH, with the approval of then Acting Secretary Soriquez, issued the
assailed Resolution No. PJHL-A-04-012 dated May 7, 2004 recommending the award in
favor of private respondent China Road & Bridge Corporation of the contract for the
implementation of civil works for CP I, San Andres (Codon) Virac Jct. Bato Viga
Road (Catanduanes Circumferential Road Improvement Project) of the Arterial Roads
Links Development Project, Phase IV, located in Catanduanes Province, under JBIC
Loan Agreement No. PH-P204.16 On September 29, 2004, a Contract of Agreement
was entered into by and between the DPWH and private respondent China Road &
Bridge Corporation for the implementation of the CP I project.

The Parties
Petitioner Plaridel M. Abaya claims that he filed the instant petition as a taxpayer,
former lawmaker, and a Filipino citizen. Petitioner Plaridel C. Garcia likewise claims that
he filed the suit as a taxpayer, former military officer, and a Filipino citizen. Petitioner
PMA 59 Foundation, Inc., on the other hand, is a non-stock, non-profit corporation
organized under the existing Philippine laws. It claims that its members are all taxpayers
and alumni of the Philippine Military Academy. It is represented by its President, Carlos
L. Agustin.
Named as public respondents are the DPWH, as the government agency tasked with
the implementation of government infrastructure projects; the Department of Budget and
Management (DBM) as the government agency that authorizes the release and
disbursement of public funds for the implementation of government infrastructure
projects; and the Department of Finance (DOF) as the government agency that acts as
the custodian and manager of all financial resources of the government. Also named as
individual public respondents are Hermogenes E. Ebdane, Jr., Emilia T. Boncodin and
Cesar V. Purisima in their capacities as former Secretaries of the DPWH, DBM and
DOF, respectively. On the other hand, public respondent Norma L. Lasala was
impleaded in her capacity as Treasurer of the Bureau of Treasury.
Private respondent China Road & Bridge Corporation is a duly organized corporation
engaged in the business of construction.

The Petitioners Case


The petitioners mainly seek to nullify DPWH Resolution No. PJHL-A-04-012 dated May
7, 2004, which recommended the award to private respondent China Road & Bridge
Corporation of the contract for the implementation of the civil works of CP I. They also
seek to annul the contract of agreement subsequently entered into by and between the
DPWH and private respondent China Road & Bridge Corporation pursuant to the said
resolution.
They pose the following issues for the Courts resolution:
I. Whether or not Petitioners have standing to file the instant Petition.
II. Whether or not Petitioners are entitled to the issuance of a Writ of Certiorari
reversing and setting aside DPWH Resolution No. PJHL-A-04-012,
recommending the award of the Contract Agreement for the implementation of
civil works for CPI, San Andres (CODON)-VIRAC-JCT BATO-VIGA ROAD
(CATANDUANES CIRCUMFERENTIAL ROAD IMPROVEMENT PROJECT) of
the Arterial Road Links Development Project, Phase IV, located in Catanduanes
Province, under JBIC L/A No. PH-P204, to China Road & Bridge Corporation.
III. Whether or not the Contract Agreement executed by and between the
Republic of the Philippines, through the Department of Public Works and
Highways, and the China Road & Bridge Corporation, for the implementation of
civil works for CPI, San Andres (CODON)-VIRAC-JCT BATO-VIGA ROAD
(CATANDUANES CIRCUMFERENTIAL ROAD IMPROVEMENT PROJECT) of
the Arterial Road Links Development Project, Phase IV, located in Catanduanes
Province, under JBIC L/A No. PH-P204, is void ab initio.
IV. Whether or not Petitioners are entitled to the issuance of a Writ of Prohibition
permanently prohibiting the implementation of DPWH Resolution No. PJHL-A-04-
012 and the Contract Agreement executed by and between the Republic of the
Philippines (through the Department of Public Works and Highways) and the
China Road & Bridge Corporation, and the disbursement of public funds by the
[D]epartment of [B]udget and [M]anagement for such purpose.
V. Whether or not Petitioners are entitled to a Preliminary Injunction and/or a
Temporary Restraining Order immediately enjoining the implementation of
DPWH Resolution No. PJHL-A-04-012 and the Contract Agreement executed by
and between the Republic of the Philippines (through the Department of Public
Works and Highways) and the China Road & Bridge Corporation, and the
disbursement of public funds by the Department of Budget and Management for
such purpose, during the pendency of this case.17
Preliminarily, the petitioners assert that they have standing or locus standi to file the
instant petition. They claim that as taxpayers and concerned citizens, they have the
right and duty to question the expenditure of public funds on illegal acts. They point out
that the Philippine Government allocates a peso-counterpart for CP I, which amount is
appropriated by Congress in the General Appropriations Act; hence, funds that are
being utilized in the implementation of the questioned project also partake of taxpayers
money. The present action, as a taxpayers suit, is thus allegedly proper.
They likewise characterize the instant petition as one of transcendental importance that
warrants the Courts adoption of a liberal stance on the issue of standing. It cited
several cases where the Court brushed aside procedural technicalities in order to
resolve issues involving paramount public interest and transcendental
importance.18 Further, petitioner Abaya asserts that he possesses the requisite standing
as a former member of the House of Representatives and one of the principal authors of
Republic Act No. 9184 (RA 9184)19 known as the Government Procurement Reform
Act, the law allegedly violated by the public respondents.
On the substantive issues, the petitioners anchor the instant petition on the contention
that the award of the contract to private respondent China Road & Bridge Corporation
violates RA 9184, particularly Section 31 thereof which reads:
SEC. 31. Ceiling for Bid Prices. The ABC shall be the upper limit or ceiling for the Bid
prices. Bid prices that exceed this ceiling shall be disqualified outright from further
participating in the bidding. There shall be no lower limit to the amount of the award.
In relation thereto, the petitioners cite the definition of the ABC, thus:
SEC. 5. Definition of Terms.
xxx
(a) Approved Budget for the Contract (ABC). refers to the budget for the contract duly
approved by the Head of the Procuring Entity, as provided for in the General
Appropriations Act and/or continuing appropriations, in the case of National Government
Agencies; the Corporate Budget for the contract approved by the governing Boards,
pursuant to E.O. No. 518, series of 1979, in the case of Government-Owned and/or
Controlled Corporations, Government Financial Institutions and State Universities and
Colleges; and the Budget for the contract approved by the respective Sanggunian, in
the case of Local Government Units.
xxx
The petitioners theorize that the foregoing provisions show the mandatory character of
ceilings or upper limits of every bid. Under the above-quoted provisions of RA 9184, all
bids or awards should not exceed the ceilings or upper limits; otherwise, the contract is
deemed void and inexistent.
Resolution No. PJHL-A-04-012 was allegedly issued with grave abuse of discretion
because it recommended the award of the contract to private respondent China Road &
Bridge Corporation whose bid was more than 200 million overpriced based on the
ABC. As such, the award is allegedly illegal and unconscionable.
In this connection, the petitioners opine that the contract subsequently entered into by
and between the DPWH and private respondent China Road & Bridge Corporation is
void ab initio for being prohibited by RA 9184. They stress that Section 31 thereof
expressly provides that "bid prices that exceed this ceiling shall be disqualified outright
from participating in the bidding." The upper limit or ceiling is called the ABC and since
the bid of private respondent China Road & Bridge Corporation exceeded the ABC for
the CP I project, it should have been allegedly disqualified from the bidding process and
should not, by law, have been awarded the said contract. They invoke Article 1409 of
the Civil Code:
ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
For violating the above provision, the contract between the DPWH and private
respondent China Road & Bridge Corporation is allegedly inexistent and void ab initio
and can produce no effects whatsoever.
It is the contention of the petitioners that RA 9184 is applicable to both local- and
foreign-funded procurement contracts. They cite the following excerpt of the
deliberations of the Bicameral Conference Committee on the Disagreeing Provisions of
Senate Bill No. 2248 and House Bill No. 4809:20
REP. ABAYA. Mr. Chairman, can we just propose additional amendments? Can we go
back to Section 4, Mr. Chairman?
THE CHAIRMAN (SEN. ANGARA). Section? Section ano, Del, 4? Definition definition
of terms.
REP. ABAYA. Sa House bill, it is sa scope and application.
THE CHAIRMAN (SEN. ANGARA). Okay.
REP. ABAYA. It should read as follows: "This Act shall apply to the procurement of
goods, supplies and materials, infrastructure projects and consulting services
regardless of funding source whether local or foreign by the government."
THE CHAIRMAN (SEN. ANGARA). Okay, accepted. We accept. The Senate accepts
it.21
xxx xxx xxx
THE CHAIRMAN (SEN ANGARA). Just take note of that ano. Medyo nga problematic
yan eh. Now, just for the record Del, can you repeat again the justification for including
foreign funded contracts within the scope para malinaw because the World Bank daw
might raise some objection to it.
REP. ABAYA. Well, Mr. Chairman, we should include foreign funded projects kasi these
are the big projects. To give an example, if you allow bids above government estimate,
lets say take the case of 500 million project, included in that 500 million is the 20
percent profit. If you allow them to bid above government estimate, they will add another
say 28 percent of (sic) 30 percent, 30 percent of 500 million is another 150 million. Ito,
this is a rich source of graft money, aregluhan na lang, 150 million, five contractors will
gather, "O eto 20 million, 20 million, 20 million." So, it is rigged. Yun ang practice na
nangyayari. If we eliminate that, if we have a ceiling then, it will not be very tempting
kasi walang extra money na pwedeng ibigay sa ibang contractor. So this promote (sic)
collusion among bidders, of course, with the cooperation of irresponsible officials of
some agencies. So we should have a ceiling to include foreign funded projects. 22
The petitioners insist that Loan Agreement No. PH-P204 between the JBIC and the
Philippine Government is neither a treaty, an international nor an executive agreement
that would bar the application of RA 9184. They point out that to be considered a treaty,
an international or an executive agreement, the parties must be two sovereigns or
States whereas in the case of Loan Agreement No. PH-P204, the parties are the
Philippine Government and the JBIC, a banking agency of Japan, which has a separate
juridical personality from the Japanese Government.
They further insist on the applicability of RA 9184 contending that while it took effect on
January 26, 200323 and Loan Agreement No. PH-P204 was executed prior thereto or on
December 28, 1999, the actual procurement or award of the contract to private
respondent China Road & Bridge Corporation was done after the effectivity of RA 9184.
The said law is allegedly specific as to its application, which is on the actual
procurement of infrastructure and other projects only, and not on the loan agreements
attached to such projects. Thus, the petition only prays for the annulment of Resolution
No. PJHL-A-04-012 as well as the contract between the DPWH and private respondent
China Road & Bridge Corporation. The petitioners clarify that they do not pray for the
annulment of Loan Agreement No. PH-P204. Since the subject procurement and award
of the contract were done after the effectivity of RA 9184, necessarily, the procurement
rules established by that law allegedly apply, and not Presidential Decree No. 1594 (PD
1594)24 and Executive Order No. 40 (EO 40), series of 2001, 25 as contended by the
respondents. The latter laws, including their implementing rules, have allegedly been
repealed by RA 9184. Even RA 4860, as amended, known as the Foreign Borrowings
Act, the petitioners posit, may have also been repealed or modified by RA 9184 insofar
as its provisions are inconsistent with the latter.
The petitioners also argue that the "Implementing Rules and Regulations (IRR) of RA
9184, Otherwise Known as the Government Procurement Reform Act, Part A" (IRR-A)
cited by the respondents is not applicable as these rules only govern domestically-
funded procurement contracts. They aver that the implementing rules to govern foreign-
funded procurement, as in the present case, have yet to be drafted and in fact, there are
concurrent resolutions drafted by both houses of Congress for the Reconvening of the
Joint Congressional Oversight Committee for the formulation of the IRR for foreign-
funded procurements under RA 9184.
The petitioners maintain that disbursement of public funds to implement a patently void
and illegal contract is itself illegal and must be enjoined. They bring to the Courts
attention the fact that the works on the CP I project have already commenced as early
as October 2004. They thus urge the Court to issue a writ of certiorari to set aside
Resolution No. PJHL-A-04-012 as well as to declare null and void the contract entered
into between the DPWH and private respondent China Road & Bridge Corporation.
They also pray for the issuance of a temporary restraining order and, eventually, a writ
of prohibition to permanently enjoin the DPWH from implementing Resolution No. PJHL-
A-04-012 and its contract with private respondent China Road & Bridge Corporation as
well as the DBM from disbursing funds for the said purpose.
The Respondents Counter-Arguments
The public respondents, namely the DPWH, DBM and DOF, and their respective named
officials, through the Office of the Solicitor General, urge the Court to dismiss the
petition on grounds that the petitioners have no locus standi and, in any case,
Resolution No. PJHL-A-04-012 and the contract between the DPWH and private
respondent China Road & Bridge Corporation are valid.
According to the public respondents, a taxpayers locus standi was recognized in the
following cases: (a) where a tax measure is assailed as unconstitutional; 26 (b) where
there is a question of validity of election laws;27 (c) where legislators questioned the
validity of any official action upon the claim that it infringes on their prerogatives as
legislators;28 (d) where there is a claim of illegal disbursement or wastage of public
funds through the enforcement of an invalid or unconstitutional law; 29 (e) where it
involves the right of members of the Senate or House of Representatives to question
the validity of a presidential veto or condition imposed on an item in an appropriation
bill;30 or (f) where it involves an invalid law, which when enforced will put the petitioner in
imminent danger of sustaining some direct injury as a result thereof, or that he has been
or is about to be denied some right or privilege to which he is lawfully entitled or that he
is about to be subjected to some burdens or penalties by reason of the statute
complained of.31 None of the above considerations allegedly obtains in the present
case.
It is also the view of the public respondents that the fact that petitioner Abaya was a
former lawmaker would not suffice to confer locus standi on himself. Members of
Congress may properly challenge the validity of an official act of any department of the
government only upon showing that the assailed official act affects or impairs their rights
and prerogatives as legislators.
The public respondents further assail the standing of the petitioners to file the instant
suit claiming that they failed to allege any specific injury suffered nor an interest that is
direct and personal to them. If at all, the interest or injuries claimed by the petitioners
are allegedly merely of a general interest common to all members of the public. Their
interest is allegedly too vague, highly speculative and uncertain to satisfy the
requirements of locus standi.
The public respondents find it noteworthy that the petitioners do not raise issues of
constitutionality but only of contract law, which the petitioners not being privies to the
agreement cannot raise. This is following the principle that a stranger to a contract
cannot sue either or both the contracting parties to annul and set aside the same except
when he is prejudiced on his rights and can show detriment which would positively
result to him from the implementation of the contract in which he has no intervention.
There being no particularized interest or elemental substantial injury necessary to
confer locus standi, the public respondents implore the Court to dismiss the petition.
On the merits, the public respondents maintain that the imposition of ceilings or upper
limits on bid prices in RA 9184 does not apply because the CP I project and the entire
Catanduanes Circumferential Road Improvement Project, financed by Loan Agreement
No. PH-P204 executed between the Philippine Government and the JBIC, is governed
by the latters Procurement Guidelines which precludes the imposition of ceilings on bid
prices. Section 5.06 of the JBIC Procurement Guidelines reads:
Section 5.06. Evaluation and Comparison of Bids.
xxx
(e) Any procedure under which bids above or below a predetermined bid value
assessment are automatically disqualified is not permitted.
It was explained that other foreign banks such as the Asian Development Bank (ADB)
and the World Bank (WB) similarly prohibit the bracketing or imposition of a ceiling on
bid prices.
The public respondents stress that it was pursuant to Loan Agreement No. PH-P204
that the assailed Resolution No. PJHL-A-04-012 and the subsequent contract between
the DPWH and private respondent China Road & Bridge Corporation materialized. They
likewise aver that Loan Agreement No. PH-P204 is governed by RA 4860, as amended,
or the Foreign Borrowings Act. Section 4 thereof states:
SEC. 4. In the contracting of any loan, credit or indebtedness under this Act, the
President of the Philippines may, when necessary, agree to waive or modify, the
application of any law granting preferences or imposing restrictions on international
competitive bidding, including among others [Act No. 4239, Commonwealth Act No.
138], the provisions of [CA 541], insofar as such provisions do not pertain to
constructions primarily for national defense or security purposes, [RA 5183]; Provided,
however, That as far as practicable, utilization of the services of qualified domestic firms
in the prosecution of projects financed under this Act shall be encouraged: Provided,
further, That in case where international competitive bidding shall be conducted
preference of at least fifteen per centum shall be granted in favor of articles, materials or
supplies of the growth, production or manufacture of the Philippines: Provided, finally,
That the method and procedure in comparison of bids shall be the subject of agreement
between the Philippine Government and the lending institution.
DOJ Opinion No. 46, Series of 1987, is relied upon by the public respondents as it
opined that an agreement for the exclusion of foreign assisted projects from the
coverage of local bidding regulations does not contravene existing legislations because
the statutory basis for foreign loan agreements is RA 4860, as amended, and under
Section 4 thereof, the President is empowered to waive the application of any law
imposing restrictions on the procurement of goods and services pursuant to such loans.
Memorandum Circular Nos. 104 and 108, issued by the President, to clarify RA 4860,
as amended, and PD 1594, relative to the award of foreign-assisted projects, are also
invoked by the public respondents, to wit:
Memorandum Circular No. 104:
In view of the provisions of Section 4 of Republic Act No. 4860, as amended, otherwise
known as the "Foreign Borrowings Act"
xxx
It is hereby clarified that foreign-assisted infrastructure projects may be exempted from
the application for the pertinent provisions of the Implementing Rules and Regulations
(IRR) of Presidential Decree (P.D.) No. 1594 relative to the method and procedure in
the comparison of bids, which matter may be the subject of agreement between the
infrastructure agency concerned and the lending institution. It should be made clear
however that public bidding is still required and can only be waived pursuant to existing
laws.
Memorandum Circular No. 108:
In view of the provisions of Section 4 of Republic Act No. 4860, as amended, otherwise
known as the "Foreign Borrowings Act", it is hereby clarified that, for projects supported
in whole or in part by foreign assistance awarded through international or local
competitive bidding, the government agency concerned may award the contract to the
lowest evaluated bidder at his bid price consistent with the provisions of the applicable
loan/grant agreement.
Specifically, when the loan/grant agreement so stipulates, the government agency
concerned may award the contract to the lowest bidder even if his/its bid exceeds the
approved agency estimate.
It is understood that the concerned government agency shall, as far as practicable,
adhere closely to the implementing rules and regulations of Presidential Decree No.
1594 during loan/grant negotiation and the implementation of the projects.32
The public respondents characterize foreign loan agreements, including Loan
Agreement No. PH-P204, as executive agreements and, as such, should be observed
pursuant to the fundamental principle in international law of pacta sunt servanda. 33 They
cite Section 20 of Article VII of the Constitution as giving the President the authority to
contract foreign loans:
SEC. 20. The President may contract or guarantee foreign loans on behalf of the
Republic of the Philippines with the prior concurrence of the Monetary Board, and
subject to such limitations as may be provided by law. The Monetary Board shall, within
thirty days from the end of every quarter of the calendar year, submit to the Congress a
complete report of its decisions on applications for loans to be contracted or guaranteed
by the Government or Government-owned and Controlled Corporations which would
have the effect of increasing the foreign debt, and containing other matters as may be
provided by law.
The Constitution, the public respondents emphasize, recognizes the enforceability of
executive agreements in the same way that it recognizes generally accepted principles
of international law as forming part of the law of the land. 34 This recognition allegedly
buttresses the binding effect of executive agreements to which the Philippine
Government is a signatory. It is pointed out by the public respondents that executive
agreements are essentially contracts governing the rights and obligations of the parties.
A contract, being the law between the parties, must be faithfully adhered to by them.
Guided by the fundamental rule of pacta sunt servanda, the Philippine Government
bound itself to perform in good faith its duties and obligations under Loan Agreement
No. PH-P204.
The public respondents further argue against the applicability of RA 9184 stating that it
was signed into law on January 10, 2003.35 On the other hand, Loan Agreement No.
PH-P204 was executed on December 28, 1999, where the laws then in force on
government procurements were PD 1594 and EO 40. The latter law (EO 40), in
particular, excluded from its application "any existing and future government
commitments with respect to the bidding and award of contracts financed partly or
wholly with funds from international financing institutions as well as from bilateral and
other similar foreign sources."
The applicability of EO 40, not RA 9184, is allegedly bolstered by the fact that the
"Invitation to Prequalify and to Bid" for the implementation of the CP I project was
published in two leading national newspapers, namely, the Manila Times and Manila
Standard on November 22, 29 and December 5, 2002, or before the signing into law of
RA 9184 on January 10, 2003. In this connection, the public respondents point to
Section 77 of IRR-A, which reads:
SEC. 77. Transitory Clause.
In all procurement activities, if the advertisement or invitation for bids was issued prior to
the effectivity of the Act, the provisions of EO 40 and its IRR, PD 1594 and its IRR, RA
7160 and its IRR, or other applicable laws as the case may be, shall govern.
In cases where the advertisements or invitations for bids were issued after the effectivity
of the Act but before the effectivity of this IRR-A, procuring entities may continue
adopting the procurement procedures, rules and regulations provided in EO 40 and its
IRR, or other applicable laws, as the case may be.
Section 4 of RA 9184 is also invoked by the public respondents as it provides:
SEC. 4. Scope and Applications. This Act shall apply to the Procurement of
Infrastructure Projects, Goods and Consulting Services, regardless of source of funds,
whether local or foreign, by all branches and instrumentalities of government, its
departments, offices and agencies, including government-owned and/or controlled
corporations and local government units, subject to the provisions of Commonwealth
Act No. 138. Any treaty or international or executive agreement affecting the subject
matter of this Act to which the Philippine government is a signatory shall be observed.
It is also the position of the public respondents that even granting arguendo that Loan
Agreement No. PH-P204 were an ordinary loan contract, still, RA 9184 is inapplicable
under the non-impairment clause36 of the Constitution. The said loan agreement
expressly provided that the procurement of goods and services for the project financed
by the same shall be governed by the Guidelines for Procurement under OECF Loans
dated December 1997. Further, Section 5.06 of the JBIC Procurement Guidelines
categorically provides that "[a]ny procedure under which bids above or below a
predetermined bid value assessment are automatically disqualified is not permitted."
The public respondents explain that since the contract is the law between the parties
and Loan Agreement No. PH-P204 states that the JBIC Procurement Guidelines shall
govern the parties relationship and further dictates that there be no ceiling price for the
bidding, it naturally follows that any subsequent law passed contrary to the letters of the
said contract would have no effect with respect to the parties rights and obligations
arising therefrom.
To insist on the application of RA 9184 on the bidding for the CP I project would,
notwithstanding the terms and conditions of Loan Agreement No. PH-P204, allegedly
violate the constitutional provision on non-impairment of obligations and contracts, and
destroy vested rights duly acquired under the said loan agreement.
Lastly, the public respondents deny that there was illegal disbursement of public funds
by the DBM. They asseverate that all the releases made by the DBM for the
implementation of the entire Arterial Road Links Project Phase IV, which includes the
Catanduanes Circumferential Road Improvement Project, were covered by the
necessary appropriations made by law, specifically the General Appropriations Act
(GAA). Further, the requirements and procedures prescribed for the release of the said
funds were duly complied with.
For its part, private respondent China Road & Bridge Corporation similarly assails the
standing of the petitioners, either as taxpayers or, in the case of petitioner Abaya, as a
former lawmaker, to file the present suit. In addition, it is also alleged that, by filing the
petition directly to this Court, the petitioners failed to observe the hierarchy of courts.
On the merits, private respondent China Road & Bridge Corporation asserts that the
applicable law to govern the bidding of the CP I project was EO 40, not RA 9184,
because the former was the law governing the procurement of government projects at
the time that it was bidded out. EO 40 was issued by the Office of the President on
October 8, 2001 and Section 1 thereof states that:
SEC. 1. Scope and Application. This Executive Order shall apply to the procurement of:
(a) goods, supplies, materials and related services; (b) civil works; and (c) consulting
services, by all National Government agencies, including State Universities and
Colleges (SUCs), Government-Owned or Controlled Corporations (GOCCs) and
Government Financial Institutions (GFIs), hereby referred to as the Agencies. This
Executive Order shall cover the procurement process from the pre-procurement
conference up to the award of contract.
xxx
The Invitation to Prequalify and to Bid was first published on November 22, 2002. On
the other hand, RA 9184 was signed into law only on January 10, 2003. Since the law in
effect at the time the procurement process was initiated was EO 40, private respondent
China Road & Bridge Corporation submits that it should be the said law which should
govern the entire procurement process relative to the CP I project.
EO 40 expressly recognizes as an exception from the application of the provisions
thereof on approved budget ceilings, those projects financed by international financing
institutions (IFIs) and foreign bilateral sources. Section 1 thereof, quoted in part earlier,
further states:
SEC. 1. Scope and Application. x x x
Nothing in this Order shall negate any existing and future government commitments
with respect to the bidding and award of contracts financed partly or wholly with funds
from international financing institutions as well as from bilateral and other similar foreign
sources.
Section 1.2 of the Implementing Rules and Regulations of EO 40 is likewise invoked as
it provides:
For procurement financed wholly or partly from Official Development Assistance (ODA)
funds from International Financing Institutions (IFIs), as well as from bilateral and other
similar foreign sources, the corresponding loan/grant agreement governing said funds
as negotiated and agreed upon by and between the Government and the concerned IFI
shall be observed.
Private respondent China Road & Bridge Corporation thus postulates that following EO
40, the procurement of goods and services for the CP I project should be governed by
the terms and conditions of Loan Agreement No. PH-P204 entered into between the
JBIC and the Philippine Government. Pertinently, Section 5.06 of the JBIC Procurement
Guidelines prohibits the setting of ceilings on bid prices.
Private respondent China Road & Bridge Corporation claims that when it submitted its
bid for the CP I project, it relied in good faith on the provisions of EO 40. It was allegedly
on the basis of the said law that the DPWH awarded the project to private respondent
China Road & Bridge Coporation even if its bid was higher than the ABC. Under the
circumstances, RA 9184 could not be applied retroactively for to do so would allegedly
impair the vested rights of private respondent China Road & Bridge Corporation arising
from its contract with the DPWH.
It is also contended by private respondent China Road & Bridge Corporation that even
assuming arguendo that RA 9184 could be applied retroactively, it is still the terms of
Loan Agreement No. PH-P204 which should govern the procurement of goods and
services for the CP I project. It supports its theory by characterizing the said loan
agreement, executed pursuant to the Exchange of Notes between the Government of
Japan and the Philippine Government, as an executive agreement.
Private respondent China Road & Bridge Corporation, like the public respondents, cites
RA 4860 as the basis for the Exchange of Notes and Loan Agreement No. PH-P204. As
an international or executive agreement, the Exchange of Notes and Loan Agreement
No. PH-P204 allegedly created a legally binding obligation on the parties.
The following excerpt of the deliberations of the Bicameral Conference Committee on
the Disagreeing Provision of Senate Bill No. 2248 and House Bill No. 4809 is cited by
private respondent China Road & Bridge Corporation to support its contention that it is
the intent of the lawmakers to exclude from the application of RA 9184 those foreign-
funded projects:
xxx
REP. MARCOS. Yes, Mr. Chairman, to respond and to put into the record, a justification
for the inclusion of foreign contracts, may we just state that foreign contracts have, of
course, been brought into the ambit of the law because of the Filipino counterpart for
this foreign projects, they are no longer strictly foreign in nature but fall under the laws
of the Philippine government.
THE CHAIRMAN (SEN. ANGARA). Okay. I think thats pretty clear. I think the possible
concern is that some ODA are with strings attached especially the Japanese. The
Japanese are quite strict about that, that they are (sic) even provide the architect and
the design, etcetera, plus, of course, the goods that will be supplied.
Now, I think weve already provided that this is open to all and we will recognize our
international agreements so that this bill will not also restrict the flow of foreign funding,
because some countries now make it a condition that they supply both services and
goods especially the Japanese.
So I think we can put a sentence that we continue to honor our international obligations,
di ba Laura?
MR. ENCARNACION. Actually, subject to any treaty.
THE CHAIRMAN (SEN. ANGARA). Yun pala eh. That should allay their anxiety and
concern. Okay, buti na lang for the record para malaman nila na we are conscious sa
ODA.37
Private respondent China Road & Bridge Corporation submits that based on the
provisions of the Exchange of Notes and Loan Agreement No. PH-P204, it was rightfully
and legally awarded the CP I project. It urges the Court to dismiss the petition for lack of
merit.
The Courts Rulings
Petitioners, as taxpayers, possess locus standi to file the present suit
Briefly stated, locus standi is "a right of appearance in a court of justice on a given
question."38 More particularly, it is a partys personal and substantial interest in a case
such that he has sustained or will sustain direct injury as a result of the governmental
act being challenged. It calls for more than just a generalized grievance. The term
"interest" means a material interest, an interest in issue affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental
interest.39 Standing or locus standi is a peculiar concept in constitutional law40 and the
rationale for requiring a party who challenges the constitutionality of a statute to allege
such a personal stake in the outcome of the controversy is "to assure that concrete
adverseness which sharpens the presentation of issues upon which the court so largely
depends for illumination of difficult constitutional questions."41
Locus standi, however, is merely a matter of procedure 42 and it has been recognized
that in some cases, suits are not brought by parties who have been personally injured
by the operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest.43 Consequently, the Court, in
a catena of cases,44 has invariably adopted a liberal stance on locus standi, including
those cases involving taxpayers.
The prevailing doctrine in taxpayers suits is to allow taxpayers to question contracts
entered into by the national government or government- owned or controlled
corporations allegedly in contravention of law.45 A taxpayer is allowed to sue where
there is a claim that public funds are illegally disbursed, or that public money is being
deflected to any improper purpose, or that there is a wastage of public funds through
the enforcement of an invalid or unconstitutional law. 46 Significantly, a taxpayer need
not be a party to the contract to challenge its validity.47
In the present case, the petitioners are suing as taxpayers. They have sufficiently
demonstrated that, notwithstanding the fact that the CP I project is primarily financed
from loans obtained by the government from the JBIC, nonetheless, taxpayers money
would be or is being spent on the project considering that the Philippine Government is
required to allocate a peso-counterpart therefor. The public respondents themselves
admit that appropriations for these foreign-assisted projects in the GAA are composed
of the loan proceeds and the peso-counterpart. The counterpart funds, the Solicitor
General explains, refer to the component of the project cost to be financed from
government-appropriated funds, as part of the governments commitment in the
implementation of the project.48 Hence, the petitioners correctly asserted their standing
since a part of the funds being utilized in the implementation of the CP I project partakes
of taxpayers money.
Further, the serious legal questions raised by the petitioners, e.g., whether RA 9184
applies to the CP I project, in particular, and to foreign-funded government projects, in
general, and the fact that public interest is indubitably involved considering the public
expenditure of millions of pesos, warrant the Court to adopt in the present case its
liberal policy on locus standi.
In any case, for reasons which will be discussed shortly, the substantive arguments
raised by the petitioners fail to persuade the Court as it holds that Resolution No. PJHL-
A-04-012 is valid. As a corollary, the subsequent contract entered into by and between
the DPWH and private respondent China Road & Bridge Corporation is likewise valid.
History of Philippine Procurement Laws
It is necessary, at this point, to give a brief history of Philippine laws pertaining to
procurement through public bidding. The United States Philippine Commission
introduced the American practice of public bidding through Act No. 22, enacted on
October 15, 1900, by requiring the Chief Engineer, United States Army for the Division
of the Philippine Islands, acting as purchasing agent under the control of the then
Military Governor, to advertise and call for a competitive bidding for the purchase of the
necessary materials and lands to be used for the construction of highways and bridges
in the Philippine Islands.49 Act No. 74, enacted on January 21, 1901 by the Philippine
Commission, required the General Superintendent of Public Instruction to purchase
office supplies through competitive public bidding.50 Act No. 82, approved on January
31, 1901, and Act No. 83, approved on February 6, 1901, required the municipal and
provincial governments, respectively, to hold competitive public biddings in the making
of contracts for public works and the purchase of office supplies.51
On June 21, 1901, the Philippine Commission, through Act No. 146, created the Bureau
of Supply and with its creation, public bidding became a popular policy in the purchase
of supplies, materials and equipment for the use of the national government, its
subdivisions and instrumentalities.52 On February 3, 1936, then President Manuel L.
Quezon issued Executive Order No. 16 declaring as a matter of general policy that
government contracts for public service or for furnishing supplies, materials and
equipment to the government should be subjected to public bidding. 53 The requirement
of public bidding was likewise imposed for public works of construction or repair
pursuant to the Revised Administrative Code of 1917.
Then President Diosdado Macapagal, in Executive Order No. 40 dated June 1, 1963,
reiterated the directive that no government contract for public service or for furnishing
supplies, materials and equipment to the government or any of its branches, agencies
or instrumentalities, should be entered into without public bidding except for very
extraordinary reasons to be determined by a Committee constituted thereunder. Then
President Ferdinand Marcos issued PD 1594 prescribing guidelines for government
infrastructure projects and Section 454 thereof stated that they should generally be
undertaken by contract after competitive public bidding.
Then President Corazon Aquino issued Executive Order No. 301 (1987) prescribing
guidelines for government negotiated contracts. Pertinently, Section 62 of the
Administrative Code of 1987 reiterated the requirement of competitive public bidding in
government projects. In 1990, Congress passed RA 6957,55 which authorized the
financing, construction, operation and maintenance of infrastructure by the private
sector. RA 7160 was likewise enacted by Congress in 1991 and it contains provisions
governing the procurement of goods and locally-funded civil works by the local
government units.
Then President Fidel Ramos issued Executive Order No. 302 (1996), providing
guidelines for the procurement of goods and supplies by the national government. Then
President Joseph Ejercito Estrada issued Executive Order No. 201 (2000), providing
additional guidelines in the procurement of goods and supplies by the national
government. Thereafter, he issued Executive Order No. 262 (2000) amending EO 302
(1996) and EO 201 (2000).
On October 8, 2001, President Gloria Macapagal-Arroyo issued EO 40, the law mainly
relied upon by the respondents, entitled Consolidating Procurement Rules and
Procedures for All National Government Agencies, Government-Owned or Controlled
Corporations and Government Financial Institutions, and Requiring the Use of the
Government Procurement System. It accordingly repealed, amended or modified all
executive issuances, orders, rules and regulations or parts thereof inconsistent
therewith.56
On January 10, 2003, President Arroyo signed into law RA 9184. It took effect on
January 26, 2004, or fifteen days after its publication in two newspapers of general
circulation.57 It expressly repealed, among others, EO 40, EO 262 (2000), EO
302(1996) and PD 1594, as amended:
SEC. 76. Repealing Clause. This law repeals Executive Order No. 40, series of 2001,
entitled "Consolidating Procurement Rules and Procedures for All National Government
Agencies, Government Owned or Controlled Corporations and/or Government Financial
Institutions, and Requiring the Use of the Government Electronic Procurement System";
Executive Order No. 262, series of 1996, entitled "Amending Executive Order No. 302,
series of 1996, entitled Providing Policies, Guidelines, Rules and Regulations for the
Procurement of Goods/Supplies by the National Government" and Section 3 of
Executive Order No. 201, series of 2000, entitled "Providing Additional Policies and
Guidelines in the Procurement of Goods/Supplies by the National Government";
Executive Order No. 302, series of 1996, entitled "Providing Policies, Guidelines, Rules
and Regulations for the Procurement of Goods/Supplies by the National Government"
and Presidential Decree No. 1594 dated June 11, 1978, entitled "Prescribing Policies,
Guidelines, Rules and Regulations for Government Infrastructure Contracts." This law
amends Title Six, Book Two of Republic Act No. 7160, otherwise known as the "Local
Government Code of 1991"; the relevant provisions of Executive Order No. 164, series
of 1987, entitled "Providing Additional Guidelines in the Processing and Approval of
Contracts of the National Government"; and the relevant provisions of Republic Act No.
7898 dated February 23, 1995, entitled "An Act Providing for the Modernization of the
Armed Forces of the Philippines and for Other Purposes." Any other law, presidential
decree or issuance, executive order, letter of instruction, administrative order,
proclamation, charter, rule or regulation and/or parts thereof contrary to or inconsistent
with the provisions of this Act is hereby repealed, modified or amended accordingly.
In addition to these laws, RA 4860, as amended, must be mentioned as Section 4
thereof provides that "[i]n the contracting of any loan, credit or indebtedness under this
Act, the President of the Philippines may, when necessary, agree to waive or modify the
application of any law granting preferences or imposing restrictions on international
competitive bidding x x x Provided, finally, That the method and procedure in the
comparison of bids shall be the subject of agreement between the Philippine
Government and the lending institution."
EO 40, not RA 9184, is applicable to the procurement
process undertaken for the CP I project. RA 9184
cannot be given retroactive application.
It is not disputed that with respect to the CP I project, the Invitation to Prequalify and to
Bid for its implementation was published in two leading national newspapers, namely,
the Manila Times and Manila Standard on November 22, 29 and December 5, 2002. At
the time, the law in effect was EO 40. On the other hand, RA 9184 took effect two
months later or on January 26, 2003. Further, its full implementation was even delayed
as IRR-A was only approved by President Arroyo on September 18, 2003 and
subsequently published on September 23, 2003 in the Manila Times and Malaya
newspapers.58
The provisions of EO 40 apply to the procurement process pertaining to the CP I project
as it is explicitly provided in Section 1 thereof that:
SEC. 1. Scope and Application. This Executive Order shall apply to see procurement
of (a) goods, supplies, materials and related service; (b) civil works; and (c) consulting
services, by all National Government agencies, including State Universities and
Colleges (SUCs), Government-Owned or Controlled Corporations (GOCCs) and
Government Financial Institutions (GFIs), hereby referred to as "Agencies." This
Executive Order shall cover the procurement process from the pre-procurement
conference up to the award of the contract.
Nothing in this Order shall negate any existing and future government commitments
with respect to the bidding and award of contracts financed partly or wholly with funds
from international financing institutions as well as from bilateral and similar foreign
sources.
The procurement process basically involves the following steps: (1) pre-procurement
conference; (2) advertisement of the invitation to bid; (3) pre-bid conference; (4)
eligibility check of prospective bidders; (5) submission and receipt of bids; (6)
modification and withdrawal of bids; (7) bid opening and examination; (8) bid evaluation;
(9) post qualification; (10) award of contract and notice to proceed.59 Clearly then, when
the Invitation to Prequalify and to Bid for the implementation of the CP I project was
published on November 22, 29 and December 5, 2002, the procurement process
thereof had already commenced and the application of EO 40 to the procurement
process for the CP I project had already attached.
RA 9184 cannot be applied retroactively to govern the procurement process relative to
the CP I project because it is well settled that a law or regulation has no retroactive
application unless it expressly provides for retroactivity.60Indeed, Article 4 of the Civil
Code is clear on the matter: "[l]aws shall have no retroactive effect, unless the contrary
is provided." In the absence of such categorical provision, RA 9184 will not be applied
retroactively to the CP I project whose procurement process commenced even before
the said law took effect.
That the legislators did not intend RA 9184 to have retroactive effect could be gleaned
from the IRR-A formulated by the Joint Congressional Oversight Committee (composed
of the Chairman of the Senate Committee on Constitutional Amendments and Revision
of Laws, and two members thereof appointed by the Senate President and the
Chairman of the House Committee on Appropriations, and two members thereof
appointed by the Speaker of the House of Representatives) and the Government
Procurement Policy Board (GPPB). Section 77 of the IRR-A states, thus:
SEC. 77. Transitory Clause
In all procurement activities, if the advertisement or invitation for bids was issued prior to
the effectivity of the Act, the provisions of E.O. 40 and its IRR, P.D. 1594 and its IRR,
R.A. 7160 and its IRR, or other applicable laws, as the case may be, shall govern.
In cases where the advertisements or invitations for bids were issued after the effectivity
of the Act but before the effectivity of this IRR-A, procuring entities may continue
adopting the procurement procedures, rules and regulations provided in E.O. 40 and its
IRR, P.D. 1594 and its IRR, R.A. 7160 and its IRR, or other applicable laws, as the case
may be.
In other words, under IRR-A, if the advertisement of the invitation for bids was issued
prior to the effectivity of RA 9184, such as in the case of the CP I project, the provisions
of EO 40 and its IRR, and PD 1594 and its IRR in the case of national government
agencies, and RA 7160 and its IRR in the case of local government units, shall govern.
Admittedly, IRR-A covers only fully domestically-funded procurement activities from
procurement planning up to contract implementation and that it is expressly stated that
IRR-B for foreign-funded procurement activities shall be subject of a subsequent
issuance.61 Nonetheless, there is no reason why the policy behind Section 77 of IRR-A
cannot be applied to foreign-funded procurement projects like the CP I project. Stated
differently, the policy on the prospective or non-retroactive application of RA 9184 with
respect to domestically-funded procurement projects cannot be any different with
respect to foreign-funded procurement projects like the CP I project. It would be
incongruous, even absurd, to provide for the prospective application of RA 9184 with
respect to domestically-funded procurement projects and, on the other hand, as urged
by the petitioners, apply RA 9184 retroactively with respect to foreign- funded
procurement projects. To be sure, the lawmakers could not have intended such an
absurdity.
Thus, in the light of Section 1 of EO 40, Section 77 of IRR-A, as well as the fundamental
rule embodied in Article 4 of the Civil Code on prospectivity of laws, the Court holds that
the procurement process for the implementation of the CP I project is governed by EO
40 and its IRR, not RA 9184.
Under EO 40, the award of the contract to private
respondent China Road & Bridge Corporation is valid
Section 25 of EO 40 provides that "[t]he approved budget of the contract shall be the
upper limit or ceiling of the bid price. Bid prices which exceed this ceiling shall be
disqualified outright from further participating in the bidding. There shall be no lower limit
to the amount of the award. x x x" It should be observed that this text is almost similar to
the wording of Section 31 of RA 9184, relied upon by the petitioners in contending that
since the bid price of private respondent China Road & Bridge Corporation exceeded
the ABC, then it should not have been awarded the contract for the CP I project.
Nonetheless, EO 40 expressly recognizes as an exception to its scope and application
those government commitments with respect to bidding and award of contracts financed
partly or wholly with funds from international financing institutions as well as from
bilateral and other similar foreign sources. The pertinent portion of Section 1 of EO 40 is
quoted anew:
SEC. 1. Scope and Application. x x x
Nothing in this Order shall negate any existing and future government commitments
with respect to the bidding and award of contracts financed partly or wholly with funds
from international financing institutions as well as from bilateral and similar foreign
sources.
In relation thereto, Section 4 of RA 4860, as amended, was correctly cited by the
respondents as likewise authorizing the President, in the contracting of any loan, credit
or indebtedness thereunder, "when necessary, agree to waive or modify the application
of any law granting preferences or imposing restrictions on international competitive
bidding x x x." The said provision of law further provides that "the method and
procedure in the comparison of bids shall be the subject of agreement between the
Philippine Government and the lending institution."
Consequently, in accordance with these applicable laws, the procurement of goods and
services for the CP I project is governed by the corresponding loan agreement entered
into by the government and the JBIC, i.e., Loan Agreement No. PH-P204. The said loan
agreement stipulated that the procurement of goods and services for the Arterial Road
Links Development Project (Phase IV), of which CP I is a component, is to be governed
by the JBIC Procurement Guidelines. Section 5.06, Part II (International Competitive
Bidding) thereof quoted earlier reads:
Section 5.06. Evaluation and Comparison of Bids
xxx
(e) Any procedure under which bids above or below a predetermined bid value
assessment are automatically disqualified is not permitted.62
It is clear that the JBIC Procurement Guidelines proscribe the imposition of ceilings on
bid prices. On the other hand, it enjoins the award of the contract to the bidder whose
bid has been determined to be the lowest evaluated bid. The pertinent provision, quoted
earlier, is reiterated, thus:
Section 5.09. Award of Contract
The contract is to be awarded to the bidder whose bid has been determined to be the
lowest evaluated bid and who meets the appropriate standards of capability and
financial resources. A bidder shall not be required as a condition of award to undertake
responsibilities or work not stipulated in the specifications or to modify the bid.63
Since these terms and conditions are made part of Loan Agreement No. PH-P204, the
government is obliged to observe and enforce the same in the procurement of goods
and services for the CP I project. As shown earlier, private respondent China Road &
Bridge Corporations bid was the lowest evaluated bid, albeit 28.95% higher than the
ABC. In accordance with the JBIC Procurement Guidelines, therefore, it was correctly
awarded the contract for the CP I project.
Even if RA 9184 were to be applied retroactively, the terms of the Exchange of Notes
dated December 27, 1999 and Loan Agreement No. PH-P204 would still govern the
procurement for the CP I project
For clarity, Section 4 of RA 9184 is quoted anew, thus:
SEC. 4. Scope and Applications. This Act shall apply to the Procurement of
Infrastructure Projects, Goods and Consulting Services, regardless of source of funds,
whether local or foreign, by all branches and instrumentalities of government, its
departments, offices and agencies, including government-owned and/or controlled
corporations and local government units, subject to the provisions of Commonwealth
Act No. 138. Any treaty or international or executive agreement affecting the subject
matter of this Act to which the Philippine government is a signatory shall be observed.
The petitioners, in order to place the procurement process undertaken for the CP I
project within the ambit of RA 9184, vigorously assert that Loan Agreement No. PH-
P204 is neither a treaty, an international agreement nor an executive agreement. They
cite Executive Order No. 459 dated November 25, 1997 where the three agreements
are defined in this wise:
a) International agreement shall refer to a contract or understanding,
regardless of nomenclature, entered into between the Philippines and another
government in written form and governed by international law, whether embodied
in a single instrument or in two or more related instruments.
b) Treaties international agreements entered into by the Philippines which
require legislative concurrence after executive ratification. This term may include
compacts like conventions, declarations, covenants and acts.
c) Executive agreements similar to treaties except that they do not require
legislative concurrence.64
The petitioners mainly argue that Loan Agreement No. PH-P204 does not fall under any
of the three categories because to be any of the three, an agreement had to be one
where the parties are the Philippines as a State and another State. The JBIC, the
petitioners maintain, is a Japanese banking agency, which presumably has a separate
juridical personality from the Japanese Government.
The petitioners arguments fail to persuade. The Court holds that Loan Agreement No.
PH-P204 taken in conjunction with the Exchange of Notes dated December 27, 1999
between the Japanese Government and the Philippine Government is an executive
agreement.
To recall, Loan Agreement No. PH-P204 was executed by and between the JBIC and
the Philippine Government pursuant to the Exchange of Notes executed by and
between Mr. Yoshihisa Ara, Ambassador Extraordinary and Plenipotentiary of Japan to
the Philippines, and then Foreign Affairs Secretary Siazon, in behalf of their respective
governments. The Exchange of Notes expressed that the two governments have
reached an understanding concerning Japanese loans to be extended to the Philippines
and that these loans were aimed at promoting our countrys economic stabilization and
development efforts.
Loan Agreement No. PH-P204 was subsequently executed and it declared that it was
so entered by the parties "[i]n the light of the contents of the Exchange of Notes
between the Government of Japan and the Government of the Republic of the
Philippines dated December 27, 1999, concerning Japanese loans to be extended with
a view to promoting the economic stabilization and development efforts of the Republic
of the Philippines."65 Under the circumstances, the JBIC may well be considered an
adjunct of the Japanese Government. Further, Loan Agreement No. PH-P204 is
indubitably an integral part of the Exchange of Notes. It forms part of the Exchange of
Notes such that it cannot be properly taken independent thereof.
In this connection, it is well to understand the definition of an "exchange of notes" under
international law. The term is defined in the United Nations Treaty Collection in this
wise:
An "exchange of notes" is a record of a routine agreement that has many similarities
with the private law contract. The agreement consists of the exchange of two
documents, each of the parties being in the possession of the one signed by the
representative of the other. Under the usual procedure, the accepting State repeats the
text of the offering State to record its assent. The signatories of the letters may be
government Ministers, diplomats or departmental heads. The technique of exchange of
notes is frequently resorted to, either because of its speedy procedure, or, sometimes,
to avoid the process of legislative approval.66
It is stated that "treaties, agreements, conventions, charters, protocols, declarations,
memoranda of understanding, modus vivendi and exchange of notes" all refer to
"international instruments binding at international law."67 It is further explained that-
Although these instruments differ from each other by title, they all have common
features and international law has applied basically the same rules to all these
instruments. These rules are the result of long practice among the States, which have
accepted them as binding norms in their mutual relations. Therefore, they are regarded
as international customary law. Since there was a general desire to codify these
customary rules, two international conventions were negotiated. The 1969 Vienna
Convention on the Law of Treaties ("1969 Vienna Convention"), which entered into
force on 27 January 1980, contains rules for treaties concluded between States. The
1986 Vienna Convention on the Law of Treaties between States and International
Organizations ("1986 Vienna Convention"), which has still not entered into force, added
rules for treaties with international organizations as parties. Both the 1969 Vienna
Convention and the 1986 Vienna Convention do not distinguish between the different
designations of these instruments. Instead, their rules apply to all of those instruments
as long as they meet the common requirements.68
Significantly, an exchange of notes is considered a form of an executive agreement,
which becomes binding through executive action without the need of a vote by the
Senate or Congress. The following disquisition by Francis B. Sayre, former United
States High Commissioner to the Philippines, entitled "The Constitutionality of Trade
Agreement Acts," quoted in Commissioner of Customs v. Eastern Sea Trading,69 is
apropos:
Agreements concluded by the President which fall short of treaties are commonly
referred to as executive agreements and are no less common in our scheme of
government than are the more formal instruments treaties and conventions. They
sometimes take the form of exchange of notes and at other times that of more formal
documents denominated "agreements" or "protocols". The point where ordinary
correspondence between this and other governments ends and agreements whether
denominated executive agreements or exchange of notes or otherwise begin, may
sometimes be difficult of ready ascertainment. It would be useless to undertake to
discuss here the large variety of executive agreements as such, concluded from time to
time. Hundreds of executive agreements, other than those entered into under the trade-
agreements act, have been negotiated with foreign governments. x x x70
The Exchange of Notes dated December 27, 1999, stated, inter alia, that the
Government of Japan would extend loans to the Philippines with a view to promoting its
economic stabilization and development efforts; Loan I in the amount
of Y79,8651,000,000 would be extended by the JBIC to the Philippine Government to
implement the projects in the List A (including the Arterial Road Links Development
Project - Phase IV); and that such loan (Loan I) would be used to cover payments to be
made by the Philippine executing agencies to suppliers, contractors and/or consultants
of eligible source countries under such contracts as may be entered into between them
for purchases of products and/or services required for the implementation of the
projects enumerated in the List A.71 With respect to the procurement of the goods and
services for the projects, it bears reiterating that as stipulated:
3. The Government of the Republic of the Philippines will ensure that the products
and/or services mentioned in sub-paragraph (1) of paragraph 3 of Part I and sub-
paragraph (1) of paragraph 4 of Part II are procured in accordance with the guidelines
for procurement of the Bank, which set forth, inter alia, the procedures of international
tendering to be followed except where such procedures are inapplicable or
inappropriate.72
The JBIC Procurements Guidelines, as quoted earlier, forbids any procedure under
which bids above or below a predetermined bid value assessment are automatically
disqualified. Succinctly put, it absolutely prohibits the imposition of ceilings on bids.
Under the fundamental principle of international law of pacta sunt servanda, 73 which is,
in fact, embodied in Section 4 of RA 9184 as it provides that "[a]ny treaty or international
or executive agreement affecting the subject matter of this Act to which the Philippine
government is a signatory shall be observed," the DPWH, as the executing agency of
the projects financed by Loan Agreement No. PH-P204, rightfully awarded the contract
for the implementation of civil works for the CP I project to private respondent China
Road & Bridge Corporation.

WHEREFORE, premises considered, the petition is DISMISSED.


SO ORDERED.

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